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SHOW NOTES FOR EPISODE 501: FIREFIGHTER CASH-FLOWING WITH ADU’S IN CALIFORNIA
Sometimes generating cash flow requires thinking outside the box. That’s how one creative and innovative firefighter found his California real estate investing niche to make crazy cash flow profits. In this podcast, firefighter, Realtor, podcast host and real estate investor Peter McKernan shares how he discovered and leveraged ADUs (Accessory Dwelling Units) as the vehicle to double rental property returns in a tough cash flowing market.
What You Will Learn
- What is an ADU and how can it double your rental property cash flow?
- How you can successfully juggle three jobs to build a real estate empire
- Where you can find ADUs
- Tricks for reducing construction costs
- What it takes to find and grow an ADU rental portfolio
- How you can convert a single family home into a duplex
- Strategies for converting a garage into a rental property
About Our Guest
Peter McKernan
Peter McKernan has been a real estate investor since 2013, a real estate agent since 2015 and a full-time firefighter since 2008. He invests in single family homes in California and he is still able to achieve cashflow and appreciation through the process of building ADUs (Accessory Dwelling Unit) on the same lot. While Peter invests, he is also working with his residential real estate team helping homeowners and home buyers with their real estate service needs. Peter is able to accomplish all this through his team model, and all the while working full-time as a firefighter.
More About Peter
- He grew up in Redlands, California (about an hour east of Orange County)
- Right out of high school, he began studying to become a firefighter
- Spent 22 years of his life in Redlands
- Got hired as a full-time firefighter
- Attended Long Beach State for college
- Lived in Orange County
- When he completed college, he felt he needed something more to occupy his time (when off-duty)
- He was considering buying a condo in Orange County with a real estate investor friend
- Started listening to podcasts (including BiggerPockets)
First Real Estate Investment
- In 2013, he had an opportunity to buy a rental property in Redlands, California
- Ended up being the best thing that could have happened for where he was going and his trajectory on real estate going forward
- Built his confidence
- A good time to buy
- Market was just starting to “sprout” after big downturn between 2008 and 2012
- Many good deals were available
- Peter and his friend bought a single family home there, rented it out to tenant who is still there today
- Have been able to cash flow since day one
- Gave him the foundation for all future deals in that area
- Bought another property in Redlands right after that deal
- He had some “not too good experiences” with the agents he was using
- They didn’t have a lot of background in investing
- While he was going through the sales process, he really enjoyed the negotiation, going through escrow
- After his first two investment property purchases, he decided to get his real estate license in 2015
- He was able to build on his experience as an investor and going through the sales process on his first two properties into helping other clients
- He wanted more knowledge
- He wanted to have access to more deals
- To also save commission on deals in California
His Real Estate Brokerage
- He currently runs a real estate team of agents in Irvine, CA
- They sell 25 to 30 homes a year
- He has a full-time assistant and a buyer’s agent for the days he’s working at the fire station
ADUs
- Accessory Dwelling Units – also known as Casitas, granny flats, mother-in-law’s quarters
- January of 2017, the governor of California enacted laws to address housing and rental shortages in California
- It enables people to build more rental space on a lot by converting existing properties or building additional dwelling/rental space
- The law originally applied to home owners who wanted to build a second unit (ADUs)
- There were a lot of restriction (i.e. if you took away parking space, you had to replace the parking space with other parking space, long permit approval process, etc.)
