The ADU and Micro Development Strategy Real Estate Investors Are Missing

Jared Jones (00:00)

We use the number 700,000, so I’m gonna run with that because one of our properties in Riverside here, the neighbor just sold their house for $700,000. And we on the lot next door built four units and our units cost us anywhere from 170 to $240,000 a piece to build.

depending on which size we were building on that lot. Well, their value is between 500 and $600,000 per unit that we built.

Cody Crabb (02:06)

Hello and welcome back to the Real Estate Pros podcast by Investor Fuel. I’m your host Cody Crabb and today I’ve got Jared Jones with me, the founder of Middle Housing Partners. Jared builds micro development projects across California, ADUs, duplexes, townhomes, small lot subdivisions, usually adding three to 10 units to existing properties or small vacant lots. He’s got around 700 units in process right now and he’s also finishing a book about why, about housing by right and how that middle housing

could be one of the real answers to the housing crisis. I’m very interested to talk about this. Thanks so much for joining us today, Jared. Of course. So before we dig into ⁓ kind of your background and things, can you give me a little bit of a definition of this middle that you bring up, middle housing?

Jared Jones (02:40)

Thanks for having me.

Yeah, I think that ⁓ middle housing is the space where our workforce lives, right? Like it’s where the teachers and the nurses, know, the people that run our communities, like these are the kinds of houses that are accessible to them. So they’re not necessarily quite, you know, affordable units.

but they also are not that luxury, luxury 2,500 square foot build. And so thinking of like, where does somebody start their housing journey? know, townhomes, ⁓ condos, you know, like that starter place. In the seventies in California, that was a 1,200 square foot ranch home. ⁓ And so today in California, it’s almost non-existent.

Cody Crabb (03:26)

Yeah.

Yeah.

Jared Jones (03:48)

And so what we build ⁓ serves that portion of the demographic, which is actually the biggest need in

Cody Crabb (03:48)

Yeah.

Yeah, you’re basically including all of my friends and people I know. So that’s very much neat. I live in Salt Lake City and even out here, that’s a huge, huge problem.

so you talk about microdevelopment. I find this really interesting. ⁓ Can you give us a little definition on microdevelopment? What is that?

Jared Jones (05:04)

Yeah, I mean, typically, even when you’re talking to like somebody that does infill development, that may mean like a three acre lot where you have 70 or 80 units or 200 units or whatever. ⁓ Micro being the quantity of units that we get in one project. And so we have, like you said, three to 10 is typically what we have in our projects, sometimes a little bit more.

But basically, it’s something that Wall Street wouldn’t roll out of bed for. It’s too small for them. But it’s also something that’s probably a little bit intimidating for the average mom and pop real estate investor, where they’re not really wanting to go in and build. They’ll buy something that exists. it’s that middle space, kind of like with middle housing, where it’s

It isn’t something that we have seen any scaled model on ⁓ in general in our area. And so that’s kind of like our thought process is how do we scale the unscalable? ⁓ And so these three to 10 unit projects, they meet a very deep need and niche within the market ⁓ that really gets the opportunity to put people

back into the places maybe that they grew up, right? And so, you know, they’re a nurse, mom was a nurse, on mom’s salary that they could afford when they were kids to live in this neighborhood, but on the same kind of salary now, you need to make three or four of those same salaries to buy the same house just 30 years later. And so this leverages the opportunity to look at that.

underutilized space and put more units in that space so that there is an affordable option within that same neighbor.

Cody Crabb (07:04)

I find that pretty interesting because I’m thinking back to like…

you know, the, the houses around where I grew up and, and, uh, I’m thinking of like the, they’re like low, they were like low hundreds when I, when I first started kind of realizing how much house costs, like maybe like 120,000, 140,000. This has been kind of suburban Salt Lake city. And then now in the same neighborhood, we’re looking at like five, six, $700,000 houses, the same houses. And so, and, and how could anybody let’s around that age, like that’s kind of looking to start out like, or, or even not even the

Jared Jones (07:15)

Mmm,

Yeah.

