BiggerPockets Real Estate Podcast: Episode Summary Episode Title: How to Unlock Your Home’s Hidden Passive Income Stream (ADUs 101)
Release Date: March 19, 2025
Host: Dave Meyer
Guest: Derek Sherrill

1. Introduction to ADUs

The episode kicks off with host Dave Meyer introducing the concept of Accessory Dwelling Units (ADUs) as a lucrative avenue for generating passive income from residential properties. Dave poses the idea that homeowners might already have untapped income streams in their basements, garages, or backyards through ADUs.

Notable Quote:
Dave Meyer [00:00]: "There may be a hidden passive income stream in your basement right now or in your garage or your backyard."

2. Understanding ADUs

Brandon Turner elaborates on what ADUs entail, describing them as second living spaces on a property. These can range from converted basements and attics to tiny homes in backyards or detached units built from garages.

Notable Quote:
Brandon Turner [00:07]: "ADUs can mean putting a tiny home in your backyard or converting your garage into a separate unit."

3. Introducing Derek Sherrill

The podcast welcomes Derek Sherrill, known as "the ADU guy," who has been involved in ADU development since his high school days in 1996. Derek shares his mission of promoting affordable and profitable real estate through open-source ADU plans available on his website and YouTube channel.

Notable Quote:
Derek Sherrill [02:24]: "We give away free plans all over the country. We teach people how to build the plans that we give away via our YouTube channel. And we don't sell anything. We're truly just here to help people build more attainable infill housing."

4. The Appeal and Growth of ADUs

Derek discusses the unique advantages of ADUs, emphasizing their role as a bridge to multifamily development in low-density neighborhoods. He highlights the financial benefits, such as the ability to secure long-term fixed-rate mortgages and inherent cost savings from pre-existing utilities and land ownership.

Notable Quote:
Derek Sherrill [03:14]: "ADUs are the training wheels to development. Most of the utilities are already there, providing significant cost savings."

Brandon adds that ADUs are particularly attractive in today’s market where cash flow is harder to achieve, making ADUs a compelling addition to existing rental properties.

5. Current Market Trends and Zoning Reforms

The discussion shifts to the recent sweeping zoning reforms across multiple states aimed at addressing the housing affordability crisis. Derek underscores that outdated zoning laws have historically restricted housing supply, and state legislatures are now mandating more ADU-friendly regulations to increase affordable housing availability.

Notable Quote:
Derek Sherrill [09:56]: "State legislators are stepping in, saying cities have failed to manage housing effectively, and they're enforcing model codes to facilitate ADU development."

Brandon emphasizes that ADUs are filling a critical void by increasing housing supply, thereby moderating price growth and providing more attainable housing options without relying on traditional subsidized models.

6. Financing ADUs

A significant portion of the episode delves into the financing mechanisms for ADU projects. Derek shares various strategies, including leveraging home equity lines of credit (HELOCs), construction loans, and private financing options. He explains the importance of maintaining good relationships with lenders and ensuring a solid repayment plan to manage short-term interest-only debt effectively.

Notable Quote:
Derek Sherrill [29:10]: "Use a combination of construction loans, bridge loans, or home equity lines of credit. The hardest part is getting the project done, but once you have the asset, it's easy to recoup your investment."

Brandon and Derek discuss practical steps for financing, such as starting with a minimal down payment on the primary property and utilizing personal or private funds to finance the ADU construction.

7. Building Strategies and Cost Management

Derek offers valuable insights into cost-effective ADU construction, advocating for simple, rectangular designs to minimize expenses. He warns that each additional architectural complexity can significantly inflate costs, recommending standardized designs to achieve economies of scale and streamline the building process.

Notable Quote:
Derek Sherrill [33:18]: "Start with a simple design. Every corner added to a rectangular ADU can cost at least $10,000 more."

He further advises self-managing projects where possible and maintaining consistency in fixtures and materials to reduce maintenance complexities and costs.

8. Implementation Tips for Investors

Derek provides actionable advice for investors looking to implement ADU strategies, emphasizing the importance of understanding local zoning regulations and building relationships with city planners. He encourages investors to utilize resources like pre-approved ADU plans to expedite the permitting process and reduce costs.

Notable Quote:
Derek Sherrill [16:48]: "Look for cities that already have pre-approved accessory dwelling unit plans. It streamlines the process, saving time and money."

9. Potential Returns and Case Studies

The guest highlights impressive return on investment (ROI) figures, showcasing projects where ADUs built for approximately $100,000 can generate rental incomes ranging from $1,600 to $1,800 per month. He contrasts high-cost markets, where ADU construction can reach $400 per square foot, with more economical builds offering substantial cash-on-cash returns for investors.

Notable Quote:
Derek Sherrill [23:18]: "We're building ADUs for $100,000 valued around $350,000 to $400,000, renting for $1,600 to $1,800 a month. That's insane."

Derek also shares his streamlined process, achieving construction and stabilization of ADUs within 90 days, underscoring the scalability and efficiency of his approach.

10. Conclusion and Key Takeaways

Wrapping up, Derek reiterates the dual benefits of ADUs for investors: enhancing property value and contributing to the affordable housing supply. He encourages listeners to educate themselves on local zoning laws, adopt simple and repeatable building designs, and maintain strong financial planning to optimize their ADU investments.

Notable Quote:
Derek Sherrill [38:07]: "The relationship with the lender is really important. When using a HELOC, have a solid repayment plan to avoid long-term interest debt."

Brandon and Dave thank Derek for his invaluable insights, highlighting the transformative potential of ADUs in the current real estate landscape.

Key Insights and Strategies:

• ADU Definition and Types: ADUs can be separate units like tiny homes in the backyard, converted garages, or additional living spaces within existing structures.

• Market Opportunity: ADUs address the housing affordability crisis by increasing supply without the need for large-scale multifamily developments.

• Zoning Reforms: Recent legislative changes in several states are making ADU development more accessible by standardizing and simplifying zoning regulations.

• Cost Efficiency: Simple, standardized ADU designs significantly reduce construction costs and facilitate quicker builds.

• Financing Options: Utilizing HELOCs, construction loans, and private financing can effectively fund ADU projects, especially when combined with strategic property acquisitions.

• Scalability: Consistent building practices and design standardization enable investors to scale ADU projects efficiently, maximizing returns and reducing operational complexities.

• High ROI Potential: Properly executed ADU projects can yield impressive cash-on-cash returns, often surpassing traditional rental property investments.

Conclusion:
This episode of the BiggerPockets Real Estate Podcast provides a comprehensive guide to leveraging ADUs as a powerful tool for generating passive income and expanding real estate portfolios. With expert advice from Derek Sherrill, listeners gain valuable knowledge on navigating zoning laws, financing construction, and implementing cost-effective building strategies to maximize returns and contribute to the growing need for affordable housing.