Building an Accessory Dwelling Unit w Tom Mulhern Part 2
In this final part of a two-part episode, we continue our discussion about the ins and outs of building Accessory Dwelling Units (ADUs) which are becoming increasingly popular in backyards as extra living space for extended family, overnight guests, or as a way to generate rental income.
Tom Mulhern, co-founder of AzADU, joins us to break down the real numbers behind building an ADU, explore financing options, and common surprises that pop up during construction. With rising home prices and changing family needs, ADUs are gaining traction as a versatile, value-adding alternative in residential real estate. If you’re curious about expanding your living space, investing in multi-generational housing, or eyeing ADUs for rental income and long-term value, this episode is a can’t-miss.
Three Key Takeaways:
Financing ADUs Requires Creativity: Most homeowners opt for HELOCs, cash savings, or funds from family home sales; traditional construction loans are less popular due to complexity.
Expect the Unexpected: Installing an ADU can come with surprises—think abandoned septic tanks or tough utility connections. Working with experienced builders who anticipate surprises is crucial!
Legal Landscape is Evolving: Recent changes to state laws make it easier to build ADUs, but every lot and municipality has its quirks. Work with local experts to navigate zoning, setbacks, and building codes.
Learn more about AzADU’s floor plans, standard features, and cost breakdowns, or for personal consultation with Tom Mulhern and his team: https://www.az-adu.com/
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Time Stamps
00:00 Podcast Welcome
00:24 ADU Episode Setup
01:47 Costs and Payments
03:49 Value and Appraisals
05:36 Site Work Surprises
08:18 Backyard Access Logistics
09:11 Finishes and Customization
10:25 Arizona ADU Law Explained
14:56 Common Pitfalls and Future
19:23 Rental Math and Parking
23:02 Quality vs Cutting Corners
24:42 Wrap Up and Resources
25:23 Podcast Outro and CTA
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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 Setup
Hello, everyone, and thank you so much for tuning in. This is going to be part two of our accessory dwelling unit episode ADUs. And if you don't know what those are, they're like the buildings in your backyard.
We call them a casita here in Phoenix. And people are... I think that they're all the rage, especially with home prices. If you're looking to have a family member move in or if you're looking to just expand the amount of square footage that you have in your house, an accessory dwelling unit might be the way to go.
And I originally wanted to do this because I was surprised at how complicated it was to actually get the ADU on the property, how much they were and just all the details that went into it. So to talk about this, I have Tom Mulhern here, and he is the co-founder of AZADU here in Phoenix, Arizona, and they basically build them from the ground up.
And so thank you so much for being on, Tom. My pleasure. I enjoy talking about ADUs. Yeah. Yeah. It's fun. And I think it's fun to talk about 'cause people are interested in it, but they don't know a lot about them, sure. And so when you know about all, then all the little details and stuff, again, that's what I'm fascinated with anyway, so in our last episode, we covered what an ADU is your plans, the- you have k- some cookie cutter plans and what it takes to put it on the property.
Costs and Payments
So let's get into paying for an ADU, 'cause you said that you have anyth- you have ADUs from $140,000 all the way they're usually like 140, 160,000.
180. Yeah, and that- 180, okay ... that's for the ADU, and then there's the site cost. So yeah. Yeah. So there's, that's for the building itself- Correct ... versus not what's in the land and- Correct ... what you're having to put in the electric and all of those sorts of things. So it would be additional when you're adding the plumbing and the electric and whatever else might be needed.
So what are the ways that you see people paying for these? Our business model is We basically collect payments along the way. So it's not like a custom home where we're getting draws. We request the, payments, all progress payments along the way. So we have people that have cash, or we have people that use a HELOC.
We haven't seen anybody refinance the house 'cause they're probably locked into a 3% mortgage. Or we see in... A couple examples are mother-in-laws selling their house and using the equity from that to build an ADU in their kid's backyard. I think their philosophy is, "The kids are gonna inherit this anyway."
