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- [00:00]
A
Welcome to Real Talk Real Estate, the show where we cover how to build wealth in real estate with no fluff, no bs, and no sales pitches. I'm David Green and I've been doing this for over 10 years. I've seen the ups, the downs, and everything in between. This is the show where we pull back the curtain and show it to you, too. So if you want to build wealth through real estate or you just love learning about it, you found your home. What's going on, everyone? Welcome to Real Talk Real Estate. This is the David Green show with a fantastic episode for everybody. We're going to be speaking with Shane Sanders, an investor who has figured out a way to maximize his properties for either maximum cash flow or maximum value, depending on if he's going to be keeping or holding. And he has been gracious enough to come on the show today and share his strategy, his challenges, and the way that he's executing this. So if you're an investor who is committed to succeeding in real estate, first off, thank you for listening to the podcast. I love you. And second of all, you're probably frustrated that there haven't been a lot of actual, like, effective strategies you're gonna be working in today's market. And this is one that I think could actually work. Shane told me about it and I said, hey, we need to come on and we need to talk about this and share it with the people. So, Shane, thank you for joining me today.
- [01:09]
B
Of course. I'm happy to be here.
- [01:11]
A
Yeah, I'm happy to have you. One of the things that I usually tell guests before we record, but I'm actually gonna be telling you while we're on air, is that if you do this podcast, you are contractually and legally obligated to do all of your loans with the one brokerage from this. Just kidding. You're gonna want to, once I introduce you to one of the guys. And I'm actually gonna talk to my partner after our show and see if we can find a loan product that'll work specifically for what you do. Because my guess would be that would be one of the parts that might be tougher about this, but we'll have you share what your experience has been like so far. Before we get into that, why don't you just give us an overview of what your strategy is and how you came about doing this.
- [01:48]
B
Yeah, so basically my strategy is buying single family homes in my market, which is central Washington, that are on large alley lots, and then building two ADUs on the lot. And then basically, what I do from there is I condo is the property because I'm not allowed to subdivide it. Sometimes I can if it's a really large lot and it just works out, but more often than not I can't. So then I go through Washington condo law, condo the property into three separate parcels and that way I can either do, I can either sell or, or finance them separately. So basically what I do is I will do cash out refis. So it's basically a modification of the, the burr method.
- [02:31]
A
Now it seems like you said alley lot, so I'm thinking this probably has to do with the fact that you need access from the back of it, not just the front. Is that why exactly.
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B
Yep. Alley or corner lots? Corner lots are the best that way, you know, it's a, it's a paved road. But there's a lot of, a lot of issues that I run into with corner lot. Sometimes like the cities will require street improvement sometimes. So there's definitely a lot of things to look out for. But yeah, they're definitely all Howie lots, even if they are on a corner.
- [03:01]
A
Isn't it a blast getting the privilege of dealing with city government officials that are just committed to making the most of our tax dollars, paying their salaries and helping you achieve your goals of providing more housing, which is something desperately needed?
- [03:14]
B
Oh yeah, for sure.
- [03:16]
A
They're always on your side and they're so helpful and they just want to put their heads together with yours and give their best effort. It's never like one of those socialistic environments where they don't want to do anything and they just want to tell you no and make you go talk to somebody else? That's my favorite part of dealing with the city. I'm sure you love it.
- [03:31]
B
Yeah, exactly.
- [03:34]
A
So is this something where you're just going to put like a gate in the backyard if it's on a corner lot and then you put a fence in between the main house and the ADU that you built.
- [03:44]
B
Yeah. So most people who do ADUs, they do it like truly as a mother in law, they're not planning on, you know, segregating the property. But I try and do it to where when you drive by one of these completed properties, you have no idea that they're ADUs, because I try to fence them off completely. Sometimes we do have to put an access gate, per the fire marshal to have access from the, you know, main road. But I try to do it in such a way to where each unit is fully detached, they have their own fence, backyard and it's just like just small houses that look no different than driving down any other street.
- [04:18]
A
Now you said the fire marshal. So in a minute let's get into all the different departments within the city you're dealing with, whether it's zoning, building fire, whatever. Because I think this is probably going to be a big part of the strategy is how you get this done permit wise. But just give me like an overview. Are we talking about building, ground up construction? Are you buying houses that already have ADUs in the back and then rezoning them? What are you looking for in a property to do this?
- [04:42]
B
So both, I mean the best thing is if I can find a single family home with an existing detached ADU in the back, that's kind of the bread and butter right there. Because most of the time when those hit the market, realtor thinks, oh yeah, you know, it has an ADU or mother in law, so the value might go up, you know, 80,000. So if that house is going to be 400,000, they might try to sell it for like 4, 8500 because they're not, they don't understand that that can be separated from the main property, which is where the main value boost comes from. So those are really hard to find. I've only bought one like that in Wenatchee and this was an existing single family home with beautiful brand new ADU in the back above a garage. And it was priced at just like an extra 80,000. But once that is condoed, then the value skyrockets, but those are hard to find. So typically I do ground up construction.
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A
Okay, now when you say it's condoed, can you put that in different terms so we understand what that refers to?
- [05:40]
B
Yep. So basically about three years ago I found out what you can do with ADUs, assuming it's a legit ADU and has its address in Washington state is you can go through a Washington condo code or condo law and basically subdivide them without technically subdividing, but they're each getting their own parcel number. And the benefit of that is the value of that ADU now, you know, just skyrockets. The value of the main house does take a hit, typically about 10% because now it's a condo and you've taken away the backyard or some of the land, but that the new ADU is just skyrocket once that's done.