- In 2020, they changed the law to allow:
- Investors to build ADUs on any type of investment property
- For a speedier permit approval process
- For more investors to increase cash flow
- For a quicker increase in appreciation
- ADUs can be added on multifamily properties
- Peter’s criteria
- He looks for properties that already have a detached building (garage, buildable space above a garage, extra building, etc.) that can be converted to rental space
- Properties that have space to build a ground-up structure
- He has to carefully assess the costs to build vs. return
- You also need a contractor that knows the laws pertaining to ADUs
- Could cost $150,000 to $200,000 to build ground-up
- It’s cheaper to convert a garage than go ground-up
- You have to carefully go over the numbers to see if it generates a good cash flow
- Peter knows of companies that actually do “Pre-Fab ADUs”
- He has never purchased a pre-fab
- It may not be that cost effective so , again, you need to run the numbers
- Here are a few pre-fab companies that we found online:
Your Biggest Mistakes
- In the beginning, he thought that his team members would be more on top of the job
- His structural engineer and architect took longer than they should have
- Do your due diligence and check out your team members thoroughly before hiring
- Make sure, when you get started, that you have the right team members:
- A structural engineer ($7,000 to $12,000)
- An architect
- A contractor
- You’re generally not going to get a “packaged deal”
- They all will have their own costs
- You’ll have to submit it to the city for permits and approvals
- There will be fees for that process
- It will take time:
- You submit for your permits and it will take a few weeks/months to get them
- It used to take more than 120 days to get approved and now the city will give you, at least a preliminary approval in 60 days
- You submit for your permits and it will take a few weeks/months to get them
- Another mistake he made in the beginning was listening to “naysayers” who were saying, “Don’t invest now. The economy is bad.”
- You can still find good deals in any market – you just need to do your due diligence
- He sat on the sidelines, waiting for a potential market crash, and it never happened
Your Biggest Success
- The first property he bought
- He attributes most of his success to just good luck
- He didn’t run the numbers (ROI, cash-on-cash, cash flow, etc.)
- It actually worked out very well for him with the returns anyway
- It appraised for more than he bought it for
- He was able to take out funds from equity for other projects
- He learned a lot from that experience that helped him with future projects
- You need to run your numbers
- You need to know the market, know the data
- You need to know what you’re buying
Advice for Old Dawgs Looking at Real Estate Investing to Help Them in Their Retirement Years
- Don’t get discouraged and think, just because you’re older, that you are out of the game
- There’s still plenty of time to succeed in real estate investing
- You can still find good deals
- If you can find a property where you can legally build a second unit, go for it!
- Look for detached garages
- You can save a lot in construction costs
- Look for bigger lots
- In California, now, if you convert a garage, you don’t have to build another to replace it
- He found a lot that’s almost 10,000 square feet
- He’s going to convert the garage
- But there’s enough room to create additional parking
- It will create additional income
- Look for detached garages
- For a general, broader point-of-view on investing
- Look into self-directed IRAs
- You can also convert 401Ks to solo 401Ks
Current Business
- Real Estate Investing
- He is going to continue to seek out and acquire properties and add ADUs
- He currently set to acquire 5 more properties this year
- In 2023, their goal is to reevaluate their portfolio and start to move into multifamily
- May sell properties with lower returns and reinvest the funds in multifamily, hopefully through 1031 Exchanges
- He is going to continue to seek out and acquire properties and add ADUs
- Real Estate Agent
- Continue to grow his team
- He currently has a full-time assistant and a buyer’s agent
- He would like to expand the team to 5 people
- He also plans to grow his marketing and advertising efforts there
- Continued healthy home sales will continue to fuel the purchase of more ADUs
- Uses the MLS to find ADU leads
- Provides a lot of detail that is helpful to find the great properties
- Continue to grow his team
- His wife
- Not involved in the Realtor/real estate sales side of his businesses
- But is active with real estate investing
- Helps assist with the design of construction and rehabs
- Works with contractors
- Peter is not strong on the “design” side of projects and his wife helps out a lot there
- Peter is not looking out-of-state for his investing business at this time
- If he goes into multifamily, he may start looking out-of-state
- He has found a great niche with California ADUs
- There isn’t a lot of competition
- He will continue to ride this out as long as it can provide good returns
Rap-It-Up
- Favorite real estate book: How to Buy and Manage Rental Properties by Irene and Mike Milan
- Favorite business book: The Alchemist by Paulo Coelho
- Most valuable web site for success (other than your own): BiggerPockets.com
- Favorite app: PropertyRadar
- Favorite quote: “Don’t let your past steal your present.”
- If you lost everything – all your assets – and had to start all over, knowing what you already know, and you only had $1,000, what would you do to launch your real estate investing business? I would split the money up. I would take $500 for marketing and $500 for the deal. The marketing could include mailers, gas/transportation. I would knock on doors, meet home owners, mail to them until i can find a deal.
How to Reach Peter
- His Podcast: Real Estate Trends and Market Updates
- Instagram: @PeterMckernann
- Email: McKernan.Peter@gmail.com
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