"So I'll improve their property. I'll have a place to live. I'll be close to my kids, my grandkids. And I'll just use that equity." So that's primarily what we've seen. There's definitely financing mechanisms out there. There's a lot of banks, second mortgages if you wanna get a second versus- a HELOC. But yeah there's lots of ways to finance them. Yeah. And people mention, always mention construction loans, but those are such a pain in the you know what- Yeah ... that I just don't think that most people will go for them once they realize what they have to submit all the time in order to get a draw on it.
So people love to throw that out there, but I don't ever think that's really a great option. Not option one. It's not easy. Yeah. Yeah. Certainly not the first one. It's not easy. Yeah. Okay, so you take them over time.
Value and Appraisals
And then do you ever talk about do people get appraisals after they're done getting their ADU on their property, or are they mostly just not really concerned about that because they're just concerned about having the living space?
So we don't really get into that- ... what the appraised value is. But I talked to a friend of mine that does a significant number of appraisals across the valley when I got in the business. And I said, "Tell me about how ADUs appraise." And he said, "Tom, most of the time if a home has an ADU on it and it appraises below the asking price or whatever the c- contracted price is, most of the time the buyer will make up the difference re- regardless of the appraised value because they, they have a use for the ADU, right?"
If you're moving your, a family member in and it comes in $50,000 below the appraisal, you're not gonna walk from the deal. So I tend to think your value increases. I don't s- I've not seen pre-construction and post- To post-construction ... construction appraisal to, to actually see it, but I believe that you'll get your value out of it.
Yeah, I would think that people would. And it would be something that would be very hard to appraise because it's not something that your neighbor would have. Sure. Exactly, no comps You know, so if you're the only one- Yeah ... in the neighborhood that, and you've gotta go two miles away to find a comp, then that might not be worth it.
It's always interesting to me because, we don't build attached, but if it's attached, it would be considered additional square footage- ... which would be the value of your house, right? If it's worth 400 bucks a foot, the ADU's worth 400 bucks a foot. We do detached, so I don't know why it would be less because it, to me, it'd be more attractive.
But yeah, I don't, I haven't really focused on appraisals. Yeah. And I don't know that people are that concerned about it because, again, most of the ADUs are being used for family in some- exactly ... some way, shape, or form, or that they just want more square footage.
Site Work Surprises
So can we continue talking about the the ground, getting the ground work?
Are there a lot of pitfalls with that a lot of issues that come up when you're doing that? Is there always a surprise, or is it oftentimes just pretty straightforward, and then there's occasionally a surprise? That's an easy answer. Yeah. There's always a surprise. Okay. Yeah. No, there's no
You're talking about usually areas of town that have been around for a while, at least where we're building. And you gotta figure out where their water is. Water's usually in the front. Sewer, if they have a s- if they have an alley, it's usually in the back, but we're bringing some all the way to the front.
Electric, if they have poles in the back, you usually can attach an, a, an, a meter there. Natural gas, we're doing one that the service is all the way in the front, and so we're having to bring a pipe all the way to the back, and there's others where the service meter's in the back. So it's a puzzle, and then when
Our contract pretty much says, "This is what we think we're gonna find, but as soon as we put a bucket in the ground, we could find surprises." And I think I mentioned on the last episode, we just came across a, an abandoned septic tank. We've hit, Lots of irrigation lines that aren't even the existing owner's ir- irrigation lines.
There's fourth generation irrigation. So you hit that. You... We've come across relocating some of the SRP service irrigation lines where they're right underneath where the ADU was gonna go. And we've even found abandoned SRP lines. So it's pretty interesting when you start digging what you're gonna find.
And that's the piece of the puzzle that's really complicated. It's not hard to build an ADU. Our contract says 180 days, and if the trades show up when they're supposed to, we can get it built in four months. So we can go from meeting someone, if they're really wanting to build something signing a contract, get them a quote within a couple of weeks, signing the contract a couple weeks after that, having a permit in s- close to a month, 'cause we talked in the last episode about our pre-approved plans, standard plans, and four-month construction.