- [06:19]
A
Okay, so you're calling it an adu, but what makes it a condo is when it gets like its own parcel number.
- [06:25]
B
Exactly. Yep.
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A
But that doesn't mean it now has HOA fees and restrictions on how it can be used. Like how we typically think of when we hear the word condo.
- [06:34]
B
Is that right? Yeah, it's a little bit of a non traditional condo. There is a hoa. So basically what I have to do is I hire a firm to do this. It costs about $15,000 to do it for the whole property, whether or not there's one or two ADUs. So a property that has two ADUs, there'll be three parcels now and there is an HOA, but it's like $35 a year. It's super low key. It's basically just like for a tax filing at the end of the year.
- [06:57]
A
So the city forces you to have an HOA if you build an ADU in the backyard, but give it its own apn.
- [07:04]
B
So not necessarily the city. That's the Washington condo code. Because like the, the city say, like the city won't allow me to subdivide the property. I then condoize it at the state level. And that's actually recorded through the county. And the city really doesn't have anything to do with that. Okay. Technically it's still just a regular lot, but through the county now it has its own parcel number, which means it could be sold or financed independently of the main house.
- [07:35]
A
So this is a strategy that basically forces the city. Well, I just should say force the city to allow you. It just goes over the head of the city and says, I don't need your permission to do this. I'm getting it from the state pretty much.
- [07:47]
B
There were some cities, like even Wenatchee, where I invest, they actually did not allow condoization of ADUs. But with the new Washington state code that rolled out about two years ago, and it's still basically they, they had like, cities had about two years to adopt it. But in that new code, it said cities cannot restrict people from condo Izing an adu.
- [08:13]
A
Okay, let me work through this. So people can't. The city can't stop a person from building an ADU and giving it its own ad assessor's parcel number, which we're going to be calling condoizing it. As long as you follow the regulations that the county has in place for how to do this, and that forces cities to allow you. Now, California did something similar. I can't remember which bill it was. It was prop. Something that basically said, hey, every house is allowed to have an ADU and what's called a junior adu, and then they come up with specifics. For like how we define like the junior ADU has to be connected to the main house. But the city can't stop you from having additional housing which is what cities want to do because they want to keep neighbors happy. The angry Karen's that don't want more people to put housing. But the state recognizes like we got bigger fish to fry than that. We need places for people to live because it's very expensive. So the way it works out in my mind the people that are choosing their state representatives are saying I want you to bring housing costs down. But the people who are choosing their city representatives don't put any pressure on the mayor to bring down housing costs. They're already there. They're like, hey, I want you to keep these people out. So you have two different motives from two different people groups that are complaining to two different government bodies which puts those bodies at war with each other. And this gives us a little bit of an idea of why it is so hard to get more effing housing built in this country. Because there's people that don't want it. And you basically figured out a way to get like to play the legal game so that they can't stop you from doing this.
- [09:44]
B
Exactly. Yep, yep. And Washington has like Washington, California and Oregon I believe have a pretty similar code that rolled out with ADUs where in Washington we can actually build two ADUs on each lot and they can both be up to a thousand square feet.
- [09:58]
A
That sounds very similar to the California ruling. Let me side note, this is not about me so I don't want to go too far but I want to give an example of how this goes bad. I bought a bunch of properties, some in Florida and some in California and the Florida ones had ADUs. And when I applied for my short term rental permit, this is how bad. They don't want short term rentals in these neighborhoods. They went in there to do the inspection and they found that when my ADU was built like in the 60s or the 70s or whatever, the coating was different than today. And now it was a foot too. It needed to be a certain amount of feet from the neighbor's fence and it was a foot too close. 12 inches. And they shut down the entire thing and said this ADU cannot be here. We are turning the power off to your property until you remove the entire adu. Right. It dude, it's been misery. I've had two and a half years of fighting with the city over and I had another property with a duplex similar thing to you. It was an alley property. So I bought this property. Has a duplex in the backyard that's right there in the back alley so you can get access to it. And then the main house has parking in the front. This was going to be a perfect short term rental. A block and a half from the beach in Hollywood, Florida. They shut me down as soon as the neighbors found out it was going to be a short term rental. Which we tried to do the nice thing where we went and introduced ourselves and said here's our number and if the guests are ever being a problem, give us a call. We'll handle it. Well, they went to the city and made huge complaints. Got the mayor's office involved. They turned off the power to the house. For two and a half years I've been making this mortgage payment on a $1.2 million property that eventually I'm not going to be able to even keep. I can't sell it to anybody else because it has these red tags. It's full of mold and termites because they turn the power off. This is how bad they didn't want short term rentals. And you can't beat the city. This is the thing that I learned the hard way. It doesn't matter that that duplex was fine before I bought it. It doesn't matter that every house on that whole street did the same thing. They all converted their detached garages into duplexes because this is such an expensive area that you can get a lot of rent for them. They don't want a short term rental operator. And so they found that the code had been updated and said, well now the zoning has changed in this area. You're not allowed to have this thing. Your method would supersede the problems that I found myself into because I'm, I'm in the way that I did it. What's the word I'm looking for here? I'm dependent on the city coding allowing this and you found a way to give it its own APN and the city wouldn't have been able to shut me down. The, the county would say nope, he's allowed to have it. You could take it up with them. Which Florida doesn't have. The same thing as Oregon, Washington and California like we just mentioned. But I'm bringing up my situation as a way of showing that your model is superior. This would work. Whereas as stupid as this is, like these are multi million dollar properties that have just drained me of reserves because I couldn't sell it to anybody else and they wouldn't let Me fix the problem. They kick you around between planning, zoning, fire, building, all of these different departments, and you're spending money on architects and engineers. And then they keep saying, dang, this would work. Now I need to fire people to say no. And then I make their adjustment and they say I need the building people to say no. And you just go around forever never getting it fixed. You've sort of just walked in and said, hey, big brother here says I can do it, so back off.
