Your Home's Hidden Passive Income Stream (ADUs Explained)

What do you think of when we say ADU (accessory dwelling unit)? If you’re like most homeowners, you probably think of a back house, a mother-in-law suite, or a converted art studio. But what if you don’t have a home that comes with a pre-fitted accessory dwelling unit? What if you don’t want to put in the money (or time) to build one out. Are you left with any options, or are your ADU dreams dead in the dust?
If you’ve wanted to start building passive income streams through your primary residence, then we’ve got good news for you. With us today is Derek Sherrell, also known as “That ADU Guy”, precisely because he is THE person you want to talk to when it comes to accessory dwelling units on your property. Derek knows his stuff, consulting dozens of homeowners on how an ADU would fit into their property and how much passive income they could make as a result.
And it’s not just about building some other structure in your backyard. You can convert attics, basements, garages, and even portions of your house into accessory dwelling units. Not only does this allow you to save on the cost of new construction, but it also gives you another option to build wealth, pay down your mortgage, or simply profit from a rarely used portion of your home.
~~~~
Join BiggerPockets for FREE:
www.biggerpockets.com/signup?...
~~~~
Find an ADU-Friendly Agent in Your Area:
www.biggerpockets.com/agent/m...
~~~~
What Exactly Is an Accessory Dwelling Unit?
www.biggerpockets.com/blog/ac...
~~~~
10 Things to Consider When Investing in Accessory Dwelling Units:
www.biggerpockets.com/blog/ac...
~~~~
AARP’s ADU Model State Act and Local Ordinance:
www.aarp.org/livable-communit...
~~~~
Get in Touch with Derek About Your ADU Questions:
thataduguy.com/
~~~~
Follow David and Henry on Instagram:
David: @davidgreene24 or / davidgreene24
Henry: @thehenrywashington or / thehenrywashington
~~~~
Connect with David and Henry on BiggerPockets:
David: www.biggerpockets.com/users/d...
Henry: www.biggerpockets.com/users/h...
Episode 581
Show notes at: www.biggerpockets.com/blog/re...
0:00 Intro
3:55 Quick Tip
6:00 Why ADUs? (Accessory Dwelling Units)
12:19 The Criteria for Finding ADU-Friendly Propertie
17:21 Challenges to the ADU Strategy
23:59 What to Look for in Existing ADUs
30:33 Garage Conversion Tips
42:29 Deal Deep Dive
45:45 Fire Round
52:54 Famous Four

[@JSRDesign23]

I'm glad ADUs are more popular now. I remember when I did a BRRRR with one of my properties and completed a 1200 Sq. ft. ADU the appraiser didn't know what an ADU was and he didn't give enough value of the ADU. I had to fight the bank and get another appraiser to re-appraise it. First appraiser appraised the property $770k . 2nd appraiser did it at$1,050,000.

[@lorenazaragoza6411]

Just finished my adu in California Central Valley. Attached garage conversion with addition. 712 sqft. Has master bedroom, small 2nd room to use as small bedroom or office, full bath with tub, open full size kitchen with island living room. The shared wall is a “wet” wall (all plumbing on that wall) and extra insulation to reduce noise. Shared laundry to save on expense. It has sewer going down to the main, not shared, own AC (no mini split) and entrance on the opposite side of the main home entrance. Build, permit, impact fees and plans all about 130k. Just moved in my first mid term tenant 6/23 and getting $2000 rent with utilities included. Will try for $2200 when this tenant it out. Hope this helps someone. Good luck on your journey and looking forward to growing my portfolio as an almost divorced middle aged woman. Thrive not just survive?!?!?

[@VS-fo9py]

Was this in Fresno? I’m in Fresno and researching this option, thanks for including your total cost, I had no idea what to expect in costs. My 2 car attached garage is 440 sq feet.

[@jameswelsh364]

I called Derek and we have a great conversation. What a nice and helpful guy. He deserves all the success that he has. Thank you!

[@carinbenge2302]

Lol

[@stangomango8393]

In San Diego, a proper detached ADU is about $300k. I want to build one in my backyard, but I can buy a proper house in FL or AZ or any other state in the country for that price. Exactly your point @ 20:44.

