All About Building an Accessory Dwelling Unit with Tom Mulhern Pt 1
Accessory Dwelling Units (ADUs) are transforming family living as more people are building ADUs to care for parents or make space for grown kids.
If you’ve wondered about converting a garage, adding a modular unit, or starting fresh from the ground up, then tune into this episode! We discuss the real costs, challenges, and benefits of building an ADU. In this two-part episode, we are joined by expert Tom Mulhern, co-founder of AzADU, to explain the real costs, legislative changes, and why most ADUs are actually built for families and not as rental income.
Key Takeaways:
ADUs Are More Than Instagram DIYs: Reality TV and social media make ADUs look easy, but there are a multitude of complexities including permitting, plumbing, electrical, and zoning. Building an ADU is a significant undertaking that requires understanding local ordinances and construction realities.
Family First, Rentals Second: Contrary to media hype, most ADUs are built for multi-generational living, not rental income. Rising costs have families consolidating, using ADUs to keep loved ones close and reduce housing costs, while also freeing up larger homes for sale in the market.
Cost Factors Go Beyond Size: Building an ADU is expensive on a per-square-foot basis, but compared to buying a full home in central locations, it can be an affordable alternative. ADU costs are driven mostly by kitchens, bathrooms, and utility connections. Modular and container homes aren’t always cheaper, given site prep, sanitation, and retrofitting requirements.
Be sure to catch part two of this episode where we’ll talk financing and more strategies for unconventional investing as we dive deeper into the cost breakdown, financing options, and rental income potential for ADUs.
Contact Tom Mulhern at AzADU: https://www.az-adu.com/
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Time Stamps
00:00 Welcome and Setup
00:27 Meet the ADU Expert
02:03 A-Z ADU Business Model
03:25 Plans and Orientation Options
04:41 What Counts as an ADU
05:55 Arizona ADU Laws Explained
08:10 Family Use vs Rentals
10:58 Attached vs Detached and Lot Rules
13:04 City Pushback HOAs and Restrictions
16:26 Costs Timelines and Alternatives
21:22 Pricing Site Costs and Permits
25:06 Part One Wrap and Next Steps
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Podcast Welcome
Welcome to the Unconventional Investor Podcast. I'm your host, Michelle Moses, certified financial planner, licensed realtor, and founder of Me Financial. If you're an accredited investor feeling overwhelmed by managing your portfolio and looking for alternative investment strategies that go beyond the traditional stock market, you're in the right place.
Let's head into today's episode so you can start taking control of your financial future.
ADU Episode Intro
Hello everyone, and thank you so much for tuning in. Today we are gonna be talking about accessory dwelling units or ADUs. So if you're curious about building one of these for your family, maybe to generate some income, put it in your backyard.
Or if you have some sort of, dream to own some sort of another unit on your property, this might be the episode for you.
Meet Tom Mulhern
And to talk about that, we have Tom Mulhern here, and he is the co-founder of A-Z-A-D-U. He began his real estate career in 1984 and has a diverse background ranging from residential, commercial investment, sales, leasing, brokerage, and property management, and now ADU.
So thank you so much for joining us. Thanks for having me. I really appreciate the opportunity to talk to you about it. Yeah, I'm excited about this because I called you to do this because I took a class about ADUs and I was surprised at all of the things that I was wrong about. About ADU and how much more complicated they were and all of that.
And then I think this is a timely topic, with the price of homes, and we're all having to kind, I think people are gonna start moving together again, like families. And I was really surprised, especially like the CONT shipping containers and stuff like that. You know that Yeah.
That people are like, oh yeah, we'll just outfit that, or I have a garage. And it is not as easy as what they make it sound like, like on Instagram or something. Sure. That is a lot more. So I'm excited to talk about this and share your knowledge about what you guys build. So can we go into just like what your company does and then we'll get into what act actually an ADU is?
Sure.
