I made $20,000 in 5 months by renting out extra apartments in my Sacramento backyard

George Warren said that over the past five months, the rental income from his two ADUs has earned him thousands and lowered his taxable income.

• George Warren added two ADUs to a duplex property he bought in 2004, aiming to earn extra income.
• In December, he started renting them for $2,000 a month each and has already earned $20,000.
• The ADUs have been so successful he plans on building more on another plot of land he owns.

This as-told-to essay is based on a conversation with George Warren, a 67-year-old adjunct journalism professor and real estate investor, who built two accessory dwelling units (ADUs) on his land. The essay has been edited for length and clarity.

My wife and I live in a century-old home in Sacramento, but also own 13 investment properties spread throughout Texas and California.

In 2004, we bought a $300,000 investment property, a duplex in Midtown Sacramento, which we rent out. The area has a vibrant and diverse community with a lot of restaurants and pubs. It's really walkable and a very desirable place to live.

The 2400-square-foot duplex was built in 1890 and sits on a 160-by-30-foot lot. When we first bought the property, half of it consisted of dirt, primarily used by tenants for parking and occasionally by homeless people who would wander in.

I realized that having a half-empty lot wasn't the best use for the property, so for several years, I contemplated what I was going to do to increase its value and generate additional income.

In 2019, I hired a surveyor to initiate a lot split because I was considering building rental units on the property. My plan was to split the lot by 80 feet for the duplex and 80 feet for whatever I was going to build in the back.

I was quoted $1.5 million to build five small loft studios. I knew there was no way that would have ever cash-flowed in my lifetime, so I pulled the plug on that project.

But when the state and the city began to embrace ADU development, I jumped on it.

Last year, I built two cottages on the duplex's lot and began renting them out as ADUs. From December until the end of April, I've made $20,000 in passive income.

I think I made the right decision.

ADUs can cost a lot to build

If you build an ADU on your primary property, you're going to have strangers coming and going where you live. It didn't appeal to me to have tenants at my primary residence, so building on the duplex's lot made the most sense.

In 2022, I contacted Anchored Tiny Homes to get the ball rolling for the construction of ADUs. After several months of collaboration with the company's design team, we submitted an application to the city of Sacramento.

With Sacramento allowing up to 1,200 square feet per ADU, I chose to build two 600-square-foot cottages on the lot. My application was approved within 60 days.

To finance the project, I took out a second home equity line of credit on my main residence for $350,000, which I wasn't initially anticipating.

I was aware of California's CalHFA's ADU grant program — that provides up to $40,000 for planning blueprints and more — but learned I did not qualify because the duplex was not my primary residence.

We broke ground in January 2023 and wrapped up construction in September. There were a few hold-ups during the process, like squatters in the alley and an inspector who halted construction for a while due to an electrical issue, but overall, it went smoothly.

Anchored initially quoted me $174,000 per cottage, but with additional upgrades, they ended up costing about $200,000 each.

They're both 20 by 30 feet and have one bedroom, one bathroom, a living room, and a kitchen with an island. The homes are also fully furnished and have brand-new appliances. My tenants also have their own entrance to the lot by way of a historic alley.

I cover all the utilities, provide YouTube TV, and offer high-speed fiber internet to my tenants.

For a rental property, I think it's really good.

I want my tenants to feel comfortable

I don't rent the cottages out for short-term rentals on Airbnb or VRBO. Instead, I use Furnished Finder, which is aimed at mid-term rentals, typically around 90 days, and caters mostly to traveling professionals.

For cottage 1909, my first tenant was a traveling ballet director who worked on Sacramento's Nutcracker during Christmas. He stayed for a month and paid me $2,000.

When he left, he was replaced by a nurse from Atlanta. She's here for the entire calendar year and also pays $2,000 a month.

I've had two other tenants in cottage 1907, including the current one, who have also paid me $2,000 monthly.

So far, I've been fortunate to have a fantastic group of tenants —typically high-earning professionals. Their payments are always on time, and they consistently leave the place spotless.

I know I could charge more in rent and adjust to market rates, but I don't want to price gouge people or create headaches.

I want them to feel comfortable and realize they're getting great value — so far, it's worked.

I made the right decision

Ultimately, the goal of real estate investors is to make passive income.

The ADUs have done that and more for my wife and me. As I decouple from my various jobs, it's reassuring to have this income stream, and it's also provided a fabulous opportunity to lower our taxable income by thousands of dollars.

I've had such good luck with these ADUs so far that I plan on building more on another lot I have near Sacramento State University.

It's free money. So what the hell do I have to lose?