[@5RavensFly]

My wife and I are currently consulting with Derek on an ADU and I have to say he is every bit as amazing as this podcast points out.

[@ThatADUGuy]

Thanks Ross!

[@juliepark8411]

Love this guy! We are building our first adu now:)

[@nitters100]

Utility locations, natural lighting, parking standards. So many helpful things. I'm SO in the prelim stages, however it was very helpful for me to gain confirmation that I'm not just looking to buy a "house with a garage" to convert. I need to be looking for "a house, with a house" property. Thank you!

[@lamussen1]

This ADU session was very informative, Derek highlighted ways to determine what’s possible and tips to make it happen. I converted my upstairs into a separate entrance apartment STR, I’m in the process of getting my first floor STR ready as well. Sound/noise is a big issue for this top/bottom that needed addressed. When Derek spoke about soundproofing I was all ears. However, he didn’t go into detail, luckily he offered listeners responses via email, I jumped at the opportunity. Derek responded immediately, “I can help, call me!” I was floored! He spent the next 20 minutes walking me through the whole soundproofing process, and offered other helpful strategies. Derek was open and kind, super easy to talk to, knowledgeable and generous as hell! Im still glowing at his kindness. If you think Derek can help don’t hesitate in contacting him, he’s fabulous! Thank you! Thank you! Thank you!

[@ThatADUGuy]

Great to meet you over the phone!

[@biancat.6155]

That's awesome! Do you mind sharing some of those details around soundproofing here so he's not flooded with repeat questions? Any help with this would be appreciated. :)

[@ThatADUGuy]

@@biancat.6155 The most cost effective way is to use RC channel on the wall/lid, then two layers of 5/8 sheetrock with green glue sound proofing compound between the two sheets. If you are not on a tight budget, check out soundproof cow and all their options!

[@biancat.6155]

@@ThatADUGuy Awesome, thank you so much for responding - very helpful!

[@lamussen1]

@@biancat.6155 Hello, (I put this together for you, just saw Derek already responded. He’s the best! Here it is again, anyway.) I’d be happy to share instructions on soundproofing an existing ceiling. 1. add channels to the current layer of Sheetrock, ensure you hit studs, to drop ceiling and create space. 2. Add 5/8 high density sheetrock, use 2 tubes of green glue per 1 sheet of Sheetrock. 3. Repeat with second layer of green glue and 5/8 high density Sheetrock. 4. Seal seams w soundproof caulk 5. Paint Here are two links. Good luck :) www.soundproofcow.com/new-ceilings-vs-existing-ceilings/ www.apartmenttherapy.com/how-to-soundproof-ceiling-36835614

[@teestella5998]

I'm so happy that he is helping first time homeowners to do this. That touched my heart.

[@ThatADUGuy]

Just wanting to do my best to give back to first time buyers.

[@wild_nectar]

great info. Also love seeing Derek's dog sleeping peacefully at the background.

[@ThatADUGuy]

Most people think I have a fake zoom backdrop, them my dog gets up and moves! Thanks for your feedback!

[@terrirafiq9329]

FANTASTIC! Been hearing about ADU for years in architecture publications. Love seeing the RE angle. But zoning is a real challenge. I look forward to seeing some regs changing.

[@ThatADUGuy]

Good points. Changes coming to a town near you!

[@Khanh.Nguyen369]

Incredible episode and so needed as that’s my current thesis. Thank you for your knowledge and for sharing so much detail.

[@ThatADUGuy]

Great to hear. Always nice to see other ADU fans!

[@teestella5998]

Hey @biggerpockets the more I listen to the broadcast the more I get confused because I always think 1 episode is my favorite but then yall have another episode where I say I think he's reading my mind. Ex. like when you're in church and you feel like the Pastor is reading your life and mind and he's talking directly to you. I've thought of all of these exact ADU ideas & researched them & he's confirmation that I can do it. Thank you @ Biggerpockets. We love & appreciate your program & education.😊

[@ThatADUGuy]

They are up and coming for sure!