A-Z ADU Model
So our company started a couple years ago and the state legislature started looking at some ADU ordinances or legislation. So I got together with a couple of guys that I've known for a long time and we decided to see how it developed and consider doing ADUs. One of my partners is a home builder.
The other one is a general contractor. And I just like the concept because I saw a lot of a need for housing. My kids are in the, first time buyer era and I know that ADUs would serve a purpose in some form or fashion to to families. So we got together, watched the legislation, and my one partner, since he was a custom, he was a production builder and did, was a division president of some of the national, stock exchange companies.
He wanted to do more the standard plan we call it. So we decided to do floor plans that we price. And you can pick A, B, C, or D, that's our business model. We don't do custom, we don't do garage conversions. We don't do remodeling. And all of those are opportunities. We don't do modular.
I think all of those are great opportunities to try to increase the housing stock. To give people an opportunity and a place to live.
Plans And Orientation
But you guys, your model is that you have floor plans that people basically pick from, and then do you turn them certain ways? Because I know that when it's in a backyard, you don't necessarily want, their front yard, their front door looking into your bedroom window or whatever.
And so do you just turn them, whichever way they need to go on the property? That's a great question because we did have to do that. So all of ours are pretty much. Square with a little bit of, maybe a little bit more of a rectangle. And we have options. So you can turn it any way you want.
You can actually flip it upside down. The plan still applies. So if you say, ah, I want my front door over here on this side, instead of that, if we, if when turning it doesn't solve it, you can, in the building business, just flip the plan upside down. Okay. And if the. If the plumbing is put in the right spot, the guy's gonna frame it, around the plumbing, so it, it actually works.
I didn't realize they could do that, but we have options where you can take a window and make it a door or you can take a and close a window. Okay, so it's semi customizable. It's basically, it's, yeah. Yes, we do have that, yeah. Okay. From a exterior and because of the same reason, 'cause we don't have.
This is the front of your lot and we know exactly how you want it oriented.
What Counts As ADU
Okay, so let's first get it, let's go into what is an ADU? Because I think there's a lot of people that think that, oh, I've got, my mom up there and there's a refrigerator, a little mini fridge and a hot.
Pad or whatever, and now it's an A DU. So let's go into what an ADU actually is. So an A DU is an accessory dwelling unit. That's the definition for it. Some people call it a guest house, a casita, but it can be anything. ADUs have been around forever. You could always build pretty much an accessory dwelling unit in your backyard in most zoning districts, but you couldn't make a habitable.
ADU. So you could build an office, you could build a garage, you could build a shop whatever you wanted to, you could do, but it couldn't be habitable. And a lot of the municipalities defined ha habitable. As having a cooking facility. Yeah, you've gotta have a cook, a hookup for a stove. A stove, which is so what a lot of people were doing in the past is they were permitting something as an office and they'd put a refrigerator and a sink and everything but a stove.
And then they'd get their C of O and they'd they'd add a stove, or they wouldn't even get a CFO, they just would build it and convert it.
Laws And Zoning Changes
So what happened was the legislature decided that they were going to try to allow habitable ADUs in all residential zoning districts. Most of the time, a habitable one could be in a large lot acre, half acre, 15,000 square foot lot.
Those would be allowed for ADUs. Pretty much anything smaller than that was not allowed. So the legislature tried to pass legislation in 23, 24, [00:06:00] 23, and it didn't make it, it got shot down, didn't get out of the didn't get a vote, but the city of Phoenix decided they wanted an A DU ordinance. So they took the skeleton of that and created an 80 ordinance where you could have a habitable.
Accessory dwelling unit in your backyard, regardless if you were a 6,000 square foot lot or a 60,000 square foot lot. So that kind of opened up the opportunity to do 'em in Phoenix. And then you start talking about building materials a container, as you mentioned, a modular there's a company called Box Bowl that can pop something up.