Cody Crabb (07:36)

thing but like let’s kind of this middle salary like you said how are they supposed to afford a mortgage on a $700,000 house in the same neighborhood where they grew up they can’t it’s impossible

Jared Jones (07:44)

for sure. And, you know, one of the things that I would say, specifically speaking to you, because I do know a bit about the place that you live. So like you go up, you know, first of all, Salt Lake’s a grid, right? Like, ⁓ in the amount of large lots that you have, you know, I used to own a place right down from the capital. And

you know, it was ⁓ a 10,000 square foot lot, but I only had a 1400 square foot house with a basement. And so really you only have 700 square feet of your lot being taken up by a structure. there’s a lot of space. And so if I can put, and if that house over on Ardmore, which is the name of the street over there, ⁓ but if that house is

$700,000 today, which it probably is, then I look at that and I’m like, well, what does it cost me to build a new structure on that as an addition? Not addition to the house, but like additionally to that property. Maybe it cost me 200 grand to put up something that somebody could live in, in a $700,000 neighborhood. Now, maybe that house that I put up for 200 grand is worth

Cody Crabb (08:43)

Easily, yeah.

Jared Jones (09:07)

450. It may not be worth 700, but I could do something where I’m putting a more affordable option in the same exact market. And that is very powerful towards speaking to the generation that has had the short end of the stick handed to them.

Cody Crabb (09:27)

Yeah, I love this. love this. feel like there’s not only is there a huge need for this, but as an investor, I’m thinking of like the options you have of, you have multiple, like you said, like that $700,000 house neighborhood. If you can rent a place in that area, it’s not going to be the like cheapest. You can get some pretty good cashflow, I imagine, going from these properties. that like one of the big advantages of this is that you can kind of sneak your way a small unit or a

would normally be a cheaper unit into a neighborhood that cost more.

Jared Jones (10:33)

Yeah, and you know, I think that the interesting thing that I’ve learned over the last little bit, the more that we’ve dove in into small subdivision, it’s not like the way that it gets looked at is like, well, the value is in the land. And I actually push against that. That’s not actually true. In most cases, the value is actually in the structure.

It’s what you can do with the land. So, and I’ll give you a really good example.

We use the number 700,000, so I’m gonna run with that because one of our properties in Riverside here, the neighbor just sold their house for $700,000. And we on the lot next door built four units and our units cost us anywhere from 170 to $240,000 a piece to build.

depending on which size we were building on that lot. Well, their value is between 500 and $600,000 per unit that we built.

And so the thing is, like, we’re in the same neighborhood, but there is a property that is, so that lot next door that just sold, sold for $700,000, but it was a little bit bigger unit.

Two blocks away, is, so 7,000 square foot lot, $700,000 house. Two blocks away, there’s a property that just sold that was a two bedroom, bath, same neighborhood, like same aesthetic kind of thing, no garage, but on a 2,000 square foot lot. So tiny lot and per square foot, that smaller house, it sold for 526.

but it was only 800 square feet instead of like 1700 square feet. So people bought the neighborhood and the structure in the neighborhood, they did not buy the lot size. And so then there’s like lots and lots of iterations of that that we can see even in that little market. And the point is, if I can offer an option that’s $200,000 less in the same neighborhood, but it’s a different product.

fine. Like that puts somebody 200 grand is massive. But also, if you’re building that thing for a couple hundred grand, and it’s worth 500 or 600, that’s massive. Like there’s real profit in that deal. And also, you get to serve an awesome purpose by creating the housing where it’s needed.

Cody Crabb (12:43)

Yeah.

Yeah, no kidding.

Yeah, wow, that’s true, that’s a really good point. It’s kind of a win-win. Now, because this sounds like the holy grail of investing, I’m gonna kind of ask you a few questions about the cons because it sounds like it’s a really, really great option, but I’m starting to think of things like zoning and things like that. Like, what kinds of issues do you run into when you’re to do this?

Jared Jones (13:25)

Well…

The reason that we do what we do is because we only use state mandated laws. So zoning is overridden by the laws that we use. So the project that I…

Cody Crabb (13:38)

Is that the case everywhere?

Are there laws like that everywhere or is it mostly just California? Yeah, but are there laws like that in other states too? Or do you know that?