[@rezbahre]

Thank you bigger pockets.. I was able to set up a free appointment with Derek and he was kind enough to help me out with a few questions I had about my property and if I can do an ADU or not.. and I would certainly recommend people started watching his videos on youtube he's a super kind, informative and generous guy.

[@ThatADUGuy]

Glad to help Rez!

[@Rosicrisp]

Im buying my neighbors mobile home in a couple months because he’s moving in with his fiance but I’ve been going to goodwill outlet (thanks to my wife) there’s all kinds serious gems there whether you’re renovating or decorating your primary home The other day I found a bunch of white backsplash and really nice tile all for $57 then I went to another goodwill and found 2 light fixtures both for $2.15 which would sell at Home Depot for 50-60 bucks

[@RGMConstructionInc.]

This is a very good information for many homeowners, very good job guys

[@dukeofkircaldy]

This guy ADUs. Great episode. Greatest of all time? For me, that’s a yes.

[@ThatADUGuy]

If you have gone down the ADU path, I could see how you feel that way. Thanks biggerpockets!

[@imaginaryderek]

Awesome episode. This is what I needed. I bought my house back in 2018 with the intentions of building a detached ADU on my lot. Hoping to get started by this summer.

[@ThatADUGuy]

Take action! Great to connect on IG.

[@chibsryder]

One of the best episodes so far

[@gevorgkhachatrian6778]

Amazing conversations Thank you guys

[@user27278]

As for the 125k to another house or an ADU its better to use it for an ADU. An ADU will rent for $1700 and buying a 500k home will barely rent for a few hundred dollars more than the mortgage. In 6 years the ADU will finish paying for itself while the 500k house you would still need 24 more years for it to finish paying for itself

[@albertcua8571]

The only pros buying another home is the tax benefit. The ADU will raise your property tax and not able to write off anything. I’ve been debating myself on this. I really like the ADU since it’s in your own backyard and other pros with it.

[@frank12876]

@@albertcua8571 I just built an ADU and you can write of the taxes based on sq ft and depreciate the value of the build.

[@albertcua8571]

@@frank12876 That’s great! Good to know. Thank you for the information. May I asked how much did you spend for the ADU? Are you in LA area?

[@frank12876]

@@albertcua8571 in my location the price is around $200-225 per sq ft. Southern Oregon.

[@ThatADUGuy]

One of many pros of ADU over seperate buy.

[@Otsenre0]

This was fantastic.

[@ltamargo]

Incredible amount of information and so generously given.

[@ThatADUGuy]

Thanks!

[@theeffectiveprogressive]

Having listened to hundreds of BP podcasts so far, and as a carpenter, this is my favorite!

[@ThatADUGuy]

As a carpenter, you have a huge advantage when it comes to cost savings. If you can build/manage your own ADU, you will kick start your investment future! If you have not already!

[@theeffectiveprogressive]

@@ThatADUGuy Yes though I live on Maui and the price of entry is too high for me to get into the market here. I’m looking at central Minnesota for an investment property which disallows any “hands on” work. Managing a project there from here is a viable option I believe.

[@ThatADUGuy]

@@theeffectiveprogressive I hear you there. Make the cash with your hands on the island, then use your mind to do the long distance investing. Great plan!

[@theeffectiveprogressive]

@@ThatADUGuy eventually I’ll be at a point where I can enter the market here which opens many possibilities; I’m also about one year from getting my General Contractors license, then will work as a sub for my current employer vs employee. I’m currently in the position of onsite project manager building a condo ground up to replace the original that burned. I take pictures and videos of the work progress that my boss compiles into a weekly report for clients and interested parties (HOA, Insurance company, etc). I know it’s possible to remote manage as I’m the guy I need on the other end.😁

[@emawussi]

Thank you. Very informative

[@evafranco7888]

Hello David What a great show

[@franciakorsak7571]

You guys are amazing with all this ideas 💡 😀

[@ThatADUGuy]

Thank for watching!

[@samiraschadt8480]

Great information as always!!

