JLM Blog | Episode 39: What Are ADUs and Why Are They ImportantReal Estate News, Updates, and Tips
Multifamily Real Estate Agency San Diego
Listen to the Podcast Here:
Podcast Episode by Jason Lee – Premiered April 8, 2022
What You’ll Learn in the Podcast:
- A look into how Kalani went from being in the Marines to working within real estate.
- How Kalani decided to work with ADUs and why they made him so excited (especially for the San Diego area).
- What exactly an ADU is and how they are different from, and similar to, tiny homes.
- The average costs, and profits, one can expect to see from converting a normal garage into an ADU in California.
- The type of construction that goes into ADUs and the differences between one that is connected to a house or is separate.
- Information about how real estate investors or multifamily property owners can build multiple ADUs to maximize the profitability of their property.
- The difference between soft and hard costs when building an ADU.
- How transit priority areas play into how one can build an ADU on their property.
Summary and Highlights:
In the latest episode of Jason Lee’s podcast, the talk was about the primary importance of ADUs and why you should pay more attention to them. ADUs provide advantages that overcome frequent development obstacles including a barrier’s inability to finance higher quality environmental protections.
Land opportunities with ADUs
Because they don’t involve paying for land, substantial new equipment, structured parking, or elevators, ADUs are a form of housing that may be built in California at a price that is more reasonable than other types. ADUs are created using an outlay single- or two-story wood frame structure, which is much less expensive than the cost of houses in new residential infill complexes. ADUs may provide the same amount of living space as the brand-new apartments and condos that are being constructed in brand-new infill structures, and they are an excellent housing option for married couples, small families, groups of friends, young adults, and older adults.
Kalani describing what ADUs are
ADUs, which are a distinct kind of dwelling, have the potential to assist California in meeting its varied housing requirements. People in their 20s and 30s who are just starting out in their careers and students alike have a strong preference for living in neighborhoods that are conveniently located near their places of employment, recreational opportunities. The lack of available space is often one of the drawbacks of high-opportunity places.
There is a severe lack of affordable housing options, and the few units that are currently on the market are priced so high that many individuals are unable to afford them. Homeowners have the option of constructing an accessory dwelling unit (ADU) on their property or converting an area of their home that is underutilized, such as a garage, into a junior ADU to cater to the requirements of people or small families looking for a living area in high chance areas. Because of this flexibility, not only the individuals renting the space, but also the owners, who have the opportunity to get an additional amount of money each month, gain.
Benefits of ADUs
ADUs provide homeowners with the versatility to share impartial living spaces to relatives and other individuals. This enables seniors to remain in their homes even as they necessitate more care and assists extended families in remaining close to one another while still maintaining their privacy.
Within the context of already established communities, accessory dwelling units (ADUs) are an essential kind of infill construction that have the potential to be cost-effective and provide essential housing options. ADUs also serve as an option for people who are looking to downsize their living arrangements. ADUs are intended to be more reasonably priced while also allowing its owners to generate extra money.
Episode 39: What Are ADUs and Why are They Important?
Watch the Podcast | Read the Transcript
00:01 [Intro] Welcome to the multi-family millionaire podcast. The show that interviews multi-millionaire real estate investors and top producers in the real estate industry. If you’re looking to create passive income and achieve financial freedom so that you can do what you want whenever you want, you’re in the right place. Our goal is to simplify and make real estate investing easy for you. For more information, you can find us at www.JLM.realestate.
Jason Lee: All right, everyone Welcome back to the podcast. Today I got my friend Kalani here today. He is the CEO of ADU geeks. He’s also a former major in the Marine Corps and has served overseas and he currently runs a badass company here in San Diego County. They’re probably building more ADUs than any other company in this area right now. And they’re my go-to guys for my personal ADUs. So, I am super excited to have him here today. Kalani, how you doing?
Kalani Kreuzberg: I’m well, man, thank you so much for having me on your podcast. I thought I’d get this invitation a lot sooner, but I know you guys, you’re busy doing your stuff, so I’m happy to finally make it to the big times.
Jason Lee: The honor is all mine to kick off the show Kalani can you just give us a little intro about yourself, who you are and what you’re doing today?