Jared Jones (13:41)

Statewide. So California is statewide. ⁓ There are, yeah,

actually in, ⁓ so one of the people that I follow or am connected with on LinkedIn that I love is actually in your area. His name is Patrick Risk ⁓ and he’s a housing advocate. I don’t think he does design and consulting and stuff like that, but you know, he’s been a large proponent in Utah.

and talked a lot about Salt Lake for this kind of product there. Arizona, Florida, New York, ⁓ Nevada, Colorado, ⁓ I’m trying to think, but there’s quite a few other states. South Carolina ⁓ have different kinds of state mandated laws. Some are stronger than others. mean, Portland, like so Oregon and Washington were the, and Hawaii.

were the first few states to start getting more aggressive towards this and California started really following in 2017. But basically we do see that there. ⁓ The drawbacks though are you have to become a better expert on the law than the city is. Because I did an hour and a half today with the city attorney in a city that we work in. ⁓

Cody Crabb (15:00)

Hmm.

Jared Jones (15:05)

on this and you know they’re always going to interpret the law in the frame that they already existed in. They’re like no it’s always been this way and it’s like well we acknowledge that there’s some new stuff but that new stuff doesn’t override our stuff it’s like ⁓ it does and it is the way though that a lot of this stuff has to get solved because cities look at their agenda and their

Cody Crabb (15:23)

Interesting.

Jared Jones (15:33)

once as like their autonomous situation that only affects their city.

The problem is housing is a regional issue. Like in the suburban sprawl that we’ve created in our country, what the city next door does affects us, right, in the city too down the road because the workforce doesn’t all get to live in the city that they work in.

Cody Crabb (16:40)

Of course, yeah.

Jared Jones (16:41)

And so as that’s the case, United States government has recently supported an appealed decision from one of the, I don’t remember what they call it, one of the regional courts, the district courts. And that is that it is the state’s right in these housing crisis.

situations to usurp the power from the cities because it is a regional need. It affects more people than just the people within their city.

Cody Crabb (17:20)

Yeah,

that makes a lot of sense. This is, I find this really fascinating. So like, what are these kinds of laws called? That if someone’s trying to do some research, well, how can they do that? Totally not asking just for me, by the way. Yeah, no, that’s… Yeah.

Jared Jones (17:29)

Yeah, I would say no, no, no. So ADU laws, right? So like it starts off

with ADU or small subdivision. know, those those are kind of the terms or middle housing laws like you Google any of those things and you’re going to find, you know, lots of information for whatever your state is.

Cody Crabb (17:46)

Hmm. Interesting.

Jared Jones (17:57)

on this kind of product.

Cody Crabb (17:59)

Gotcha, that’s really interesting. I don’t think I knew that. I find it especially interesting because you could find yourself at the city planner’s office and they say, no, sorry, this doesn’t work. And you go, okay, sorry. Like that’s really interesting to me. And they’re wrong. Like that’s crazy. Yeah.

Jared Jones (18:14)

Yeah, often, like

probably 70 % of the time. Like, and

Cody Crabb (18:20)

That’s crazy. See, I think

that’s that’s extra wild because I feel like that’s even that’s even doing your due diligence is kind of checking to see what the city planners like the fact that the fact that you could you’re still having to kind of go a step further than that is wild

Jared Jones (18:35)

Yeah, and so we learned that a few years into this process as we had been hiring consultants, like in designers and architects, engineers, and like trying to use their knowledge to push through the process, like we ultimately had to bring design in house. So we have architects and engineers that work directly for us because we had to become the experts at the law because it wasn’t just practicing

creating structures, it was practicing housing law. And so as we have gone through the process of figuring ⁓ those things out, it has changed the trajectory of our company. And we help a lot of other investors do the same thing now.

Cody Crabb (19:23)

That’s fascinating. just to kind of, so if somebody is, they already own some properties or they already own some things, or maybe they’re kind of looking for a deal that they could kind of use in this way, what are some things to look for? I imagine stuff like an irregular lot or a weirdly large lot or something like that, but are there other things that you would say are important to look for?

Jared Jones (19:48)

Yeah, mean, depending on what the goal is, like on a three unit development, the process is different. Like I’m looking for a different thing than a 10 unit.

Cody Crabb (19:57)

for people that kinda own a property already or they wanna kind of maybe look into this for new deals or things like that, I’m curious, what is it that you kind of would want to look for?

I imagine stuff like a big lot or a weirdly irregular lot like your house is way off to the side of a lot or something like I’d be curious to know what sort of things you look for and ⁓ You know, what what are some of those things if you already have a property maybe that what that? would you know if this is a good option for you?