- [13:11]
B
Yeah, exactly. Yeah. As soon as that state code passed, it's been a game changer. Technically, though, Ellensburg, where I invest as well, they haven't adopted it yet and they have, which I didn't know they could do this, but they got an extension for another year and a half. So they have until the end of 2026. So it's a bunch of stuff like that to deal with. But yeah, one of the. Just talking about cities like that, one of the things is the city of Ellensburg, they require you to do street improvements if you're upping the value of any property by 150%. So basically I have a property here where I did 181 ADU and they said that did not trigger that, but to do the second adu, it would trigger street improvements. But the state code says cities cannot require street improvements based on the fact that you're building an adu. But the city saying that they're not requiring it because it's an adu, they're requiring it because it's a value thing. But obviously the intent of an ADU is to up the value. So I actually just last week had to get the city manager and the city attorney involved and they agreed with me and they said, yeah, that is correct. So you're good to go.
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A
That's cool that you were able to get those people on the phone. They dodge us because they know that I'm trying to get them to let me do something that they don't want in the city. And the problem came because the state of Florida says you're allowed to operate your house however you want. There are prohibitions against cities stopping you from having a short term rental. That made me feel safe. So I bought it knowing that there's a lot that says I can do it. And the city goes, okay, we'll find some other reason to shut you down. Oh, we changed the coding. I mean, we're talking about stuff that they wanted me to change in houses that were built in like 1930 bathrooms that were added to a house in 1930 that they say now according to our current city code, you need to have a bigger water heater for that extra bathroom. And, and there's no room on your electrical panel, so you need to upgrade your electrical panel. And if you do that, there's not enough power being pulled from the city. So now you have to run power underground from this place and it's going to be $400,000. It just gets to be insane. And the, the moral of the story here is when you try to fight the city, they will fight you. But if you can get somebody involved that says you can't fight this guy and you're in an area like in your case, where they actually may want this, this may work better. Now let's talk about the actual X's and O's to the building. Are you going to a contractor? Are you going to a home builder? How are you figuring out the floor plan, the architecture, how big it's going to be, what it's going to cost? Is this a specialized person that does this or can this just be your everyday Acme construction company?
- [15:47]
B
So basically, so I've been in construction since like middle schools when I started working part time and went to school for construction management. Just have been in that industry for a long time. And I actually, I actually do all of it. I do hire an architect for the plans, but I'll do the site plan, figure out what I'm going to build, kind of come up with a, a good layout of what I want and then I will get it designed and then I'll actually gc the property myself, which I didn't really want to do. But the problem with this market is the value of the ADUs at the end. I mean they're great if you can build it from, for like, you know, roughly. I mean obviously it depends on the size and everything like that, but like roughly $130,000 per adu where if I hire a GC, it's going to cost like well over 210, 220. But if I do it myself, I can, I can save almost a hundred ,thousand dollars per adu and that makes a profit.
- [16:43]
A
Great.
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B
Right. Where in Seattle and other markets where the value is so much higher, you can pay a GC and still have a lot of meat on the bones. But in a market like this, I have to keep those costs down by gcing it myself.
- [16:55]
A
All right, so let's see if I have a good understanding for the people that are listening that haven't themselves had to build something you're going to understand the framework is what, a thousand square feet is the maximum it can be, right?
- [17:06]
B
Yep.
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A
So you're going to go to an architect and say, I need a floor plan for a place that's a thousand square feet. They're going to have a couple options to choose from. Or are you telling them, hey, custom floor plan. This is what I want.
- [17:16]
B
I pretty much tell them I'll find something online what I want, and I'll just try to have them do it as cheap as possible.
- [17:21]
A
But so you say, okay, I want plans that look like this thing, and this is where the kitchen will be. This is the bathroom, this is the bedroom, whatever.
- [17:28]
B
Yeah.
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A
And then they give you plans that you pay for. What do you approximately pay for these plans?
- [17:32]
B
About 5,000.
- [17:34]
A
Okay, that's actually not bad at all. I paid. God knows how much more I had to pay dealing with the ones I did because they were custom and it was like how to make the city happy and ended up being for nothing. But. So 5,000 bucks, you get plans, you take those to an engineer and you say, hey, I need you to figure out the electrical component to this, the plumbing. Is that the case?
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B
Yep. Yep. An architect basically does. Does everything, and they do all the energy credits and everything like that. I don't really get into the weeds of that.
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A
So you don't have to go to an engineer yourself? I mean, yeah, an engineer. The architect deals with them themselves. And that's included in the 5K?
- [18:05]
B
Yep. And in this market, we actually don't need an engineer because we don't have to do any civil stuff or anything like that. Maybe if it was on a. A big slope, but with these properties, we don't have to have any. Any of that.
- [18:17]
A
Oh, that's awesome. Okay. So then you take those plants to the city and you go, I'm going to build this. And they say, no, you're not, because I have power. And you go, sorry, this. The county says I can. And then they get mad and they tuck their tail, but they go, okay, fine. And then the plant. Or do you take the plans to the county?