[@ThatADUGuy]

BP shows have helped me and so many people I know!

[@Matheus545]

Does Derek only operate in a specific market or can we consult with him from anywhere in the US? Thank you!

[@javiermejia2716]

Loved this episode

[@annswallow2247]

Hi, question for Derek. We want to build an ADU Airbnb community on land we own in Canada. There is a house and barn in one corner of the property. How would we start?

[@JSRDesign23]

38:54 He was right! Converting a Master Suite is the cheapest way to do an ADU. I bought a house in Los Angeles with 2 Master suite! I converted the one Master to an ADU for only $5,000!!

[@ThatADUGuy]

Great to see this!! Awesome!

[@peqyuyu]

The challenging part is some cities require for one of the places to be owner occupied 😅 I’m in a pickle now because we have an ADU but we cannot move and rent the house and ADU separately

[@MariE-go7ol]

I have a very large backyard in California and have considered ADU but wondering if I couldn’t just put a tiny house in my backyard.

[@user-er9ie1on2j]

Hi, our home could be turned into a duplex relatively easily. I dont think I would want to live in it if we did that. Our other option is to build a garage apartment which we would rent out. we are on a septic, though. Thoughts?

[@AberrantArt]

Can you get an owner finance if you buy in an LLC you own? Or does it need to be personal name?

[@justinzunker]

If you're reading the comments and need a great Realtor in Milwaukee, feel free to reach out!

[@karliekrinock6101]

Hoping to convert our unfinished walkout basement to a short term rental… but I know nothing 😂 Hoping to learn how to get started here.

[@margaretlouis8091]

Actual investors don't spend much time on charts/trade journals and yet they make more money then others. There's secret is.... they have professional help either from a broker or mentor. *Life hack* find yourself a professional if you care to make a fortune. I found mine *(Cassandra Ann Minervini* ) on a *CNBC* show where she was featured and with her help I generated at least $200k with proof of earning. *You can search for her if you care for supervision*

[@ThatADUGuy]

Come up with a simple plan, shop it around to builders in your area, save up, take action!

[@margaretlouis8091]

@@ThatADUGuy Actual investors don't spend much time on charts/trade journals and yet they make more money then others. There's secret is.... they have professional help either from a broker or mentor. *Life hack* find yourself a professional if you care to make a fortune. I found mine *(Cassandra Ann Minervini* ) on a *CNBC* show where she was featured and with her help I generated at least $200k with proof of earning. *You can search for her if you care for supervision*

[@MrDudeguy52]

Your show notes link is broken. Anyone else having this problem?

[@MakuLabs]

Converting master bedroom to ADU is the key! Boom!

[@Simonsaysboxing]

How about if I want to add a kitchen in my Existing converted garage? Could they force me to call it an a d u? I just want to add a kitchen to entertain guests. Not create an adu

[@ThotBonker]

No talk about finished basements with a walkout/seperate entryway?

[@Michaelwentsomewhere]

Bought the book immediately, wish it was audible

[@ThatADUGuy]

Kols book is great!

[@sharon-reggiecrawford3806]

We bought our home April 2021, in a small Georgia town, it has a detached 37x15 workshop with a covered full length porch that I want to make into a rentable studio. It has power (box runs from house) and water only. I asked before buying if this would be allowed and was told yes, no permits needed, neighbor said people have lived in it over the years as is (needs work). Now, listening to this I'm understanding this could be considered an ADU I'd never heard of (new to real estate). Our septic is needing to be redone probably this fall and thought I could go ahead and set this workshop to have the sewer attached then. What do I need to learn? Where do I get info? Thanks for this episode!

[@ThatADUGuy]

A few action steps to consider. Confirm with the AHJ you can convert your workshop into a legal dwelling. Research the standards for septic limits in your county. Plan your septic upgrade to include capacity for the new converted ADU, if allowable.

[@Jdeneik]

Some cities allow short term rentals that are limited to a maximum of 30 days/year for an ADU’s . Some other cities won’t allow shorter than a 30 day rental..:

[@ThatADUGuy]

Become a pro in your local zoning code!