Jared Jones (20:24)

I mean, in Southern California or California, if you already have a property and you’re not looking to trade it, mean, basically, if you have a garage, great, like that can work. You can convert a garage. And so, you know, if you have extra space in your backyard, like our footprints are typically about 750 square feet. And so…

If you’ve got a couple thousand square feet in your backyard, you can put a unit like it works. But if I’m going out and targeting property, that’s when like I’m going to if I want to do a bigger project, I’m going to look is my land flat? Am I close to utilities sewer? Like all of those factors. And then I’m going to figure out basically

what my costs are versus the value of what I’m going to build. And once I figure out those numbers ⁓ and like that factor, if I’m on, on sewer or not, like I a flat lot, I should be building some stuff, you know?

Cody Crabb (21:29)

Yeah.

Yeah, well, this is I find this absolutely fascinating. I think it sounds like a great option for so many people. mean, I’m even thinking of the, you know, people that want to get into investing. Maybe they’ve got their own place and they want to just, you know, get some. sounds like the ADU thing might be more possible than a lot of people think it might be. So definitely something worth looking at, at least ⁓ because you never know. Like I said, it’s even the city, even your city planner may not fully know what’s possible in your area. So it’s super good idea there.

⁓ So just a couple quick things as we’re finishing up here. ⁓ What are some things that people should be cautious of? This sounds like a really good idea on paper, but ⁓ it seems like this is one of those things that could easily kind of spiral or not, what should you plan ahead for in these kinds of projects?

Jared Jones (22:23)

Yeah, that’s a great question. I would say that the Mr. B says this and I love it. Consultancy is a cheat code. So there’s somebody in your market that already does this and it’s likely that you can follow them or get advice from them. But. Who you work with matters and so the the contractor that you’re going to use you want to know.

they do these kinds of projects, not that they just know how to do a room addition or a remodel, right? And then.

Cody Crabb (22:56)

Yeah, because there’s things they

might have to run into all the time that they can plan for and do better. Yeah.

Jared Jones (23:01)

Correct. And

then knowing your city’s fees, knowing the timing. Like, so those are kind of the biggest things that you want to plan for. And then also know your exit strategy. I like to have multiple exit strategies. Like, so it’s like, hey, no matter what, I know I have equity in the project. But then also, if my goal is always to pull all of my cash back out and then be able to debt service.

And so if I can do that on a project and I have equity that I’ve created, like now I’ve got two exit options. ⁓ And so like I’m always kind of looking at what is the plan path, the path of least resistance, and then what’s my backup plan.

Cody Crabb (23:48)

Love that, yeah, that’s a great way to think of it. ⁓ Well, thank you so much for all these insights. This has been one of the most interesting episodes I’ve done in a long time. If people kind of love this idea, they like what you do, they wanna learn more, they wanna get in touch with you, who should be reaching out to you and how can they do that?

Jared Jones (24:06)

Yeah, I mean, the people that that I can be very helpful to are accredited investors, regardless of whether so people that are, you know, making two to three hundred thousand dollars a year or have a million dollars net worth. Those are the people that either we can help to scale that are doing this or people that can passively invest in what we do. ⁓ At the same time,

If they just want to like learn about projects and watch stuff, ⁓ Middle Housing Partners is our Instagram and we talk about the stuff at Nazium and those people ⁓ still can pick up a lot of the gyms by watching our pitfalls and the things that trip us up, but then also learning about new things that are going on. but that’s kind of like our avatar is the

Cody Crabb (24:46)

Wow.

Jared Jones (25:03)

high net worth individual that’s looking to either scale their own investment business or that’s looking to passively invest in an opportunity of creating housing, doing good, ⁓ but also doing well at the same

Cody Crabb (25:18)

That’s pretty much all you could ask for is a chance to do something good and also make money from it. That’s fantastic. Make sure to give Jared a follow. I’m certainly going to. I’ve got so many questions now. If you found this episode interesting, make sure you give us a follow as well. Go ahead and give us a like, subscribe, comment, all the things so you don’t miss another great conversation like this. Jared, it’s been a pleasure. Thank you so much for talking to me today. Take care.

Jared Jones (25:45)

pleasure.