- [18:32]
B
Nope. So these. All these properties are in city limits. So I take them to the city and they do allow it. They're actually fairly easy to work with other than like, the street improvement stuff and, you know, stuff like that.
- [18:44]
A
And this was like a rural area like. Or like a suburb outside of Seattle.
- [18:48]
B
Yeah. So it's about. Ellensburg is about an hour and a half from Seattle, and it's a town of about 20,000. And then Wenatchee is a town of about 35,000. So they're smaller towns, but not, not tiny by any means.
- [18:58]
A
Okay, so then they say, all right, plans are approved. We want to know at this section of the construction to be notified so we can come verify that the foundation was laid correctly, the plumbing was put incorrectly, the electrical done was done. Right. And then you would be the one managing this because you don't have a gc, right?
- [19:16]
B
Yep, exactly. Okay.
- [19:18]
A
So then you find a construction company that's going to build, and you go to the foundation people and they pour your foundation. And then you go to the framing guy and he does the framing and you just pay them when the work is done as it goes. And then eventually you get to the rough and plumbing and the electrical. And then you put in the, the insulation and the siding, put a roof on this thing. You put all your finishes in. You've got yourself a ADU that will become a condo. Or is it already a condo? Have you already got it zoned in the. With the new APN before you start?
- [19:48]
B
So the first company that I worked with, they said I couldn't condo is it until the foundation was poured. But the company that I work with now, they actually restart that process immediately when I close. So the condoization takes about three or four months. So as I'm getting my permit and starting to build, that's in the works.
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A
Yeah, well, that's better. I'd rather be building on something that's its own APN than a different one in case something goes wrong.
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B
So that's good.
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A
Okay, so then you build the whole thing, and you said it was around 220,000 to make it.
- [20:14]
B
Nope, they're about. And granted, I've yet to do a thousand square foot one because that's new. I, I went off the old code for these last couple because they allowed them. They just didn't allow two. So I did one at like 630 square feet, another one at 500 square feet. So those ones are about 120,000 is what I build for. But the thousand square footer, that's going to be closer to probably like 160, 175.
- [20:37]
A
And where's the majority of the cost coming from? Is it materials? Is it labor? Is it split about 50? 50?
- [20:41]
B
It's, it's. Yeah, it's probably about, yeah, 50 materials, and then about 10 to 15 for all the hidden fees, like utility stuff and permitting and impact fees and all that. And then the rest is labor.
- [20:54]
A
Like 35 to 40% labor.
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B
Yeah.
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A
Okay.
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B
Somewhere in there.
- [20:57]
A
So now, now you have this thing built. The city goes in and they approve it. You put a fence up between the main house and the ADUs and its own entrance. And now at this point you can either choose to sell it to someone else, you can choose to rent it to someone else. Which way have you been going with most of those decisions?
- [21:15]
B
So I've yet to sell one because I do want to stack rentals as long as the numbers work out. So basically what I've done so far is complete these units, rent them out immediately and, and then do cash out refis on the units. That way I can pull all the money back that I put in, back out and more, and then leave in 25% equity using a DSCR cash out product.
- [21:38]
A
Okay, so that brings me to the next question. If you're going to be keeping them, you now have your own second unit that's basically own, free and clear. And so you do a cash out refi.
- [21:48]
B
Yep, exactly. Yeah, exactly. Assuming I build the first one with cash, which is what I try to do, I'm actually building my first one with construction financing in Wenatchee here. Should have the permit next week. But up until this point I've just built them with cash and a mixture of cash and credit cards. And then at the end then it's free and clear. Then I do my cash out refi, but it's still collateral of the existing loan on the existing property, the whole parcel. So when I do that cash out refi and this is what costs a lot, which is kind of a bummer, but it's just part of the game. I have to do a. Say I do two ADUs. Now I have to do a triple refi because I have to release the collateral from the existing house. So when I do that refi, we go off the condom app, then I do my cash out refis on adus so the financing cost stacks up.
- [22:42]
A
So if it's own free and clear, you're going to do a cash out refinance to get your money back to go do the next deal, which is like kind of like a remix of the Brrrr method, just a different application of it. But if you're taking a construction loan, you're going to refinance that construction loan with this money. Get better terms. You said you use a DSCR loan, which means you're basically getting the loan based off the income that the property's going to generate. Pay it off, get a better rate. What Are the construction loan terms like that you're typically seeing if you want to try to build one of these.
- [23:11]
B
So about. So it kind of depends on how I go about it. Like this one that I'm doing in Wenatchee right now, basically since it's already been condoized and that one had an existing adu, the dirt there now is free and clear. So I really don't have to do anything down there because it dirts the collateral, which is great. And it's about 11% interest only and it's a 12 month term.
- [23:34]
A
That's actually not bad at all. Does that come with points?
- [23:37]
B
Yeah, it's. I want to say it's. I want to say there's about 12,000. Okay, $12,000 that I have to pay for. Like. And I don't know exactly what that is, but in the closing costs.
- [23:49]
A
Yeah, yeah, the total closing cost. So you don't know how many points that is, but everything that's not, I mean it's probably a little bit more than what it would be. If you, when you do the dscr, you're maybe like double. But when we're talking about numbers like this, it's maybe like a $6,000 difference, maybe 5,000 I guess, compared to what you finance into. Because you're basically like, even though 11% sounds high, you're not borrowing a ton of money. You just said you're doing this for like 120,000.