[@oldcarproblems3332]

What about putting a 100k already-built tiny house (mounted on a trailer) on the property? Financing is easy as they're considered RV's and people love renting them?

[@ThatADUGuy]

Those are great if the code allows them! Check with your local planning/zoning office.

[@Jdeneik]

I just trying to find the main house first…The challenge is being able to find any decent property even when you bid 100K over the asking price at the 450-550k range and lose the bid…. At least in the Denver, Dallas and Austin markets

[@ThatADUGuy]

It is a hard time to get in for sure! Don't give up, wait for the perfect pitch.

[@stevexspeed7649]

Luckily, Austin metro area I just closed on a good size corner lot to be able to build an ADU. Only bid 20k over for the home

[@javierarroyo9765]

My plan for the least couple years was to sell my free and clear owned house at these high prices and wait on the crash, then go buy 2 or 3 at the bottom of the market. But im starting to think there might not be a drastic crash, no now I'm thinking of getting a Heloc and building an ADU in my back yard.

[@ThatADUGuy]

If your goals are long term and you dont have to sell in the mid term, it is a great stategy to consider.

[@Timtimzi]

So should I be investing in a property that has an ADU? Specifically a duplex + adu

[@ThatADUGuy]

Based on your goals, Yes and yes. Do the math, talk to your lender on the up front costs of both.

[@mg.1680]

Im adding an ADU to a 4 unit. If i need to refi, does it change the loan terms from conv loan to commercial loan since it’s a 5 unit? Or does it show 4 u with an ADU?

[@ThatADUGuy]

I have been in that same example, it was still considered res, not com because an ADU has to be accessory to a primary. But always confirm with the lender you are using.

[@DavidPerez-yd5ty]

Great conversation how do you split electric and water bill?

[@ThatADUGuy]

Private or public sub meters. If private you can read them and bill back, if public, they come with a small service fee and a large permit/install fee.

[@ThatADUGuy]

This is how I handle power, kzbin.info/www/bejne/e5W0q2WJdqmde7c

[@kasokachibanga8837]

“Collaboration not Competion🔥”

[@ThatADUGuy]

The only way to go!

[@chrystle4108]

But isn't it difficult depending on state & county regulations? For instance I'm in Texas/ Tarrant county.

[@ThatADUGuy]

Call your local planning office and ask if ADUs are allowed.

[@1rstjames]

I would offer someone 2.8 to take my property off my hands as it is right now, before I even complete the JADU, primary residence interior/exterior renovation, not to mention before I install other allowed structures before starting the subdivision process. A group of investors would reasonably offer me 3.5 million right now!

[@johnnyayala8438]

How about if i have land in the back of a property does it make sense to build an ADU?

[@johnnyayala8438]

From scratch**

[@lalo5648]

I have a 3 bedroom and 1-1/2 bathroom. Small bathroom next to garage . Does making a garage a ADU , make sence? I can easily make a 1 bed room from garage , it’s a bug garage .

[@lalo5648]

Did comment before seeing entire vid, answer was provided . Thanks

[@ThatADUGuy]

the garage is still an option, just make sure you can still my the sewer line fall and also meet the parking standard.

[@juliem2538]

I have been waiting on permits for almost 10 weeks , after plan check for 4 weeks and fees. Already $1000 into fees just for planning and building checks. Don’t even know how he can say $500 in fees. I still don’t even know what my permit fees will be. So frustrating. Oh by the way, this is a new build home (closed on Oct) with an attached ADU. We are only trying to close off the door connecting the unit to the main home and add 2 electrical circuits for the small oven and garbage disposal/vent. Pretty ridiculous.

[@ThatADUGuy]

Sorry to hear this.

[@lynnb2920]

Can I ask where you’re located, Julie?

[@juliem2538]

@@lynnb2920 the property is in Victorville

[@juliem2538]

@@lynnb2920CA

[@ThatADUGuy]

@@lynnb2920 Southern Oregon

[@kampaninipot9458]

Hi Derek - my primary residence sits on an acre lot and the township is giving me the ok to build up to 5 small units. My question is funding them and also what would you do first if you were me? Thank you.

