The idea of wealth growth through real estate, specifically through accessory dwelling units (ADUs), came around 2013 and 2014. If you're unfamiliar, an ADU "is a secondary housing unit on a single-family residential lot," according to www.buildinganadu.com. I wanted to know how it worked, so I started saving all I could from 2014 to 2015 in order to put a down payment on a property. As a salesperson, I know it's a lot easier to sell a product I believe in, so I wanted to see if I could make this happen.
In 2016, I started looking for a property. ADUs were slightly new at that point. I had already identified that I wanted a duplex, and I wasn't as familiar with ADUs. I had targeted duplexes until I saw the ADU opportunities that came with single family residences; and also, single family residences (SFRs) are the easiest to get into via owner occupation. There all kinds of benefits to going that route, including putting less on a down payment. Then, I started asking myself, "What do I really want to live in? Do I want to live in a house or a duplex?" The truth is, I really wanted to live in a house. So, I ended up looking for SFRs that had detached structures already built, whether it was a detached garage, a rec room, a guest house, etc.
I finally found one in the city where I was looking, which was Orange. In December 2016, the time of purchase, it was $562,500. People said I overpaid, but joke's on them now. I think there's this assumption that you need to get killer deals out there in order to make this work, but that's not even remotely true. So, I got into this single family residence, which included 3 bedrooms and 1 bath in the main house, and a detached 2-car garage. It even had a little rec room above the garage. That's when I thought, "I could put a unit up there."
But it wasn't without risk, of course. I did as much diligence as I could, going down to the city to ask if I could run plumbing and put a kitchen in. At that time, they said no to the kitchen. This was a before a lot of the state laws came down. To recap quickly, it only cost me $30,000 down to get into the property. I started getting the tax benefits, and the value was increasing. All I had to do was make my payments. As the laws kept revising, I realized that those revisions would be extremely advantageous. Then, I could eventually put a kitchen in it, get a different address for it, and change the meters.
The revisions to the laws legitimized it not just as a guest house, but a full-blown unit. All the while, the process wasn't as strenuous because I was living in the house and started building equity and saving some money. By the time June 2018 rolled around, we started building the ADU and converted that whole space. Then, it started cash flowing. For those who are good at math, I put %5 ($30,000) down, spent a total of $80,000 renovating the house and building the ADU, so it took $110,000 to get it going.
Right now, I'm positive cash flow about $1,400 a month because of the ADU. I've since moved out, so that includes the rent from both the front house and the back house. So, $1,400 multiplied by 12 is a little over $16,000. If you divide that by the $110,000 I invested, I'm making 15% cash on cash. Since the initial $30,000 I put down five years ago, the equity has increased to $236,000--not including the ADU. In 25 years, the property will be with $2,000,000, and rent will be $7,800. The best part is, we can show you how to do all this too!
Before I went into purchasing the property, I knew that I was going to try to achieve this. That means I had to roadmap where I was going. And for everyone, it's different, but you need to know where to start. Some might not be able to start in a single family residence right away. Maybe, some will have to start in a condo, build up equity, and then buy an SFR. If you're wondering what your best roadmap to success is, we can help! We'd love to invite you to a free wealth-building consultation, where you'll receive your custom wealth growth plan. Schedule yours today!