Kalani Creutzburg: Yeah, absolutely. So, my name’s Kalani Creutzburg, and as you said, I was in the Marine Corps for many years. While I was there, I focused on logistics overseas. I was responsible for beans, bullets, and band aids. So, I had to feed the Marines, had to house the Marines, had to take care of medical and take care of all the assets. And as it relates to what I’m doing now with ADU is every ADU project is another logistics puzzle to put together. So, yeah.
Jason Lee: Very cool. And how do you think your experience in the Marine Corps you know, kind of benefited you and got you ready for business to kind of start your own company?
Kalani Creutzburg: Yeah, well being an officer of the Marine Corps and being exposed to so much responsibility and failure was never an option, obviously you don’t clock in and clock out when you’re in the Marine Corps. So, the work ethic that I have really came from my experience in the Marine Corps, it was always about mission accomplishment and no matter what, and you just kick down doors and crash through walls and make it happen. So, I took that same work ethic. And as I had an idea to start this company, I did the same thing. I kicked down doors, I crashed two walls and I did not take no for an answer. And I burn a lot of midnight oil, but eventually here we are a hundred fifty-seven ADU projects later, something that I started out my garage at the start of COVID. I honestly believe that it’s the work ethic and leadership skills that I got.
And in terms of leadership, it’s all about leadership by example. And so, the team that I have with me, I try and show them through my own example, what it means to be an ADU geek, got to stay up on the codes. You got to stay up on the regulations. You got to know every single thing and what the history is behind the ADU rules. Have to know what we can and can’t do, got to be the first one at the office. The last one to leave. You got to go above and beyond and treat every single one of our clients as if it was your own mom and dad’s project. Cause that’s how you’d want to be treated. So, work ethic and leadership, by example, that’s what I take from my experience in the Marine Corps. And that’s what I used every single day at the office.
Jason Lee: That’s fantastic. Yeah. You know, from my personal experience I can attest that I feel like, you know, the customer service and the work ethic you have for your clients and your employees is phenomenal. So, it’s truly amazing. What kind of got you inspired to start this company. What made you want to start building ADUs for people?
Kalani Creutzburg: That’s a juicy question. So about two and a half years ago, I simply wanted to do tiny house in my dad’s backyard, nothing special. The guy lives in Riverside. He has a huge backyard. I grew up on a ranch. We had horses and goats and dogs and chickens. And anyways he doesn’t have those horses anymore. So, he’s got all his vacant land. And one day I was visiting my dad and we were throwing some horseshoe around and had a few beers. And the dad you ever think about putting a tiny house back here in your backyard? And he says, why the heck could I do that? And so, I said, I don’t know. I figured you could finance the cost of doing this and whatever that monthly financing ends up being. I’m sure you could rent it for a whole lot more and thereby creating some additional cash flow for yourself.
My stepmom overheard the conversation and was like, oh my gosh, you could do that. And right then and there, I found myself my first tiny home project. So, I did what anybody would’ve done. I called an architect, called a contractor. They fed me a bunch of stuff that led me to believe that, yeah, this is the right decision to make it’s even a big deal. So, I paid a thousand dollars, got into this project before I knew it, I was getting called every single week. Hey, we need soil study. Hey, we need structural engineering. Oh, by the way, it’s another 5,000. It’s another 10,000, etc., 20G into this thing. I’m like, man, how long have you been an architect? Why didn’t you just tell me from the start?
And in the spirit of simply trying to save projects, I freaked out and I started Googling and I started researching. And then I realized this tiny house thing I’m trying to put in my dad’s backyard is actually called an ADU. And then from there I discover the ad rules and the regulations and the ordinances and all that stuff. And I just started geeking out about the possibilities of what this all meant. And I remember one day driving down the eight-freeway looking in people’s backyards. And I thought for myself, why isn’t everybody else doing this? What I realized is just like me, A lot of these folks don’t know where to start. They don’t. Let alone they probably don’t even know what an ADU is.