So six months would be super aggressive for me to sit here and say that, but there's no way it's gonna take a year if you're moving fast and we're moving fast. But and that's if we don't hit surprises, and then the surprises always probably add time. Yeah. And money. Yeah. Really. Yeah. 'Cause if you were doing natural gas and you needed to bust up some concrete in order to do it and to run a new line, that's, significant.
And a lot of backyards have a lot of mature landscaping. They've got a small gate. They're pushed right up against their property line. They've got a pool.
Backyard Access Logistics
That's another question. So the gates to the backyard. So what about access? We- Do you... Are, do you have to bust down gates sometimes because the, it's so small?
Gates, walls, yeah, go around pools. Yes, we've had to do all of that. Wow. Yeah. I, yeah, 'cause I didn't think... That was another thing I didn't think about, was access. I'm like, yeah, you need to at least have an RV gate, right? Yeah. Or do you need to have bigger? You can get mini excavators that can get back there.
The biggest part is the excavator to prepare the pr- the pad, so that, you need a piece of equipment to get back there for that, 'cause they don't wanna hand dig a pad. No. And then getting, getting the lumber back there. A lot of AC units are craned from the front over the top of the house.
And the trusses, believe it or not, are so lightweight that you can actually just carry them back there and guys can lift them. So it's just some of the equipment and some of the materials. Okay.
Finishes and Customization
And then on the interior, do you, do people pick their tile and everything, or you have set tiles and design elements that are part of your package?
Great question. So on our website, we have a kind of a standard finishes page. So if you go on that, you'll see the appliance package, you'll see the cabinet package, you'll see the fixtures, for the bathroom and the kitchen the doorknobs, the doors. All of that's on there as our standard features.
Now, a lot of people are like this is in my backyard. I want, I don't want an asphalt shingle roof. I want a shake shingle. I want a tile to match our existing." Yeah, they want to match whatever they have- I- ... and make it match their house- And I would too ... a lot of times. Yeah. Yeah, I would absolutely want to do that.
So we, we end up customizing probably more than we really want to, but we're very conscientious that we're working in someone's backyard, and they want it to look like when you walk out of their house and they go into their ADU, it doesn't look like this, thing dropped out off the moon. So yeah, work, we work with our customers with that. Yeah, 'cause they probably want it painted the same color. Stucco- yeah ... same finish. Yeah, boar- batten board siding in some cases. Yeah, so b- yeah we're willing to do that, and most of our trades are pretty good about that.
Okay.
Arizona ADU Law Explained
And then I would like to pivot a little bit to the new laws or the new law that was passed about ADUs. Do you think that... 'Cause I know the, some of it, in the classes that I took, it, it was, okay, it needs to be set, how far do they have to be set from the wall from the, I should say, the property line.
But it, and I think it was five feet, but it didn't say is it from the roof line or is it from the base of it. There's a lot of, I think, things that are pretty nebulous, and I think maybe that's what you're seeing in the cities as to maybe they're not willing to work with you, and some of them are more willing to work with you.
But do you think that the bill that was passed in Arizona is clear enough to develop ADUs in the future, or do you think that there's gonna be a lot of things in the court? No, I think it's very clear. Really? Yeah I do. It's, it, y- 'cause then you're really dropping into building codes, right?
So what they basically said is you couldn't, y- you can have a side yard and a backyard setback of five feet. So you can build in the rear yard setback. A lot of s- eight, a lot of houses are three and 10, in, in R-16. So you can go to five and if it's a, like I said, if it's an alley, you can go to the lot line.
So you don't even have to have a setback if it's on an alley. You could, your back wall could be the fence. And then the roof would hang over- So- ... the fence? W- it could hang over into the alley, yeah. Really? Technically. But so then you get into the eaves, right? Do you want a zero eave?
Do you want a one-foot eave? Do you want a two-foot eave? And a lot of times they look at their house and say I want it to match my house." So then we'll design the eave like that. Now, if it gets pushed towards the house, let's just say they've got a limited amount of space, then you start talking about firewalls.