- [24:13]
B
Right.
- [24:14]
A
So let me actually pull that up right now and I'll give the listeners an example of when you're having a low loan balance like this, the interest rate has much less to do. It's not as impactful as you would think. So let's see here. If you've got. Okay, so for example, if you're borrowing $120,000 total, you're not, you're not putting a down payment down at all. And the interest rate is 11% amortized over 30 years. Your total monthly payment would be $1,142. If you drop that down to like 8%, the payment goes to 880. Let's see, what was the original one? Do you remember what the number was I gave Shane for the.
- [25:01]
B
Yeah. 1142.
- [25:02]
A
1142, right. So 880 plus 20 is 900. So you're talking about like 260 bucks difference a month. And that's a pretty big spread from 11 to 8%. You'd think that the payment would be way different. It's a couple hundred dollars. So you're only paying that for the period of time that you're actually constructing the house. So if it's like 300 bucks a month more and it's a six month process to build the house or something, that's not. It's like eighteen hundred dollars difference. Exactly. A lot of people hear hard money loan rates and they freak out like that's so much. I can't pay 15 or something. But it ends up being a total of like 2 grand dep longer.
- [25:42]
B
I'd pay 20 if I had to. It would still pencil out just fine.
- [25:45]
A
So yeah, it's a great point. Especially because you're going to be able to refinance thing into a DSCR and it won't be hard to. The DSCR loans are actually much easier to do in most cases than conventional loans. There's less paperwork that's needed. They don't have all the complications of like, like, well, you make your money but you don't make it a W2. So you're claiming this stuff on taxes and you're writing this off. But if you write this off, they even though you make that money, we are going to not give it to you as credit. And the whole thing gets convoluted versus a DSCR loan. They're like, well what's it going to rent for? What's our loan balance going to be? Boom. It can pay for itself. We'll give you the loan.
- [26:22]
B
Exactly. Yep. Much easier, especially for me because I don't have a traditional W2 income. So they're great.
- [26:28]
A
That's exactly right. I mean these are the people that should be using the DSCR loans now. They only work for investment property. You're not gonna be able to do this if you're trying to buy a primary residence. But if you're someone that's listening to this, you're probably a real estate agent, a real estate invest investor, a house flipper, a wholesaler, a mix of all of these things together. You don't have traditional income so you're writing things off differently and you don't have the stability. A lot of banks don't like that. But the DSCR lenders aren't going to care. And that's. I think we probably do more of these than anyone in the nation right now. We do a ton of them because mostly it's investors that are coming to me. Although I wish that would change. I'd much rather if I got primary residence people coming to buy. Everyone needs to have a freaking primary residence. Man. There's so many People that think real estate's only for investing in, for investors, not so. So you're going to be able to use this method to theoretically scale infinitely. How many properties do you have so far?
- [27:17]
B
Nine. Yep. And four of them are 50. 50 with my sister.
- [27:21]
A
That's a lot, dude. So have you done this nine times or you just have nine total properties?
- [27:26]
B
No, the first two properties I bought were when interest rates were 3%. So I just bought. Yeah, I bought them, rented them out, and the cash flow was like 600 bucks a pop. And that was great. But then interest rates went up and I was like, I either have to stop real estate investing or find a strategy. So that's what I'm. I'm glad interest rates went up because that's what kind of drove me to this. Okay, so, so let's work our way.
- [27:48]
A
Through this, like Burr acronym to buy properties. What are you looking for when you're looking for a property you want to buy to use this strategy on?
- [27:55]
B
So it's got to be a very specific property I'm looking for. Actually, the first ADU I did was in like a standard cul de sac type neighborhood. So you had to walk to get back to the adu, walk on the side of the house and park on the street and go past the window of the main house. So that was not ideal, but it worked out. I still have that property, but now I'm only buying on pretty much long skinny alley lots, or some of them are like a double wide, still one parcel, but on an alley where I can do two ADUs. And they could be accessed from this side or the alley. That way they're just totally separate, you know, I don't want it to be like a kind of a situation where there's people looking at each other's windows and walking past and that sort of thing. So. So I'm looking for a property like that. I also want the purchase price to be cheap because the, the main house does take a hit when I condo it and take away the rest of the land. But the lower you go, the less it goes down. So if I'm buying a property for say $800,000 and doing this, that property would go down like well over 100,000. Because now it's a condo, it doesn't have as much land. But if I'm buying one for 280,000, that's a 1930s, 800 square foot, two bed, two bath house, it might only go down by 10,000. It's so close, you know, lowest you.
- [29:11]
A
Don'T have as much of a spread in the comps like you do at 800,000 exactly.
- [29:15]
B
And it's like one of the lowest priced, you know, houses in town. So it just. It can only go down so much now.
- [29:22]
A
Okay, that makes sense. When you rehab it, the next stage of brrrr. Are you able to compensate for some of the value that you're losing in when you cut the backyard down by rehabbing the inside of the house that may be outdated when you bought it?
- [29:39]
B
Yep.
- [29:40]
A
The main.
- [29:40]
B
Depending on the situation. Yep. Like I've bought one of them that just had a fresh remodel, so I didn't touch it. And you know, it goes down by about 30,000, 40,000. But I have one right now in Ellensburg where it's a 1930 build and it's pretty rough. And I've actually yet to renovate that. I just rented it out, but I'm going to. And that'll bring the value up to where it basically, you know, is the same cost of or same price of what I bought it for or that will actually go up a little bit even though it's condoized.