There's stick and brick, like we do, we have a foundation and a framed house and with air conditioning unit and everything. So it doesn't the definition is more, from the habitable standpoint is what made it attractive to us. And it needs to have a stove, basically, so it can't just be an office.
And I think what I also learned is having the separate electric panel. And that you've gotta have, you have to be able the, if you're gonna rent it or have somebody there and you were actually gonna try to resell it, then the electric panel needs to be separate. They have to be able to access their electric panel.
And then, a lot of like fire code type of stuff where there needs to be if it was attached, then you've gotta have fireproofing, between the walls. So it was really interesting to learn about some of the. Like multifamily type of legislation that kind of carried over to an A DU.
But what I think is interesting is that, you have this definition of an A DU, right? You gotta have the stove and the refrigerator and a bathroom, all the plumbing and everything.
Family Use Vs Rentals
But the most use of them is for families, right? It's just most people build these things on the back of their house, or in, I should say, on their lots, and they're mostly using them for family.
Whereas I think in the media, a lot of times they talk about, oh, let's rent them out, and you can, have an income. But it's a very high percentage. I don't know that anybody really knows what the percentage is, but when you talk to people, like most of the people, it's for families, right?
That you're having your mother-in-law or your mom, mom or dad or kids or some sort of, or you're just extending and making your house bigger. Is That's what you guys have, right? Too? A hundred percent. Yeah. That's what we're finding. It's not that there's not a rental market or that there will be rentable units, but that was the fear as the city passed their zoning text amendment, and then the state came through in 24.
Passed the ADU ordinance that it was gonna be renters, everybody was gonna be renting. We haven't done one for a renter yet. We've done 'em for exactly what you said, family members, excess space, mother-in-law. So that, that's been the main use. But that also makes sense too, because then it's two people that aren't having to pay for two big houses.
Your then your family's just moving together. So even though it's not turning into this whole rent. Income thing that they were talking about. It is solving the housing issues because families are just moving back together versus living apart. As I've always said, it really doesn't add to the housing stock, so to speak.
It's not that it's a for sale unit, but what it does do is if my mother-in-law, for example, lives in a house and they're gonna, she's gonna, we're gonna build an a DU in my backyard for my mother-in-law or my mom, when that is built and she moves in her home goes for sale. So it is, it's not a, it's not that my mom's buying the lot or buying something in my backyard, but her house is now for sale.
So it adds for it that way. Yes. But it doesn't, it's not like there's all, it's more consolidating the population a little bit more. Yeah. In California they now you can split your lot and actually sell your backyard to somebody. So you can create a second lot and I think. Arizona will go that way long term.
'cause California's had 80 ordinances in place for 30 years. But it's not there yet. And I'm not suggesting that's the, around the corner by any means, but that it's an evolution of that market. And back to your electric, yeah. You can. You can attach to the existing panel or you can drop in a new meter.
And a lot of that depends on where the electrical service is.
Two ADUs And Parking
And, and we might get into that later, but and you did touch on that, there's attached ADUs and detached ADU, so to pick up on or finish the whole legislation is so in 24. The, the city of Phoenix already had their text amendment in place to allow ADUs in all residential lots.
Then the state passed a house bill, I think it was 27 20 that allowed, stick with me on this phoenix allowed unattached or a detached. The state legislation that now applies to every municipality over 75,000 allows an attached. And a detached. So you can actually have two Aus on any lot that's zoned for residential if you live in a municipality over 75,000.
So that opens up a little bit of a different model because, a single family house can turn into three, right? Basically. Yeah. Yeah, as long as you can fit it on the lot and they increase lot coverage, so that helps. Yeah. I was gonna say it you can only cover 80% of the lot, or is that right?
With the building? Probably a little high, like 60. But my son lives in a 6,000 square foot lot at. In Osborne and seventh Street area, 1200 square foot older house on a 6,000 square foot lot, he could easily do an attached and a detached. He doesn't have a pool. So he is got plenty of room and he'll never hit the, 60% lot coverage.