So I went to an architect, a different architect, and I said, hey man, if I went out and educated the community and what ADUs were, would that be of value to you? And you pay me for it and said, yeah. So just like that, I started my first job working for an architect and I learned a lot. I was with him for six months until I realized, and this guy’s doing the same thing to my clients that was done to me. And I realized there’s an industry norm here. And that norm is the old school bait and switch hook. Just tell them just enough to get them into the doors and pay their thousand dollars deposit. And then once you got them in the system, then they’re hooked. You can’t go nowhere.
So, I decided to do something different. And that moment is when ADU Geeks was born and that’s kind of what sets me apart from everybody else. And I’ll say that loud and clear, very loudly that for all of our projects, we do our very best to just rip the band aid off. Let’s talk about the elephant in the room and talk about the good, the bad, and more importantly, the ugly cause these are not overnight projects and not cheap projects either. If you could get to that finish line, the value is there and always, the numbers always pencil out.
So that’s kind of how I started, why I started with ADU geeks and how I developed and transpired into what it is today.
Jason Lee: It’s a fantastic story. I mean, it’s funny how you said you always treat your clients like your parents, but you literally started by wanting to build a house for your dad. So, that’s pretty fantastic.
Kalani Creutzburg: I remember one client that brought this architect and she reminded me so much of my grandmother. Unfortunately, she’s no longer with us. My grandmother’s no longer with us today, but she made this client really made me feel like I was at my grandma’s house, and I did everything I could be right by her. But she was just caught up in this system that I just described. So, when I left working with that architect, I went to her and I said, here’s what I think is going on. And I feel so bad because I did this to you. Let me give you a full refund. I’m no longer working with this guy but let me give you full refund.
What she didn’t know is I paid her that full refund out of money of my own pocket. I didn’t have that money at the time, but it was the right thing to do. And I’m glad that I did that because just energetically speaking, right. I was able to start off, ADU Geeks with a clean slate and you know what, to this day we don’t always get it right. And if we have somehow did something wrong that hurt somebody, I will give that person a full refund doesn’t matter. And I think it’s that type of love and care that really does mean the biggest difference in today’s community.
And so, when that kind of word gets out, that we take care of our clients like that, it comes back tenfold every single time.
Jason Lee: Yeah. The energy you put out there is the energy you get back.
Kalani Creutzburg: Right.
Jason Lee: That’s very cool. So, for someone who has no idea what an ADU is, can you explain, you know, exactly what it is and what it entails?
Kalani Creutzburg: Absolutely. ADU, stands for accessory dwelling unit. It’s very much like a tiny house in your backyard. Or if you have a garage, you could convert that garage space into a tiny house. Now I just want to qualify in my world where we’re doing designs and permits tiny homes and ADU. They are very much two different things, tiny homes, legally our small houses on wheels, right? But by and large, an ADU is also small in nature. So, for example, if you have 150 square feet minimum, I could turn that space into a livable dwelling unit. And that’s what an ADU is. Now Keyword is accessory, meaning it’s accessory to something else. Usually, it’s a single-family residence or some multi-unit structure that you have on the lot.
And ADU is a way to build dwelling units, add dwelling units to your lot above and beyond what you’re allowed to do by right. The reason why ADUs are a thing today is because California is under a serious housing crisis. I mean, we’re short about 40,000 homes per year and the problem’s only getting worse. So, in a space where we’re running out of land to build, you know, lawmakers in their wisdom said, you know what? Let’s look at our current homeowners and see if we can use their backyard space to add more homes. And that is where ADU became a thing.
These rules incentivize property owners to open up their backyards, literally open up their garages and allow us to add housing to the community. It is a, there are some jurisdictions that are a lot more lenient, lot more progressive than others. City of San Diego being one of them. I love city of San Diego. There’s a whole lot, It’s like a wild west out of here right now. But it is absolutely fueling the high prices real estate right now. Nobody’s really talking about that. We just see it as like this real estate boom, but underneath all of that, we got guys like the Jason Lees of the world that, you know, who could already figure out 10 ways to finance, you know, a piece of property. But now that we got this ADU thing in a mix just makes it even easier.
Jason Lee: Now that was a fantastic explanation. So, for someone who’s wondering, you know, what is, what are like the benefits of building an ADU in their backyard or adding an ADU to an investment property besides the extra income that they’d receive on the property?
