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December 12, 2023

Exploring ADUs and Multifamily Investments with Shawn DiMartile [Ep183]

In today's episode, we have a special guest, Shawn DiMartile, who is an expert in real estate investing with over 300 rental units to his name. Shawn shares his insights and experiences, particularly in the realm of ADUs (Accessory Dwelling Units), which are gaining popularity in California. We delve into San Diego's unique ADU policy, its impact on housing development, and the potential risks and rewards involved. We also discuss the ongoing housing crisis, the affordability gap, and the influence of NIMBYism. Shawn offers valuable advice on his investment strategies, both in San Diego and in other markets such as Greensboro, North Carolina. So, if you're ready to learn more about ADUs, value-add investments, and the future of the real estate market, let's jump right into this episode.

Episode Timestamps

  • 02:08 Unique San Diego ADU policy, overcoming land shortage.
  • 04:55 Tax assessed value based on purchase price or current value, plus hard cost for building new units. Lower tax liability for builder of converted property.
  • 08:35 City needs 108k rental units, unlikely goal.
  • 11:28 House hack for ocean view dream property.
  • 13:59 Location may determine project feasibility and permits.
  • 17:31 20% of rental units in San Diego are accessory dwelling units, praised as a success despite parking issues.
  • 20:04 Affordable shared living in bigger communities, smaller units.
  • 23:33 San Diego's real estate market faces challenges.
  • 29:51 Growing ADUs may spread nationwide due to housing shortage; California policies criticized.
  • 31:19 Restrictions on tenants limit investment in San Diego.
  • 37:07 Likely interest rate decline in 2024, millennials buying homes.
  • 40:42 Pump the brakes on multifamily investments, focus on San Diego.

Episode Table of Contents

  • Introduction to ADU with Shawn DiMartile
  • The Rise of ADU in California
  • The Advantages and Risks of ADU
  • Addressing the Housing Crisis in San Diego
  • Investments Outside of California
  • Future Predictions in Real Estate Investing

Introduction to ADU with Shawn DiMartile

Introduction to ADU with Shawn DiMartile
Photographer: Blake Wheeler | Source: Unsplash
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Overview of Shawn's Experience

Shawn DiMartile steps into the spotlight with an impressive portfolio of over 300 rental units, rooted in Greensboro, North Carolina, and San Diego. With hands-on experience in real estate, Shawn brings a wealth of knowledge to the table. He’s articulating the finer points of real estate investment and management. His expertise is particularly poignant in the area of Accessory Dwelling Unit (ADU). ADU has surged in popularity as a solution to the housing supply crisis, especially in California's tight markets.

Risks and Rewards of ADU

Venturing into ADUs comes with its set of challenges and advantages. Shawn candidly maps the landscape of potential risks, including the uncertainty tied to government policies which could shift and impact ADU viability. Yet, he also spotlights the strategy's unique capacity to mitigate traditional development risks. This includes extended waiting periods for permit approval and soaring holding costs. By adopting this model, investors can utilize existing properties to generate income while new units are greenlit. A strategic approach that deftly balances the risk-reward ratio.

The Rise of ADU in California

The Rise of ADU in California
Photographer: Maarten van den Heuvel | Source: Unsplash

Shawn DiMartile on ADU Popularity

Shawn explains that accessory dwelling units have become a beacon of hope in the mission to tackle California’s housing shortage. Initially gaining traction as secondary units like granny flats or garage conversions, ADUs provide a creative solution for expanding living spaces within existing properties. These units not only add value to the property but also offer crucial rental income streams in high-demand areas. In Californian cities grappling with ballooning housing costs, ADUs represent a versatile residential feature. This can potentially help stabilize the rental market and offer diverse housing options to residents.

San Diego's Unique ADU Policy

Shawn focuses on San Diego, highlighting its trailblazing approach to ADUs that outpaces other Californian cities. San Diego’s policy is distinct in allowing an unlimited construction of ADUs on multifamily-zoned lots located within transit-priority areas. By circumventing the need for rezoning and waiving substantial development fees, San Diego is incentivizing homeowners and developers to increase housing density. This proactive measure demonstrates the city's commitment to alleviate the housing deficit. While mitigating the complexities often encountered during traditional property development ventures. Shawn's spotlight on San Diego's policy anticipates a potential model for other metropolises confronting similar housing dilemmas.

Accessory Dwelling Units in San Diego: "I really believe with the city and and what they're doing because, I mean, obviously, I could be biased because this is a business model of mine. But the city is just so constrained on housing, and so many people wanna live here … I don't really see the city having many other options other than just straight up going vertical and having a lot lot more density." — Shawn DiMartile

The Advantages and Risks of ADU

The Advantages and Risks of ADU
Photographer: Markus Winkler | Source: Unsplash

Lowered Development Risks and Costs

Since the ADUs follow existing municipal codes, developers can avoid the lengthy and uncertain rezoning process, reducing time frames and costs. Additionally, this approach sidesteps hefty developer impact fees and mitigates the necessity for parking provisions in transit priority areas. This can substantially lower the overall expenses involved in the development of new housing units. By leveraging existing properties and enhancing them to accommodate new living spaces, the financial uncertainties linked to ground-up developments are substantially decreased.