So you could... there's distances, and I'm not an expert on that, our building guys are, but I think the minimum is five to eight feet. So you have to stay five to eight feet away, or you've got to firewall. You wanna only have to firewall the the ADU. You don't wanna get into having to firewall the house.
And it's really not that difficult, quite honestly. You plug the bird holes in the eaves a lot of times, and then you wrap a sheet of drywall around the exterior. So it- for a typical firewall, if you don't, if you're restricted on space under $2,000. Really? Yeah. But, but- Oh, so that's not that big of a deal.
No. It sounds like a big deal. Yeah, it does. Oh my gosh, you have a firewall. It sounds like a big deal. Yeah. But yeah, we're building within, if it, if, and by the way, if we're building on the three-foot side of a fi- of a house, we don't have to stick to the five foot. We can actually go to the three foot, and then you could have your one-foot eave, and you're kinda close to your neighbor.
Yeah. And you can go up two stories. I'd have to take a look at that. I think in s- I think the instance is you can go up as high as the main house. So I think if you have a two-story house, but I thought it was restricted to 15 feet, but I could be wrong. Oh, really? Okay. Yeah, I think.
Yeah. But and every municipality can... They can't be... they can be less restrictive as the state, but they can't, or they can be more- Yeah ... but they get, can't be less, right? Yeah. So the state bill kinda trumps that, but yeah that's why we talked about it last time is that it depends on the municipality you're working in.
Phoenix loves ADUs. They're great to work with from the staff to the s- the council. They're very pro-ADU, and that makes it nice. And quite honestly it's the b- for us, the only place we're building and the best place to build because there's not a lot of HOAs in the center of town, and you typically have large lots with small houses.
So the ideal ADU situation is a large lot with a small house. And when small, I don't mean, you know- Yeah, but just- ... 1,200, 1,400- ... compared to the lot- ... it is a small house. And no pool. Or if the pool, it's on the left side or the right side or, you know- And then you have the other side where you can put the ADU.
'Cause if the pool's right in the middle, you start talking about having to fill in a pool- ... and grading and drainage and- ... and all of that. And on an alley, 'cause the alley means the sewer's in the back- ... and usually means there's electric poles, so you can come right off them.
Now, there's some abandoned alleys, but it serves the same thing. The sew- the manhole may be in your backyard, but it's in the back instead of having to go all the way to the front. 'Cause when you gotta get the right slope for 150 feet for your, your wastewater it can get pretty deep. Yeah, I bet.
I bet it can. Yeah.
Common Pitfalls and Future
So are there any like- mistakes or pitfalls that you see homeowners make with ADUs or, that's pretty common that come up? I, since we stick to our little niche y- I don't, we haven't come in to save somebody- ... let's say. But I think on paper it sounds really easy.
The cities are even starting to talk about we have plans that are pre-approved, and you can build it in your backyard." So you think, "Great, I just saved an architect, and I just, it's already approved." You still have to figure out how to hook up to the utilities. Yeah. And you still have to figure out how to get equipment in your backyard, and you still gotta be ready to hit something that you didn't expect to hit.
So it's not as easy as it sounds. And those plans might not fit on the way- 100% ... that your land is situated- 100% ... 'cause every backyard is so different. Yeah. So yeah. And they've asked us to participate in that and, but you basically then, you give up the right to own your house plan.
So they'll put us on their website, but they won't say it's our plan. Oh. And so we just thought, "You know what? We'll just keep doing what we're doing." But yeah I think, I really am encouraged by the industry and the cities and the forward-thinking. I think Phoenix, I've been in the real estate business since the '80s, has done a great job with, transportation infrastructure and staying ahead of it and really anticipating where the needs are for the future generations.
And I think ADUs will be a common term in 20 years. Yeah. And there'll be lots of them, and there'll be a lot of people doing them, and they'll be everything from container homes to stick-built to modular to garage conversions to, attached and detached, but it will help the community. Yeah, I agree.