Kalani Creutzburg: So yeah, the two immediate benefits is adding that monthly income that’s I would say that’s 99% of the reason why our clients do it. And then we also have like the 1% where they’re doing it to add to allow their mom and dad or grandparents for children to stay at home. And then there’s also the increased value that you’re adding to the property. That’s not immediate and not necessarily right now, especially as ADUs are fairly new here in San Diego, not a whole lot of comps going around. Last year, there was almost no comps, and I was seeing the craziest valuations coming in for these ADU. I mean, you could have cost or was going to cost about 200,000 a bill, but it came back at a $50,000 valuation simply because there weren’t any comps like this appraiser didn’t know how to sign a value to the ADU. But now as there’s more and more comps, you’re welcome by the way the values are starting to be there.
The other reason why it’s valuable to do an ADU, here’s a strategy. Think about this, you own the house you are in, right? But you build this, you’re ready to downsize a bit. Rental market today is crazy. The real estate market today is crazy. Prices are high, good time to sell and cash out. What if you did the ADU in your backyard, sold your property and put it into the contract that you would then be the renter of the ADU. That’s a win-win for everybody. So now that buyer has a guaranteed renter, somebody who loves the ADU, who loves the property is going to treat the property well, but now there’s that guaranteed income. There’s another value add there that nobody really, really talking about.
Another reason why ADUs are super popular is because money is easy to come by right now, relatively speaking, fairly cheap. And then you know, conventional lending doesn’t work, then there’s also hard money loans and there’s everything in between, but there’s a renter for every door, smaller, wide, or tall your ADU is there’s always going to be a renter for that ADU. I guarantee you; you finish your ADU on a Friday. You could have that thing rented out by a Monday If you’re in San Diego.
Jason Lee: That is true. The demand is crazy right now, that demand is crazy. And San Diego is a major housing crisis. So, what you’re doing it benefits everyone. It benefits homeowners, investors, people looking to move to San Diego creates more housing. So yeah, it’s been a win-win for every party. So, what are some challenges you face, or a new client faces when you’re looking to, you know, taking ADU from the plans all the way to, you know, finishing construction.
Kalani Creutzburg: So, our number one challenge is timing. Lots of folks with their expectations think that this thing is supposed to be an overnight process, or, you know, they’ll think that once we submit the plans to the city, the whole planning and review process is supposed to be relatively fast. And it’s not. In fact, that’s the part of the project that is outside of everybody’s control. And people need to know that seriously, if you’re doing an ADU project city of San Diego, you could guarantee that that project from design, the permits guaranteed, it’s going to be six, seven, maybe eight months.
Here’s an example. If I submit your plans today to the city, guaranteed, city’s not even going to acknowledge our submission for at least 45 days. And then once they do acknowledge that submission, it’s going to take them three weeks to review it and provide reviewed comments. So, they’re, I mean, by my calculation, there’s two months right there, just getting through the first round of review comments.
So, it’s always, the biggest issue is timing. Surprisingly, the money is not the problem. As I said earlier, money is easy to come by.
There’s different ways that you can finance your ADU projects. You can finance it, using your equity or may be line of credit, cash out refi That’s easy to use, easy to come by, if you’ve got the equity, and if you don’t have the equity, then you can always use like a construction or renovation loan where your lender will allow you to borrow against the future of value of the property. So, you basically create the equity that way.
And I also heard of some guys out there, I don’t know how good or bad this is, but there’re guys out there that are willing to finance your ADU project, if you’re willing to share the rental income with them. So, lots of crazy things happening out there, money’s easy to come by. Well, please, if you’re listening to this and you’re one of those who is thinking about doing an ADU project, just from an expectation management perspective budget a year, a year, to cover you on designs, a year to cover you on the plan review process. And then that’ll also cover you on the construction fees too. And I’d hate to say it. If you’re in the county, I’ve just got to turn into a year and a half project.
Jason Lee: Yeah. I feel like the most painful part of development or building an ADU is the city. cause that’s something you literally can’t control. I mean, you can control how fast you make your plans, how fast you do your construction. But the city is just like, what are you going to do? Can’t do much.