And I thought what else was interesting too was because you don't think about these things just as a normal person. So if you dude has somebody living in your backyard at an A DU the parking. That you're, the legislation covered that you don't have to increase the parking, that you don't the entrance to get to it.
Like they, they eased up on a lot of that because when you're talking about multifamily, you have to have so many parking spots and so many entrances. And so I thought I never would've thought about that. Just, of course I should have been thinking about it, but I didn't think about parking and, you don't have to increase those things.
Yeah. There was a lot of pushback from the cities saying, state don't tell us what to do. And you're right, there's no parking requirements. So that, again, the concern was they're gonna have a bunch of rentals. I'm living in this house and the two next door neighbors, I've got two neighbors.
They both had two a U so now I've got six neighbors and there's gonna be, eight cars on my block. I haven't seen that happen. That doesn't mean it doesn't have the possibility of happening, but it's mainly been for family members. But that was the concern. So the state did waive the. They wave some height, they wave some setbacks, they waved some design.
They're very progressive because they see the housing crisis and the beauty of building an ADU in your backyard, if you're in an area that you can do it, is it's got the street, it's got the water, it's got the sewer, it's got the electric, it's all the library, the school, the parks, it's got, it's, you're in now a community versus having to live at the, the outskirts of town.
So it's a great concept. And I think it will continue to grow, but it's change is difficult, and it's interesting because if I say ADU to somebody in Arizona, they look at me and they're like, huh, I've got three heads, right? Really? Yeah. But you say Casita, they know what you're talking about, a guesthouse, but you say ADU to someone in California.
They know exactly what it's, yeah. 'cause they've been living with it and probably somebody in their family's living in an ADU somewhere across, California. Yeah. So we're gonna get that way. It's just a matter of time. And it's, I'm going off topic here, but there was someone that came into our meeting that was from Oregon or maybe Washington anyway, Pacific Northwest.
And they have a whole move where they're trying to get the legislature to after the ADU is built. And if it's a separate building. To actually split the lot so that you can then sell them separately. So pretend, the family sells it and has an ADU, then the next person comes in and wants and then splits the lot and then obviously increases the value because they have two properties now that are completely separate.
So I think that could be down the line too. But that brings up a whole another thing about the parking and the entrance. 'Cause then you gotta have a total stranger, living next to you. So that think that will bring up all. Kinds of things, but I thought it was interesting that it was going that way.
Yeah. Which is why I'm bringing it up. There's progressive states. There's progressive cities that see a need for housing and are gonna attack it.
HOAs And City Pushback
I mean, even with the ADU ordinance in place as a, as legislation in Arizona, some of the municipalities over 75,000. Don't wanna work with you, so I won't call out any of 'em.
But there's ones that clearly are welcoming and working with ADU builders. And there's some that aren't. Oh really? Yeah. They're drawing areas that they can't be and calling it for, maybe it's around an airport or something where they're trying to restrict the area.
Which you can build ADUs. And part of it is also homeowners associations, homeowners associations usually have the right to approve ADUs and if it's in your, the state legislation doesn't. Take precedent over recorded CCNRs and HOAs. So if you don't have a house in an OR property in an association, you've got a better chance of doing it with l with less pushback.
Okay.
Costs And Comparisons
And so can we go into some cost and what some of these things will cost? Yeah. And. 'Cause I know, so building from the ground up, which is what you do, a lot of people think that this is the most expensive route to go, especially if they're like, oh, I have a garage that I can convert.
Or I above the garage, or as I said, like the containers. And so what are, and let's talk about, the cost and what it's like going out there. And maybe you can include the timeline too while we're talking. Sure. It is expensive on a per square foot basis. It's not expensive. If you look at what you, what your alternative is to live in this, the heart of town, right?