I think I'm okay with ADUs as long as I'm not looking at a two story that's, butted up against my property line looking down into my... that's where I kinda have an issue with it. But otherwise I'm like, go, you know- Yeah ... go on with your ADU and have a great time with it. Yeah. And, whatever it needs to do 'cause I agree with you.
We do have large lots with smaller houses on them, which I'm very grateful that I have that for my house, right? 'Cause I can have a pool and the plants and everything. But it is wasteful because it's you see a lot around town, like the churches have a lot of land, and they'll sell their land.
And then I'll be reading in the business journal, it'll be like, "Okay all that land just went to five houses." I'm like, "Five houses?" Like- You could've had hundreds of people, not that everybody wants to live in an apartment, but still, it, it doesn't seem right sometimes that only five people get to go on that land when there's a lot of people that would like to share it, yeah, density. Yeah. It all comes down to density. But no, you're right. I think the two story I think that's more restricted. I talked to a friend of mine in California, and the AD ordinance I don't think applies to the coast. And so people are having ADUs that are two stories that are b- blocking the view- I know, exactly
of the houses that aren't right on the coast, and it's a problem- Yeah ... over there It's hurting their pr- home value 'cause that's what they bought their home for. For the view. Yeah. For the ocean view. Yeah. So yeah I do think that... I'm not saying everything's positive about ADUs. Again, there can be, there's gonna be situations where you're gonna go, "Oh my gosh, we've got 20 built on our street, and it's become a rental street."
I say to people you can't stop the waves, but you can learn to surf, right? The legislation's been passed. It's going to happen, so your choice is to- And we need housing. And I really have been saying that I think because the housing's so expensive that families are gonna start moving back together or living together- Yeah
longer. And it, that happens all over the world. I'm not, we were very unique in having all of that land to be able to spread out our families. And hopefully we've all learned boundaries by now so that we can move back together. Yeah. No I think you're right. I don't, I... And I think, when you, it- forget, put the s- price of housing aside for a second.
Think about what- a care cost in an assisted living. Yeah. So if you could have your, an in-law, mother-in-law, your mom or dad or in-law in your backyard where you could keep an eye on them 'cause they're not in need of the intensive care versus a- Yeah, or there was someone in- ... several hundred dollar a day-
to take care of them during the day while- ... you were working in your house. There is just a lot of benefits to all of that. Yeah. Yeah. I think it's a good, family environment if you're close to your family and you can make it work, and I think it does save money for a lot of families.
Yeah, yeah.
Rental Math and Parking
Well, before we sign off, I do wanna touch on, 'cause I have done a lot of the financials, and I know this isn't what you get into with the [00:18:00] financing of or renting them, I should say, 'cause you hand over the keys and then you're like, "Okay, we're done." But I have done a lot of analysis of what it would, how many years it would take to recoup the cost if you were going to rent it out.
And a lot of times, it's y- a significant amount of time, five, 10, 12 years, depending on what the rental income is in, in certain areas. 'Cause I think a lot of people think, "Oh, I'm gonna build this, and then I can rent it, and then I'll be able to sell it for more." And they're just really hard to price, and I, it's not as simple and straightforward as what people were or originally saying.
I'm not saying people couldn't figure it out, but you do need to have the cash in order to build it and to invest in something like that, even if you were going to rent it out. So you guys, I d- just wanna reiterate, do your homework on something like this because they're just a lot more complicated than you think.
And if you did wanna rent it out you do have to have a stove hookup. It needs to be a AD, an accessory dwelling unit, not just a casita with maybe a bathroom and a refrigerator. You have to provide, a central area where they can access their panel. There, there's a lot of things that you need to be thinking about if you are actually going to rent it out and, have it as a business.
So I encourage you to talk to someone that knows about ADUs and renting them out. But it is all very new, so I'm not sure if you were gonna resell it that you would necessarily always get what you were, what you put into it. Yeah, I think the economics are, it's like any, it's got a pencil, so to speak, as we say in the real estate business.