Kalani Creutzburg: Can’t do much. And what’s interesting is city of San Diego has this thing where we’ll go through all these rounds over review comments, and then they’ll send you an email notification saying, Hey, your permits already for issue. And this is a real situation that we’re dealing with right now. It’s like we notified our client said, congrats, your permits are ready for issue. I know it’s been a long road and she’s happy too. Here we are. Six weeks later, no permits. Why? Because the city, again, it’s completely out of any designer’s control. Permits are ready for issue today, but the city still has to go through internal things, processes, and procedures to get the actual permits ready. So just manage your time Well. Whatever design company you’re using, have the conversation with them, make sure you’re planning from a holistic perspective, timing, your budget, design to your budget and understand what that budget is.
How do you arrive at a budget? It all starts with your end goal. What do you want to do you want to rent out the ADU? Well then, the question should be how much rental income can you get in that area? And then you figure out what that number is, back plan and that’ll tell you what your budget is for the project. And I’ll be the one to say, just cause ADUs are allowed to be 1200 square feet, doesn’t mean you need 1200 square feet and don’t let anybody tell you otherwise. You go to a contractor they’re going to sell you on a 1200 square foot ADU because they get paid more, more than they build, more They’re getting paid.
Talk to your designer, figure out what your end goal is, figure out what the potential rental link could be. There’s always an equilibrium point at which you want to find that sweet spot, how much rent can I get for building as small as I can keep those costs down. Now we have found is it’s usually a two-bedroom, one bathroom, no more than a two-bedroom, two bathrooms.
And our team has proven time and time again, we’ll give you two-bedroom, two bathrooms with just 750 square feet, thereby allowing you to avoid development impact fees, depending on what area you’re in and helping you keep your cost down.
Jason Lee: That’s amazing. So, I know this is a tough question to answer, but let’s say someone’s looking to do a garage conversion. It’s about let’s say it’s 600 square feet. What kind of costs would an investor or a homeowner be looking at? You know, from start to finish.
Kalani Creutzburg: That’s actually a very easy question to answer. And that’s one of the things that separates us from everybody else, where designers and contractors would be a little bit hesitant to commit to the number, right? I’ll do it on day one in front of the entire, on blast here on your podcast. But I’ll qualify why I can do this because our team has turned this ADU game into a volume game and we have our preferred contractors. We’re doing this by the numbers, and you know, 150 ADU projects later and my estimates are pretty dead on, but should we, you know, miss a mark or cost of know, materials goes up a little bit. We’re able to work with our numbers, knowing that we’ve got other projects in the pipeline. So, it always works itself out.
And that’s one of the things that I did at the front of building this company was I got good people, designers, and contractors. Well, I consider, hey, we turn this into volume game. Can we all agree to reduce our margins? And let’s pass the savings onto our client and be part of the housing solution instead of being the company out there, trying to get rich on just one single project, right? So that’s not who we are anyways, back to your question.
How much is it for a 600-foot garage ADU? I’m going to assume that we’re talking mid-grade finishes. I’m going to assume that this garage we’re talking about is in good condition. IE, not one of those old school garages, that’s better off demoing and starting it new, right? So, if you’re in San Diego, a good number to budget for a garage conversion with 225 a square foot, okay. If you can budget with that number and swallow that pill, then you are in for a smooth project.
In addition to that, that’s going to get you all the finishes You need, not the appliances. Again. I said, mid-grade finishes. Do you want separate utilities? That’s another added feature that you should budget for, right? That could be anywhere from 4,500 to 6,500. I’m going to use 6,500 in this example. And with any construction project, there’s always site preparation types of that you want to account for, not knowing anything about this particular example. I’ll just assume that the garage is good to go. I’ll also assume that the garage is close by the house. So, the distance to tie into the existing plumbing and utilities isn’t too far, but just budget 10,500 to that, the site preparation.
Now side note, if we were doing a detached ADU, we would also want to account for solar, cause detached ADUs would require solar, but for a garage conversion, it does not. So right now, I’m at 152,000, and in the world of construction, you always got to have a 10% convenient fee, maybe even more. So, let’s multiply that by 10% or 1.1. And that puts us at $167,000. So somewhere your 600 square foot garage conversion is going to land somewhere between 152 and 1 67.