- [30:09]
A
Have you experimented with increasing the size of the main house? Like it's 900 square feet. And so when you're making the ADU, you also extend the main house to give it more bedrooms, bathrooms, or square footage?
- [30:20]
B
I haven't yet. I've thought about it. But another cool thing about this strategy, in some situations, depending on the location in the house, and that's another thing, what I'm looking for. The existing house can't be like right in the middle of the lot. I need it to be all the way in the front or.
- [30:34]
A
Or the back. Yeah.
- [30:36]
B
And if it's under a thousand square feet, I could then convert that, which I've yet to do this, but I'm probably going to do it here pretty soon. That can now become an adu. Then I can build a new single family.
- [30:46]
A
That's exactly what I was thinking.
- [30:47]
B
Yep.
- [30:48]
A
You could also probably pull this off. I don't know if you're. If this area has much construction this way, but if you get a house with a big basement, you may be able to develop the basement and make that into a living space and have that declared as an ADU and then build the new thing. Now you got three units on one lot and you didn't have to spend the money to build a completely new thing because you already had a foundation, you already had the walls. You basically just have to bring in the finishing and some plumbing into that basement to build your kitchen and your bathroom and maybe like probably less than half the price of building a new one. You've got a third unit and you're doing the world a service because you're taking a crappy property and you're making it better and you're providing more housing and you're doing it creatively. This is when I, when I wrote my book Better than cash flow, the 10 ways you make money in real estate. A lot of these strategies were in there. This is how you take the property and make the property better instead of. Traditionally, what most real estate investors do is they hunt for the property that's ready to go right out the box.
- [31:47]
B
Yep, Exactly. Yep.
- [31:49]
A
Now, did you have a background in construction? Like, do you think that that helped with you figuring this out?
- [31:54]
B
Yeah, for sure. I. I started working for my uncle building cabinets when I was like 13, 14, just like after school. And I've been in construction ever since, so that definitely helps. And I do self perform some of this. I don't do too much, but I'll do all the fences, landscape flooring, stuff like that. So that definitely helps. And just having an understanding of utilities and what to look for and everything like that helps a lot.
- [32:19]
A
Have you considered building a form of a construction company yourself and getting paid to do rehabs on other people's properties or maybe help them do the same thing with this skill set and the like. The. You already have the connections with the subs. Have you considered sort of functioning as a GC to earn additional income, helping other people do the same?
- [32:41]
B
I have, I've thought about it actually the last like six years. I was in corporate for like two years after college. And then I actually started a fence building company in Bellevue, right next to Seattle.
- [32:51]
A
Oh yeah.
- [32:52]
B
I moved there just to make as much money as possible, knowing that's one of the hottest markets, you know. So I did that for like six years. So I still have that company and I'm. But I'm kind of phasing out of that and I have considered it. But the thing is, it's like now that I can pull my money out back out, I would almost rather just do, you know, X amount of these projects.
- [33:13]
A
As long as there's enough properties to keep finding. Right?
- [33:16]
B
Yep. Which there definitely are. I'm kind of lucky because about probably, probably half the lots in this area, they're on alleys, so.
- [33:25]
A
Wow.
- [33:25]
B
It's. It's almost too easy to find them, honestly. Like every two weeks a Perfect one pops up. That's not going to last forever, but it's. Yeah, it's. It's awesome.
- [33:36]
A
I have some family in Kirkland and then in Bellingham, so I think. Isn't Bellevue pretty close to Kirkland?
- [33:43]
B
Yeah, it's right next to it. Yeah. That's where probably like half the fence jobs I did were in Kirkland.
- [33:47]
A
Well, here's why I asked if you've done that. One of the strategies are better than cash flow. It's like the 11th strategy, the bonus one, is making money in real estate. So being a real estate agent, being a loan officer, whatever the construction, and if you're a full time real estate professional, which it sounds like you would definitely qualify to be.
- [34:05]
B
Yeah.
- [34:05]
A
What can happen is if you earn income from these side construction businesses, let's say you make 100 grand in a year by taking the crew that you have and doing your own and doing other people's too. You can take the depreciation that you're going to get from these units, which will be significant if you're making them worth more. And now their tax basis is this high and you take bonus acceleration and you can shelter the 100 grand that you made in the construction with the depreciation from these properties, which would probably be going to waste if you didn't and keep all that money tax free. And it's sort of if you've got the skill set of construction and you've got the resources of the people to do the work and you've got the brand that people come to because they know you as this guy, which, I mean, Shane Sanders is like the perfect name to brand out there. You sound like a baseball player. Like everyone's going to know that name. The All American Fence Building Company. You sort of got the right way to play offense where you're earning money, play defense where you're saving and living expenses because you're burning properties and you're able to like live in one of these properties if you want and pay for itself. And then you're also investing, which was the third pillar in the book. Pillars. By accumulating these properties that are going to be going up in value. And maybe you can't do this right away because you're still working out some of the kinks of what the, the process will look like. But I would definitely encourage you to think about that. You're sort of set up to be able to scale in all three of the pillars of wealth building.
- [35:27]
B
Yeah, for sure. Yeah. And yeah, this is actually the first Year that I am filing as a real estate professional. So that definitely helps a lot.