So if I have a home again, I'll go back to my son's. It's seventh and Osborne. If he wanted to buy a house for me because he is worried I'm too old to live on my own, and he was gonna buy his next door neighbor, he's five, $600,000. If he builds an ADU in his backyard, it's 150 to a hundred, maybe $200,000.
So I'm, I don't have as much space. But I'm close and it's affordable. So I think I, I think that's the concept. If you're gonna compare it on a price per square foot, you're not gonna be happy. I'll just tell you that. No, it's expensive. Because they're small, right? But the expensive stuff is the plumbing and the electrical.
And so adding bedrooms and adding all those empty rooms, that doesn't cost anything. What's expensive is. The kitchen, the bathrooms, the main things. Sure. Yeah. And so obviously the price would go down the bigger it would get when you're just adding bedrooms and empty, I call it empty space, sure.
It's not highly. I talked to a custom home builder and he looked at me like I was crazy. He said, I, you run the same trades through your little ADU that I run through a custom home and I'd rather do one large custom home than 10 ADUs. And he's got a point. That's why I'm not seeing the field as crowded as I, it, it might ultimately be because it's a lot of work, and then we may get into that later.
But yeah, I mean it's per square foot, it's expensive. But when you look at the alternative, it's not. Yeah. And we are, we competed for one site and I don't think the person is built yet, but he got a quote from a modular, and he said, by the time I did all the work that I needed to prep the land and then they were gonna come in with a crane and drop it in my backyard, I was a little bit less expensive than you, but I would, I had a modular home, so it's for a family member.
I'd rather pay a little bit more and have something that's stick and brick and that's just where we are. Yeah, that's exactly what, basically the conclusion is, 'cause I thought a lot of that stuff would be cheaper, especially the modular, the container homes people were talking about in the containers, how you have to test them for all kinds of things.
'cause you don't know what's been in them. And so sanitizing them and getting them clean is thousands of dollars. Along with, you don't have any windows, it costs almost just as much to have these modulars, to have the containers to retrofit a lot of your garages and things like that.
'cause your garage, the slab is not made to hold the weight. So you basically have to repo the slab. So then what's the point? You're starting from scratch, so then you've got the added expensive tearing down the garage versus just having the land. So it is a lot more complicated than I think people realize because of preparing the land and preparing the electrical and the plumbing.
Just to put anything there. That's, I think, the complicated part. And how is it gonna fit in, on the property. Do you have a lot of issues with that? Yeah and I tell people, you can convert a garage. It's not what we do. And, we're happy. I'm, I, as I said before the show, I'm a very big advocate for the industry.
We're not gonna be right for anybody. Just like any service or business is not right for everyone. But I'm an advocate for the industry 'cause I think people deserve. To have a home where they have all the services. One, and I think we could use some of the larger lot developments in the valley better.
So I'll encourage people to do conversions, to do additions, to add a, add a story if they can do that, which we don't do. But yeah, it's an industry that's gonna continue to grow, but there's way more costs than people think there is. It, we'll get a call and, Hey, can you come out and look, we've got some extra space.
It's a, it's a. I think I got one that was a like the excess of a horse area attack room can, we just wanna add a bathroom in a kitchen and sounds easy and it looks easy, but it's not, no, I would just wanna add a bathroom in a kitchen. Oh, I just wanna run all this water and electric get all this permitting done. And yeah, it takes a lot to do all of that. Yeah. Yeah. Yeah. Yeah. I guess we see it on TV and people think it's easy, sure.
Pricing Site Variables
You know, so is your price all in, like if you're saying it's 150,000, you guys do the permits and everything? Yeah. So if you go to our website, you'll see our pricing.
And our pricing is for the structure. The ADU, the guest house, the Casita, they're 400 to 800 square feet and they're 140,000 to 180,000. But we don't know what the site costs are, what you've touched on earlier. So then we'll come do a site investigation and we'll see where your water is and where your sewer is.