If you’re an investor, you’ve got your own GC team, then you’ll beat these numbers all day long. But if you’re the average homeowner, who’s doesn’t have your own GC team and you’re going to go out there and list a bid from contractors. If that contractor gives you a price within the range that I just gave you, that is a fair number. You’re getting a good deal. If you get a number that’s much less than that, there’s a red flag. If you get a number that’s much higher than that, there’s also a red flag for the obvious reasons.
Let’s talk about the low number. There’s always going to be a lower bidder out there, but in this game, lot cheaper is usually more expensive in the long run. It’s usually going to come at the expensive additional costs or changed orders that is so like everybody’s doing change orders. They’re going to give you a low number, get their foot in the door and then they’re going to hit you with change orders along the way. Oh, I didn’t consider this. Oh, I didn’t see that. All these things don’t do that. Work with a contractor that’s going to give you a realistic number and it’s going to steer you in the right direction by telling you what you need to hear and not what you want to do.
Now that range that I gave you, 152, 167, That was what we call hard cost. Soft costs is everything leading up to construction. And then hard cost is construction. Examples of soft costs are design fees, permitting fees, school fees, water, sewer fees, depending on what jurisdiction you’re in. You might have development impact fees, so on and so forth. So, you would be wise to just budget 20 grand for soft costs right off the bat. So, figure out what your hard cost is later on in additional 20 grand. That’ll get you in the door all the time. A simple back of the napkin math. How do I figure out how much this 600 square foot garage ADU going to cost? There’s your answer.
Now let’s take it one step further. 167, How much can we finance that for? 167,000. What would you say? We financed that at three and a half percent. What’s the mortgage rate today? We’re going to have [26:39 inaudible].
Jason Lee: Yeah. Yeah. High threes is fair.
Kalani Creutzburg: Okay. We’re going to do 4%. So, I financed 167,000 at 4% over 30 years. And I’m using some good old fashioned Google mortgage calculator. Anybody can do this. Your payments are most likely going to be somewhere around $995, somewhere around there. Okay. Monthly payments, $995. If you’re in San Diego, 600 square foot ADU, I could give you a two-bedroom, one bathroom, a two-bedroom, one bathroom studio in San Diego, depending on what area you’re in Obviously, I guarantee you can rent it for 1800 bucks.
Jason Lee: Minimum, minimum.
Kalani Creutzburg: Okay. Let’s just make math simple. $2000 bucks. So, $2000 minus your $995 mortgage payment is what? $1005. So that cash flow is the exact reason why everybody’s doing ADUs today. Let me be a bit more specific for your audience. If you are the person with the garage and your car is sitting in that garage, or you got a bunch of junk in that garage, that car in there is costing you $1,005 of monthly cash flow, right? Or if you do, it’s like, I don’t mean to offend anybody, but if we do have junk in the garage, go put that stuff in storage somewhere, pay to eat the cost, pay a $100 a month, $200 a month. Have it stored in there, convert your garage into an ADU and earn that extra cash flow? The numbers will always pencil out, guarantee you.
Jason Lee: Yeah. Or just throw it away. If you haven’t touched that junk in over six months and start that ADU.
Kalani Creutzburg: There you go. And so, Hey, like if you’re here’s, what’s interesting. So, you’ve got general rules for ADUs where, you know, single family residents, you could have a junior ADU. Got it. Multi-Unit lots, you can have up to two detached ADU. You could convert garage spaces, etc. City of San Diego guys, if you’re investors, if you’ve got some money to invest in a property life it’s crazy out here. Cause city of San Diego is so progressive with ADU. With this ADU game, they’re allowing all kinds of stuff that wouldn’t necessarily fly in other jurisdictions, parking requirements, The general rule is if you’re within a half mile public transportation, don’t have to provide parking. Well, city of San Diego is not, they’re just saying, you know what, no parking at all for. I don’t think you could be 10 miles away from a bus stop doesn’t matter.