- [35:36]
A
Yeah, especially because so many people need good contractors. And if you're an investor, all the investors are going to use you. Because when they're like, hey, this is my property, this is what I want, you can be like, you know, we could also develop that basement. Or you know what, we could also take this sunroom you've got in the back, add this or that, move this thing out, turn this into a 500 square foot ADU that would probably rent for 900 or whatever the case would be, and it's going to be ninety grand to do the work. This is going to be like an X percentage return on your income. You might talk a lot of people into doing additional work that they wouldn't have done. Because most contractors don't think like investors think. They just think, oh, you want us to be pretty. Here's how much it'll cost.
- [36:16]
B
Yeah, exactly. And there's definitely, yeah, a lot that goes into it, like not overbuilding, especially in this market. You know, it'd be pretty easy to spend an extra 100 grand on a build and not get that back out. You know, there's definitely, definitely a balance. So I try to make them look nice, but also keep them cheap.
- [36:33]
A
Yeah, you got to use the cheaper materials. And that was actually. Thank you for bringing this up. We're moving down the bird thing here by rehab. Now we're at rent. The question that actually made me think about running through the framework is I wanted to get to rent. It doesn't sound like you have a ton of population there. This isn't Kirkland where everybody's moving into or Seattle. This is actually like a lower, dense population, which means you don't have automatic tenants lining up to rent all your properties. Have you found that you like the, the remodeled rental properties in this market will take precedence over the junkie ones? Or is it like some of the other markets in the country where anything you throw up there, someone's going to.
- [37:09]
B
Rent It Kind of depends. Ellensburg actually has a lot of building going on. There's apartment complexes popping up and Dr. Horton's here building a whole bunch of homes. And this market's a little bit tougher. So yeah, absolutely. Here Wenatchee, the other market I invest in, there seems to be a lot more of a housing shortage and there's a lot of industry moving in, like with the data centers and everything like that. So that one, you, you put something up for rent and you get 10, 20 people applying within a day or two. Ellensburg's a lot tougher. So, yeah, definitely in Ellensburg.
- [37:39]
A
Yeah, that doesn't get brought up very often. And we've just been so blessed in the last 10 years, you. It was hard to fail at real estate. There was no vacancy. Everything rented, rents went up every year. If you did any work on the property, you increased its value by like, three times what you spent on the house. It was just taking action because almost all action resulted in a positive gain. Y and we've sort of. I don't think we're crashing, but we have hit a wall, a ceiling. Now, you got to be intelligent about where you spend your money. You got to be intelligent with the area that you're investing in. It's not guaranteed that if you just take action, you're going to succeed. And we may find that real estate starts to sink. It may go down in certain markets like the one you're in. Much less likely to happen. Those are the ones that are going to be resilient. They're going to. That's where people are going to move into if we have a recession, where in the past, if you grew up in Ellensburg and you were a smart person, you moved out of there, you're like, I'm going to Seattle. I'm going to Tacoma. I'm going to somewhere nice. I'm getting out of this place. Now I think you're going to see people moving into those areas where housing is cheaper, it's more affordable. You don't want to have $800,000 house in the market that we may be.
- [38:46]
B
I know what's happening here. Yeah.
- [38:47]
A
So you've already noticed this?
- [38:49]
B
Oh, yeah. It definitely seems like. Because I actually went to college here and then moved away for a few years and came back, and now there's a lot of people in their 20s and 30s and 40s and everything like that moving, moving back here because, yeah, the houses are literally less than half of what they are on the west.
- [39:04]
A
Side, which becomes valuable in a bad economy. In a good economy, no one cares about affordability. They want to be in the place with the best sushi restaurant and the beach and the prettiest girls and the who's who of whatever. And my theory, what I'm seeing in the market is as we go into a recession, you're going to see people flooding into the cheap areas. And that's why I released that book Better Than Cash Flow. Because one of the ways that I talk about, like, how you should make your investment Decisions is, is the market I'm investing in going to appreciate more than the national average? And if you're moving into a cheaper area and other people are going there, even if it doesn't appreciate more, if it just doesn't lose value as much as the expensive areas did, it's the same thing you, you got ahead of it. Right. So I call that market appreciation equity. Like, how did you pick your market wisely? And when the market, when the economy is chugging along, you want to be in Austin, Texas, you want to be in Miami, Florida, you want to be in New York City where everybody's moving into. But when blue collar work is the name of the game and people are shopping at discount grocery stores instead of Whole Foods and Sprouts, you want to be in the place where they're going to be going to before they get there. And you want to have housing ready for those people to move into. And you'll probably see rents increasing in those areas where they typically didn't before.
- [40:21]
B
Yep, exactly. Yeah, I'm a big believer in, you know, the lowest priced housing. Just with how expensive everything is and how everything is nowadays, I'm a big believer in it. The cheapest units, like that's what's nice about these ADUs, they're brand new and the value of they're about 250 to 350 when they're condoed and completed and you know, some of the lowest priced nice stuff you can get in these cities.
- [40:47]
A
It's really smart, man. This is like you may be leading the charge in the next wave of real estate investment strategies that work and it's gonna be the opposite of what everybody did. But you gotta roll up your sleeves. This is not a thing where you have like the old method was I work in a tech company, I make a ridiculous amount of money. I get my work done in three hours and I got five hours of my day with nothing to do. So I go long distance investing and I buy a turnkey house and then I sell courses teaching other people how to do this. And that's the way everyone made money. Now we're moving into. I do the work myself a lot of the time. I'm intimately familiar with the project. I'm on scene and I know the people doing it. I'm applying things with intelligence, where I put my leverage and where I put my money. I'm buying the affordable houses that other people have been skipping on. That's not sexy. And I am immersed in the real estate. It is not a side hustle that I just expect to make me a million dollars. So I love this. I love people getting to hear that this is the way that it works and I love the approach you're taking to real estate. I really think it'll just give our whole reputation, the reputation of the industry, a better name that you've got. People that are like wearing a T shirt like yours and a hat like yours, driving a pickup truck, not a BMW, going to the the site and they're not showing up with cameras and lighting at walking their house. They're showing up with the tool belt and work boots.