And are you on septic? We're doing a septic tank right now, and we just came across a septic tank in someone's yard the other day that was abandoned. And it's in central Phoenix and we're trying to figure out how to deal with that. Whoa. So yeah, we don't know. Surprise if you want natural gas.
Do you want a tile roof versus an asphalt shingle roof? Do you want an upgraded appliance package? So there's site conditions and then there's change orders and upgrades. But if you go to the website, it will show you what the ADU costs. And then we come out, we call 'em unique property costs.
There. They're basically site cost. And then we do an estimate of that. We give you a quote, and then based on that you can say, yeah that's in my range. And, push forward. And then we start getting our experts out there to look at how to connect all the utilities.
Permits And Turnkey Build
And and once you get it done, so you help with the permitting process or you do the permitting so that the city has it on the records.
So we have five approved plans at the city of Phoenix. So if you pick. Plan, and we call it the Bisbee. It's a 480 square foot, one bedroom, one bath it. We've built a couple of them. The plan's approved. So when we come to your house and you engage us, we have to do a site plan. The city wants to see how it's gonna sit on your lot.
Then we have to do what we call a project description plan, which is how we're gonna hook up to utilities. So out of the 16 pages of plans, the city of Phoenix, when I say they're approved, they're in the city of Phoenix, has to approve two sheets. They don't have to approve the whole plan 'cause it's already been processed.
They're stamped, ready to go. So that expedites the process, makes it, pretty efficient. Now you can't make changes, so you gotta like what we have out there. But yeah, that's the way we do it. We have approved standard plans in the city of Phoenix that move through. Fairly quickly. They were doing some over the counter stuff, but they had to pull that in.
'cause I think they had a lot of requests. Okay. And so once it's done, then it is on record as the city that your square footage has increased, right? So your property taxes will go up, that sort of thing. Yeah. And we don't really get involved in that. But yeah, there definitely is a building permit.
So back to maybe your question I didn't answer. We're start to finish. I tell people we're from the nice to meet you to, here are the keys. So we permit. We build, we finish and we hand you the keys. So it's all in one. You don't get handed off from an architect to a contractor, et cetera.
So we do it all. And I think people find that attractive and worth some expense. 'cause they're only talking to us. They don't deal with anybody but the three of us. Oh, that's nice. Yeah. Yeah that, and I think that's helpful rather than trying to piece it all together and figure out, 'cause it's essentially like going, not to keep going back to the container thing, but if you're buying a container and you're like, oh, this is a great idea, then you gotta find all these people to do all of the work.
So it's nice that you're right. And there's one stop. There's nothing wrong with. Finding an architect and then a contractor and then overseeing the building. Yeah. But they're not all talking and, yeah. Yeah. And but that's not what we do. I'm not saying you can't get it done that way and there's a lot of being done that way.
But we are a one stop shop. Okay. Yeah.
Part One Wrap Up
So we are going to take a break 'cause we're making this into two part series you guys. So I hope you'll tune in next week for the second part of the series. 'cause we're gonna be talking about. Some of the cost breakdowns and other things about adu, like how people finance it, and maybe some rental income possibilities.
We are going to break here and we're gonna continue this next week. So thank you so much for listening. You guys. I hope you've learned something and then tune in next week. So for part two of accessory dwelling units.
Podcast Outro And CTA
Thank you for listening to the Unconventional Investor Podcast. I hope you feel more confident in how you can grow your wealth using the strategies I shared in this episode.
If you're ready to take the next step in diversifying your portfolio outside the stock market with alternative investments, head to me financial.net/contact us to book a 15 minute consult call with me. Let's discuss how we can work together to achieve your financial goals. Until then, I'll see you on the next episode.
Disclaimer: The information provided in this podcast is for general informational purposes only and should not be construed as professional financial advice. Always consult with a qualified financial advisor or professional before making any financial decisions. The hosts and guests of this podcast are not responsible for any actions taken based on the information presented.