And I think the economics work at some level, and with the states attached and detached, where you could t- turn a single family rental into basically a triplex it probably looks a little bit better. But yeah, there's a lot of costs. Do you buy a lot and build three? Do you buy a h- an existing house and fix it up and build two?
And there's probably some price point that it works in rental income stream. But yeah, I think you gotta really do your his- research on that and parking too ... and parking. So are you renting it to two people and you already have four people in your house, and then you literally have nowhere to park.
Even your street parking is filled up. There's things to think about. We talked to a company that bought, several thousand homes in the downturn, and they still own them. I can't think of the name of them. And they're building... they're test- they're modeling ADUs in California, and they own several thousand homes here, and they're gonna try it next, and they talked to us about being one of their builders.
But interesting enough, t- building on what you said, they said the two things we find are a real advantage if you're gonna do a rental is parking and some storage. I- it's not s- it's, if it's a rental and they're gonna be there 12 months, they want some storage- ... and they wanna be able to come home and park, in front of the house or even on, gravel area that's off the street, but they said that was a big marketing point for them.
So- Absolutely. Yeah. Yeah, and I love this whole movement, total side note, of not doing away with cars, and all of that, and they're like, "Oh, there, we built this," especially in California, right? And there's no parking lot. I'm like yeah, but then you need to build a train or something." We're stuck with these cars. So either you're gonna do trains or we're gonna do parking lots. I don't- Yeah ... you know what to tell you. But yeah, you gotta think about the parking, and 'cause someone that's renting let's pretend they even have a little kid, and they're not gonna be carrying groceries and y- you know, like two blocks away.
Not in the hundreds of degree weather. Yeah. Yeah, yeah. Yeah. So there's definitely logistics.
Quality vs Cutting Corners
And then and then just on the financing side they are a little bit more expensive. I think people think that they could do them for $50,000, and that's just not the case. So it is a significant investment.
And then to recoup that based upon whatever your rents are and, the expenses that you've got, so it, it took a lot longer than what I thought it would. Yeah, y- to the extent you can build it for less, y- it, that all comes down to the finishes and the insulation and the air conditioning and all that.
So y- yeah, you gotta be careful about building something inexpensive that won't rent because it's not quality. Yeah. Yeah. And that goes onto my whole spiel about real estate. I just can't believe- The pickle that people get themselves in just to save a couple hundred bucks. Yeah.
It's if you would just spend the money on an AC unit, right? Just spend a couple extra thousand dollars, you're gonna save yourself so much headache down the road. But people are so cheap. They don't wanna hire l- a licensed contractor. They don't wanna pay... it's like they wanna do this stuff themselves.
Sure. And it just opens up this whole thing. And I was actually talking to one of my good friends. She's a she doesn't- she lives in Kansas City, but she's a real estate attorney. And I was complaining about, like, how cheap people were and how it just backfires all the time, right? And I'm like, "It's just crazy to me."
And she's And she just paused and was silent for a second. She's "This is my whole job." That's what I do. "It's it's it's 100% the reason I have a job- Yeah ... is because people are cheap." Yeah. Because they don't wanna hire the lawyer. They don't wanna hire someone like you to actually do it right, they think they're gonna save all this money, and in the end, you just don't end up saving all that money, but yeah. Yeah, I agree. Yeah. Yeah.
Wrap Up and Resources
So, Tom, thank you so much for being on. Thank you. It's a pleasure. I, yeah, I really appreciate you sharing your knowledge about ADUs with us. I hope you guys learned something about ADUs, and if you wanted to have one in your backyard Tom's website is az-adu.com.
I will have it in the show notes. And as he said, they're have all their for- their floor plans and costs and everything on their website if you are interested in that. And then I would imagine if you wanted to do ano- a different one besides build, he would also be a good resource for you, too, with people in the industry and stuff like that.
Happy to help any way we can. Yeah. Yeah. Yeah. Yeah. So you guys, thanks so much for listening. I hope you learned something, and I hope you have a wonderful day. I will see you next week.
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 mefinancial.net/contactus 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.