And then they took it one step further. They were like, you know what? If you are converting a garage for an ADU, not only do you not have to provide parking for that ADU, but you also don’t have to even have to replace the parking for the unit that that parking was for. So, there’s an example. And here’s one of my favorite things you could do bonus ADUs. If you’re willing, so let’s say we do two detached ADUs right. One way to get above and beyond what you can do by right here instead of San Diego is to do what’s called bonus ADUs. You willing to deed restricts a third ADU towards affordable housing. You can get that third ADU, which then unlocks a bonus ADU a fourth ADU. So, there’s four.
And I’m literally doing a project where as long as we don’t run into lot coverage problems or floor area ratio problems, or height limitations, long as we don’t hit those things and we have the space for it. There’s parts of city of San Diego where this whole bonus ADUs thing is unlimited. That means you could just keep repeating that cycle over and over and over, you know, multi-unit lot where you think you could only do two detached ADUs. I just helped the buddy out walk this site this morning, this guy could do, we calculated up to eight ADUs. Some of them being bonus, some of them being de restricted, but there it is.
Jason Lee: Were those lots of single-family homes or were they duplexes? What were they?
Kalani Creutzburg: When I walked this morning with him, it was a multi-unit. He had like, it was a gigantic lot. It was probably 15 units, maybe even more. But in the back of the lot, there was at least 4,000, maybe 5,000 square feet. Lots of space to work with.
Jason Lee: Wow. Tell me if I’m wrong. But I heard some investors say that if you own a five unit or above in, in city of San Diego, you can convert as many garages as you want into an ADU.
Kalani Creutzburg: That is somewhat true. But I think we, the underlying concept there that, that fueling that is the fact that we’re in a transit priority area. It’s a multi-unit lot, transit priority area. City of San Diego. There is a rule that will, cause the general rule is you could only convert garage into an ADU up to 25% of the number of units you have. Otherwise known as 25% rule or one. So, if you have four units, you could get one ADU out of your garages. If you have eight units, you could get two ADUs out of your garages. That or one piece is basically saying, hey, if you have one, two or three units, even though the 25%, doesn’t get you to one, they’ll still give you ADUS out of the garage.
Now what you were talking about is with the conditions that I just said, city of San Diego multi-unit and transportation priority area, this whole garage conversion thing is unlimited. So, I’m literally doing a project like this where we, this guy has five units and five garages. We are converting every single one of those garages into individual ADUS. It’s insane. It’s nuts. But this dude just turned a five-unit lot into 10 units and didn’t even have to add a new structure to the lot.
Jason Lee: That’s powerful. That’s powerful stuff.
Kalani Creutzburg: Yeah. So, let’s talk to these investments, maybe some new investors here. If you have the means to get yourself a small multi-unit lot, maybe two units, three units, four units. Let’s just say three units, but we could do more than ADU, Let’s say we could do three ADU a user and now we’re at five units at the end of the day. Well now you just turned that lot into a commercial lot, right? From a financing perspective.
So, whereas before comps would’ve been a big factor in terms of what the value is for that lot. Now you just change the game. And when you go to sell that lot, you’re targeting a different investor who is looking for a certain cap rate from certain return on his or her money. So, then you just rent out those units for max rent and get your buyer, the cap rate they’re looking for. That’s what the value is. So, me personally, that’s what I’m interested in buying for myself is looking for those projects where I can get, I could get the lot where it’s got four or less units and then convert it into a commercial lot where it’s got five or more units, rent them out for max rent and create the value that way.
Jason Lee: Got it. So, I got a personal question for you. It might help other people. So, I’m looking at a deal right now in north park. It’s three units. It’s pretty close to a bus stop right off elk home Boulevard. It’s got two garages in the back, a two-bedroom house in the front and then two, one bedroom in the middle. It’s a 7,000 square foot lot. From your calculations and your intelligence of, you know, the ADU and the codes, you know, how many ADUs do you think could be built on that lot, If I had a bonus ADU or a JADU.
Kalani Creutzburg: Well, knowing the part of town that you’re in, it’s definitely in a transportation priority area. So those, you said there’s two garages?
Jason Lee: Yeah. It’s two single car garages.