[@ThatADUGuy]

If there is a need for rentals in your market, I would cost, plan and build one at a time, as you can manage/afford them. You will learn as you go and confirm this strategy works in your market.

[@kampaninipot9458]

@@ThatADUGuy Thank you. This approach makes sense and is more practical. May you never get tired of sharing your gift.

[@ThatADUGuy]

@@kampaninipot9458 You are welcome! Sharing is what fuels my engine! Thank you for the kind words.

[@georgechang4006]

Can ADU be sold separately from original property any downside to purchasing an ADU?

[@ThatADUGuy]

In some cases you can do a fee simple lot with the ADU, but most times in most states, no.

[@georgechang4006]

@@ThatADUGuy thank you

[@jiechen2392]

Any good way to condo out this ADU to increase the value of the house?

[@ThatADUGuy]

Yes, in some areas. Also look into fee simple lots.

[@jiechen2392]

@@ThatADUGuy Thanks, I will listen the podcast again. Other than condo out, what other strategy can add value of house, other than more cash flow?

[@ThatADUGuy]

@@jiechen2392 more sf, more options,larger buyer pool to name a few.

[@MarqFlournoy]

Glad i listened to this one... But how did he start buying before he started paying retail on the mls? I'm doing this same model in Georgia! I'm paying retail. Also, anyone can hit me up if you're looking to partner!

[@ThatADUGuy]

Great to join up and share with others in your market!

[@ThatADUGuy]

Saved up 5% down and 6k for simple conversion on first ADU.

[@MarqFlournoy]

@@ThatADUGuy I'm definitely shopping for backyard parking, no hoa, and plan to put up to 25% down to enjoy a comfortable cash flow. But as you said, I'll talk to the city first.

[@thomasvarughese118]

How does the HOA play a role in the ADU? If the zoning allows for ADU, can the HOA still restrict the development of ADU?

[@Jdeneik]

Yes they can, the language can be “no detached dwelling living quarters”

[@ThatADUGuy]

Yes and no. Some hoa rules may be in place, but have been struck down by state law. Become an expert in your local zoning code.

[@thomasvarughese118]

@That ADU Guy for each city where is the ADU information listed?

[@ThatADUGuy]

@@thomasvarughese118 the city/county you live in, call or email the planning dept and ask if an ADU is an allowable use at the exact address you own or are trying to buy.

[@justinzunker]

HOA can do whatever they want, whenever they want, without any government intervention

[@BiggCope]

28:00 does doing this turn a SFH into a MFH?

[@ThatADUGuy]

No, in most cases. This is an accessory use to the primary house in a single fam zone. If your property is in a multi fam zone, maybe. Become an expert in your local zoning code! Thanks!

[@mg.1680]

Do u split the water?

[@ThatADUGuy]

3 options I use or see used most. 1. Water is on same meter and paid by owner. 2. Pay fees and cost for seperate water meter for the ADU if AHJ allows. 3. Install private water meter off of shared supply line.

[@pilateswithamala]

🙌🏽

[@BatBrakesBones]

ADU

[@theeffectiveprogressive]

Double commenting for the algorithm 😉

[@blaisepastel4505]

With the White House announcing close to 14,000 ADUs coming in the imminent years, this is a great way to generate income 🙏

[@ThatADUGuy]

Great point!

[@blaisepastel4505]

@@ThatADUGuy this should ultimately keep market price low for these units initially, even if you don’t have the means to build one outright. You could still purchase one, correct? (If it’s the right deal)

[@ThatADUGuy]

@@blaisepastel4505 yes, if the math works. It is key to have a great lender/lenders!

[@blaisepastel4505]

@@ThatADUGuy thanks for the response 👍

[@ThatADUGuy]

@@blaisepastel4505 watching the full 1hr 6 min full video now, great stuff for the ADU runway!!!

[@freddiesmith4285]

What is ADU?

[@ThatADUGuy]

Accessorry Dwelling Unit. Think small house in the backyard or basement apt.

[@stangomango8393]

they literally define the acronym 100 times...