The Impact of Rent Control Policies on Rental Units: "The supply of rental units decreased by 20%. And they concluded that it actually made the problem worse and we have these similar regulations in San Diego." — Shawn DiMartile

Policy Change Risks and Urban Impact

Despite their benefits, ADUs carry potential risks, mainly stemming from possible regulatory changes. Shawn points out that while sudden policy reversals could impact the business model, San Diego's pressing housing shortage coupled with the geographical limitations suggests a persistent demand for innovative housing solutions. The unlimited number of ADUs policy under San Diego's regulations bolsters this business model's viability. Nonetheless, as noted by Shawn, the increased number of ADUs has led to challenges such as exacerbated parking congestion. This reflects a broader urban impact that may provoke future regulatory scrutiny or community pushback. Isues that investors should weigh when assessing the long-term prospects of ADU projects.

Addressing the Housing Crisis in San Diego

Addressing the Housing Crisis in San Diego
Photographer: Markus Winkler | Source: Unsplash

Impact of Restrictive Regulations

Shawn argues that one of the core reasons behind the housing crisis in San Diego is the bevy of restrictive regulations. This put a damper on new housing development. He points out the critical need for a variety of housing options to bridge the affordability gap. Shawn underscores that the city's stringent rules discourage developers from taking on new projects. Leading to a scarcity of housing in a market that is already tight due to geographical constraints. With the ocean to the west, Mexico to the south, mountains to the east, and a military base to the north, San Diego lacks space for horizontal expansion. Making it imperative to find innovative vertical solutions to provide affordable living spaces.

Housing Crisis in San Diego: "I think California has been shooting itself in the foot for so long." — Shawn DiMartile

Rent Control Backlash and Consequences

Rent control in the Bay Area serves as a cautionary tale with a 20% reduction in available rental units. Shawn cites this as a clear indication that such policies may have intentions of affordability but can result in the opposite effect. Shawn discusses that San Diego's version of rent control exacerbates the housing crisis by artificially lowering supply and creating fierce competition for available units. When rents are suddenly escalated to market rates due to tenant turnover, the surge in rental prices puts further strain on affordability. He articulates a grim picture for the middle and lower classes as the city continues to face increasing rent without a proportional increase in supply. Thus widening the wealth gap in terms of who can afford to live in San Diego.

Investments Outside of California

Investments Outside of California
Photographer: Bradley Allweil | Source: Unsplash

Greensboro, North Carolina Focus

Shawn DiMartile articulates a strategic approach toward real estate investment that leverages the favorable market conditions in Greensboro, North Carolina. Here, Shawn finds significant value in pursuing affordable properties—with particular attention to those offering potential for value-addition. This investment style is underpinned by the strong economic dynamics of the region, which provide a reliable foundation for such ventures. Unlike the restrictive and fluctuating environment he associates with the California market, Greensboro presents a more predictable and stable landscape for Shawn’s investment criteria. The focus on markets like Greensboro underscores his broader investment philosophy, which is adaptive to regional market conditions and regulatory climates.

Exit from Greenwood, Indiana

In the process of adjusting his investment portfolio to align with strategic goals, Shawn DiMartile identifies a shift in his holdings. Noting the recent divestment from properties located in Greenwood, Indiana. This move is reflective of Shawn's broader investment horizon and his careful consideration of market positions that are conducive to his specific business objectives. The decision to sell properties in Greenwood suggests a tactical re-evaluation of where and how Shawn chooses to allocate capital. Ensuring that his investments remain optimally positioned within the ever-evolving real estate landscape. By divesting from properties that no longer align with his evolving strategy, Shawn demonstrates an active and responsive approach to portfolio management.

Future Predictions in Real Estate Investing

Future Predictions in Real Estate Investing
Photographer: Jen Theodore | Source: Unsplash

Housing Affordability and Development in California

Shawn anticipates the gap between owning and renting homes in California to continue broadening. He attributes this trend to several factors. Including the state's failure to construct sufficient housing and the power wielded by NIMBYs to curtail development. Shawn expresses concern that restrictive housing policies and resistance to new construction are diminishing the region's ability to provide a balanced housing market. According to him, governmental actions, such as stringent rent control measures, aggravate the problem by diminishing the rental supply. Thereby spiking rents when units do become available.

The Shift Toward Micro Units: "The second thing I'm seeing here a lot to kind of reduce that cost are smaller units. Micro units, but they'll be caught here. So you'll see a lot of apartments being built with 300 square foot studios, Sometimes even smaller." — Shawn DiMartile

Interest Rates and Market Activity

Shawn DiMartile projects that towards the latter part of 2024, interest rates will start to decrease, prompting a surge in home buying. This is especially relevant for millennials who've postponed the purchase of their first homes. Shawn suggests that the pent-up demand from this demographic, who are reaching the prime of their professional lives, will rapidly absorb available inventory once it becomes financially feasible for them to enter the market. Furthermore, he anticipates a resurgence of investment in multifamily properties, fueled by the significant cash reserves that investors have amassed during periods of economic uncertainty.

Government Intervention in the Housing Market

As home affordability deteriorates, Shawn predicts that steps will be taken at the governmental level to mitigate the crisis. One such step could be the introduction of 40-year mortgages, backed by federal entities such as Fannie Mae and Freddie Mac. This would lower monthly payments, potentially enabling more people to transition from renting to owning. He notes the growing calls for such financial products as a sign that this policy shift is already under consideration by lawmakers. If realized, this governmental support could open the door to homeownership for a demographic currently priced out of the market.

Where To Find Shawn DiMartile

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Darin Batchelder

Wealth creation through real estate provided me with a new passion to get the word out and let others know that they have an alternative to investing in the stock market.

If I can inspire and educate just one person to take action that results in life changing wealth creation then the work to launch and grow this podcast is well worth the effort.

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