Kalani Creutzburg: Yep. You can convert both of those into two individual ADUs. So, there’s two right there. Now there’s single car garages. So that’s enough for a studio and I do single car garage studios all the time. I don’t know how [35:26 inaudible] in terms of land to develop a ground up ADU. But the thing that you have to know is it’s got to be detached from all existing structures. So, you have to have up two detached ADUs. You just have to be detached from all existing structures.
Here’s a cool thing, those ADUs I just mentioned, even though they have to be detached from these existing structures, they’re allowed to be attached to each other [35:52 inaudible]. Definitely allowed to do that. And if you have enough space, then there’s four ADUs I just put on your lot. So, your lot just went from three units to seven units. And if you have more space because it’s city of San Diego, we could do the [36:09 inaudible] thing and give me enough land where I could have a 400 square foot footprint and I’ll give you another two ADU that way. One of them will be derestricted for affordable housing. And then the other one will be the bonus ADU. So, each going to have derestricted. That’s the only one that is reserved for affordable housing, but that other one hit the bonus you could rent full if not, not restricted for affordable housing.
Jason Lee: Wow.
Kalani Creutzburg: And here’s what’s also cool. How big is the, are the two ones? Two ones and then what was the front house? How big is that one?
Jason Lee: It was the two-bedroom One bath.
Kalani Creutzburg: Okay. All three units. Are all three units, two ones?
Jason Lee: Oh, sorry. No, it’s two, one bedroom and one, two bedrooms.
Kalani Creutzburg: Oh, got it. Got it. Got it. Okay. Let’s just say for conversation, say you had one unit that was massively big, and you knew a way to split it and create another ADU out of the deal. City of San Diego, it says the information [37:21 inaudible]. You actually can convert some of that [37:26 inaudible] livable space into an ADU up to one. So, you could do that too. So, there’s [37:34 inaudible] basically endless just get creative with it.
Jason Lee: Yeah. I mean I feel like what you’ve said, you know, it’s easy to tell that, you know, ADUs are a huge opportunity in San Diego right now or in California. So, for the investors that are listening to show or looking to get into real estate, you know, when you look at deals and you say the numbers don’t work, you know, you got to get creative sometimes. And sometimes the ADU game, it really makes a difference on whether a deal pencils or not. So, thank you Kalani for all your wisdom and your knowledge about the ADUs and how it can help homeowners and investors. Your time has been greatly appreciated on the show. Is there any last words or advice or anything you want to mention before we head off here?
Kalani Creutzburg: I’ll crack a joke. Well, what’s the difference between a geek and a nerd?
Jason Lee: What is it?
Kalani Creutzburg: A geek is a nerd, but with social skills. No, in all seriousness. Listen, if you close your eyes and imagine San Diego being like this blank canvas to dirt, right. San Diego’s not developed yet, but you are the developer who has a vision of what San Diego could be in the year 2022. If you knew what you knew now, would you start developing, knowing what it could be? Obviously, the answer is yes. And I’m here to tell you ladies and gentlemen, you have been given a blank canvas, knowing [39:14 inaudible] can and will be in the future, would you develop? The answer should be yes, there is no good reason why ADUs like you can’t do an ADU. ADU are win-wins every single time where you’re at.
I’m grateful to be here on your podcast Jason, I appreciate this. Again. Maybe we could talk about SB9 later and how ADUs play into that. But yeah, we could have that conversation and we’ll go from there.
Jason Lee: That sounds great.
Kalani Creutzburg: Here’s a shameless plug. Find me at www.adugeeks.com. Please follow me at ADU geeks social media. I got a YouTube page with a few videos, and I’ll get, and I continue to share free information that way.
Jason Lee: Awesome. Yeah, that was be my last question I was going to ask, you know, what’s the best way to find you. So, thanks for letting the audience know. I’ll put a link in the show notes, but other than that, Kalani, it was a pleasure having you on the show and, you know, thank you for your time.
Thank you for joining us on the multifamily millionaire podcast. The show that interviews, multimillionaire real estate investors and top producers in the real estate industry. We’re here to help you create passive income and achieve financial freedom so that you can do what you want whenever you want. We’ll catch you next time on the multifamily millionaire.
[End of Transcript]