- [42:08]
B
Yeah.
- [42:08]
A
Like it used to be.
- [42:10]
B
Yep, exactly.
- [42:12]
A
So anything else you think that we should share about this strategy? Who should be adopting it, what markets you think it could work in for the listeners?
- [42:19]
B
Yeah, I mean it just really depends on your skill set or even just your confidence in yourself because I do believe anyone can do it. I mean with, with YouTube and podcasts and all the information out there. I mean I think anyone with or without construct could do this. It might take them a lot longer. But the val, there's so much value in it. I mean there's so much profit in this strategy. One, if you sell or two, if you do what I do and hold them and do your cash out refis and just stack rentals that way. Because I mean it seems like everyone wants to buy rentals but it's just so tough right now with the rates and everything. It's just a, it's a great strategy and you know, you can leave in 25 equity, get all your money back, have that property, you know, pump out just a couple hundred a month in cash flow and just keep stacking them. It's a great way to, to build long term wealth.
- [43:08]
A
You brought up. I mean dude, you're leading the conversation because we just got out of rent now we just went into refinance and you covered repeat right there. So we hit all the burrs. You brought up another good point that I really like. It drives me nuts when people criticize Bert. Not because I wrote the burr book, but just the, the stupidity of the argument itself when they say that brrrr. Leaves you over leveraged. I don't understand the logic because the bank doesn't let you pull out 100 of the appraised value. They cap you at 75%, 80%. Right. So you're leaving 25 of the equity in that house. If somebody put a 25 down payment on a home, which is the same thing, would we accuse them of over Leveraging. No, we're like, yeah, you did the safe thing. You put 25% down. Like, you were conservative. It's the exact same result, but instead of putting your cash in with a burr, you're leaving the equity that you created in. You created value out of. I don't want to say thin air, but you created it out of nothing with your labor, with your intelligence, with the work you did with planning, with all of these resources of labor. Instead of using the money that came from resources of labor at a job. Right. It just. Instead of doing it at work and putting the money in, you put the work in on the house, and the equity came from both of them the same way, and you left it there. And it is a safer investment strategy.
- [44:38]
B
Yep. And that money's not taxed. You don't have to go earn it somewhere else, pay tax on it, then put it in. You're not having to pay tax on it.
- [44:44]
A
I used to say that all the time. Such a good point. If you're paying, like, for, like, 30 taxes in order to make 50 grand, you're gonna pay 15,000. You have to make 65 grand in order to get 50, versus if you do it this way, you just have to get the 50 out of the property itself, and it's not taxed.
- [45:02]
B
It's a really good point. And that, yeah, that really is one of the reasons why I love this strategy opposed to selling the units is you don't have to deal with, you know, paying for closing costs to sell it, and you don't have to deal with the taxes because, you know, loans aren't taxed. So that's one of my favorite things about it.
- [45:19]
A
Well, thanks, man. We appreciate you being here today. If anybody wants to reach out and contact you, where's the best place to do it?
- [45:24]
B
Probably just Instagram. It's Sugar Shane Sanders.
- [45:29]
A
When you have to pick a nickname and your name is Shane, is like Sugar, basically, like, your only option?
- [45:35]
B
Pretty well, I didn't even pick it. I've had that since probably, like, fifth grade, so just kind of stuck with it.
- [45:40]
A
There's certain names that come with, like, an inherent nickname, Right. Like, if your name is Floyd, for whatever reason, everyone calls you Pretty Boy. Like, it's always Pretty Boy Floyd that comes along with it. Sugar Shane.
- [45:51]
B
Yeah. Either Get Shano or Sugar Shane, but I think I'll go with Sugar Shane.
- [45:55]
A
That's better than Shane. Oh, yeah. Shano sounds like Drano.
- [45:58]
B
Yeah.
- [45:59]
A
Well, thanks, dude. I appreciate you being here. We'll have you back on Again, to get an update in the future and see how things are going. And maybe we can even have you come in and, like, share what the plans look like and, like, the specifics of what an ADU is. And we could go over the construction process, because I think for a lot of investors, that's where they get intimidated like this. The numbers part and the vision that we described, a lot of people are on board with. They get in the weeds when it comes to, like, how do I actually build it and how do I know if I'm being ripped off.
- [46:26]
B
Yeah, exactly. Yeah. And that's kind of part of the strategy, too, is I just keep them super simple. These buildings are a rectangle, so I don't. I don't get fancy with them.
- [46:37]
A
They look great.
- [46:38]
B
You know, they have a little awning out front and everything, so they look awesome. But the building itself is super simple. Love it. That's a big part of the strategy.
- [46:46]
A
Thanks, man. Let's make sure we stay in touch. We'll have you back again.
- [46:49]
B
Thank you. Appreciate it.
- [46:50]
A
All right, and thank you for listening, everybody. We appreciate it. If you don't mind, would you please take a minute to comment on the video. Like it. And make sure you subscribe to the channel if you're not already. Share this with somebody else in the industry that you think would benefit from hearing it. And remember, there are some strategies that are still working. And Burr's not dead, is surely alive. We'll see you guys next week on the David Green Show.