San Diego ADUs Are Turning Backyards Into Multifamily Deals with Nicholas Novak

San Diego has a big need for housing, and ADUs are becoming a smart way to create more doors, more rent, and more value. In today’s episode, Ginny Bolling talks with Nicholas Novak about how he uses San Diego’s Bonus ADU Program to turn single-family homes and small properties into larger multifamily-style projects.

Nick shares how he went from working as a prison guard to building a real estate career through development, partnerships, and faith. He explains why location matters, why Pacific Beach is such a strong rental market, and how larger units can bring in strong rents near the beach. He also talks about construction costs, build-to-sell strategies, refinancing, capital partners, and the future of condo-style ADUs in California.

This episode is a clear look at how ADU development can help investors build equity while also creating needed housing. Nick’s message is simple: real estate development may look big and scary, but with the right people, the right deal, and the will to learn, it is possible to get started.

Reach out to Nicholas Novak:
Instagram: https://www.instagram.com/realnicknovak/
LinkedIn: https://www.linkedin.com/in/nicholas-novak-6a7272256/ 
Phone: 805-975-5066
Email: nicknovak27@gmail.com

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Connect with Ginny Bolling on LinkedIn https://www.linkedin.com/in/ginnybolling

Pivot to Prosperity is a podcast that is sponsored by Pivotal Real Estate Investments, which focuses on helping investors build wealth and income through commercial real estate that improves communities. To learn more, visit www.PivotalRealEstateInvestments.com/contact-us

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To watch other episodes, go to https://www.youtube.com/@PivotalREI

Transcript

Ginny Bolling

(0:00) I'm Ginny Bolling with Pivotal REI, the Real Estate Investing Podcast. (0:05) And today I have Nick Novak with us. (0:07) And so Nick, thank you so much for coming on.(0:10) Appreciate it.

Nicholas Novak

(0:12) Hey, how's it going?

Ginny Bolling

(0:13) Good, good. (0:14) We have some interesting things to see with you today. (0:19) I insisted you come on the podcast, didn't I?

Nicholas Novak

(0:22) Yeah, you did. (0:23) Yeah. (0:24) You didn't have to twist my arm too hard though.(0:26) Yeah.

Ginny Bolling

(0:28) So we're going to talk about ADU's Accessory Dwelling Units today. (0:32) And San Diego does it like nobody else, if you ask me. (0:35) So I want you, Nick, first talk a little about how you ended up getting into this.(0:39) And then let's see some pictures and talk about it.

Nicholas Novak

(0:42) Sure, yeah. (0:43) So long story short, I used to be a prison guard. (0:48) Got into residential real estate as a regular realtor.(0:54) Met about a year into my real estate journey. (0:59) Met a developer from my church. (1:02) And he started teaching me the ground up development game.(1:06) Long story short, after that, I started raising capital for these projects. (1:13) Then eventually I started to become a GP or general partner on some of these developments. (1:21) But the way that San Diego works is it's called the Bonus ADU Program.(1:26) San Diego is very forward development, because if you know anything about San Diego, to the south we have Tijuana, which is Mexico. (1:36) To the north, we have Camp Pendleton. (1:39) So it's a military base.(1:40) So you can't really build up there. (1:42) To the west, we have the ocean. (1:43) And to the east, it's very hard to build out.(1:46) And so you have this dense little pocket that is called San Diego. (1:50) And we need housing. (1:52) And we need affordable housing.(1:54) So that's where the mayor put in the Bonus ADU Program. (1:57) And this will allow us to build up to what's called the floor area ratio. (2:02) Won't go into too in-depth for that.(2:04) But yeah, I'll be happy to share some pictures.

Ginny Bolling

(2:07) That's terrific. (2:08) And San Diego is near and dear to me. (2:11) I have family that lives there.(2:13) And I've been there quite a few times. (2:15) It's a beautiful place to be. (2:17) It really is.(2:18) Not only the view, but the weather. (2:20) And everything's really nice. (2:22) So you probably have a lot of demand.(2:24) So that's a big deal. (2:27) So what you're doing is ground up, though. (2:30) You're not taking existing structures, right?(2:32) Or are you doing a little of both?

Nicholas Novak

(2:34) A little bit of both. (2:35) It's deal dependent. (2:37) Typically, our main business model is we're buying great locations.(2:42) So we like the Pacific Beach market because you can create a lot of equity if you build here, just because the rents are very high. (2:51) So I call it ADU development. (2:54) But really, we're using ADU code to build multifamily structures.(2:59) So typically, how our business model works is we'll see a single family home on a really good zoning. (3:07) And with the Bonus ADU Program, we can build, call it, five to six additional units in someone's backyard. (3:17) Now, our business model is we'll tie up the property.(3:22) We'll use maybe like a hybrid bridge loan or something like that. (3:27) It's called construction holdbacks to renovate the existing structure, whatever that is, whether it's a single family home or maybe it's like a small four unit. (3:36) We'll renovate the existing structure.(3:38) And then we'll refinance into a construction loan and build the additional units on the back and then sell it as a, call it, six unit or an eight unit.

Ginny Bolling

(3:49) Terrific. (3:50) Yes. (3:50) And you have some pictures you can share?

Nicholas Novak

(3:52) I do. (3:53) Yeah. (3:53) Let me share my screen real quick.(3:56) OK.

Ginny Bolling

(3:56) So in Florida, while you're pulling that up, in Florida, an ADU is usually like one unit. (4:02) And it's kind of like a shed, typically. (4:06) So more and more people turn sheds into living units.(4:10) So yes, it's not near what you guys have.

Nicholas Novak

(4:14) Yeah. (4:15) So you can see my screen?

Ginny Bolling

(4:17) Yes.

Nicholas Novak

(4:18) OK, awesome. (4:19) Yeah, yeah. (4:20) So this is a project we have going on right now.(4:23) Yeah, like I said, it's currently a six unit. (4:26) We're renovating the existing units right now. (4:29) On Monday, I'm actually, we just got access to the third unit that we're able to renovate.(4:35) So we got a great contractor. (4:36) He's going to go and do the remodel for us. (4:38) And then we have submitted plans to the city right now through our architect that is going to build four additional units in the back.(4:46) And I know that probably looks like more than four additional units. (4:49) But the typical way we do it is kind of like a duplex model. (4:53) And then we also structure it like a loft.(4:57) So we'll do like 800 square feet on the bottom, and then like a 400 square foot bedroom. (5:03) And then, yeah, kind of like a loft where it has those open concept balconies. (5:10) And this will have bay views when it's done.(5:14) So I think it'll be a great piece of real estate when we finish it all up.

Ginny Bolling

(5:20) How many bedrooms are these usually?

Nicholas Novak

(5:24) So it depends. (5:25) It's deal dependent. (5:27) But sometimes we'll do two beds.(5:29) What we've been seeing in the Pacific Beach market is the SDSU students like to, the San Diego State students like to come here their senior year and hang out and go to the bars and live by the beach and stuff like that. (5:46) So they like the bigger bedroom styles. (5:48) And we've kind of seen a niche in the market because we're like, OK, not a lot of bigger units exist where we'll have like a four or a five bed even.(5:58) Maybe we'll rent it out to a sorority or fraternity. (6:01) And typically, they'll have their parents cosign on the, what is it, on the lease so we can get a little bit higher rent. (6:08) So that's our business model.(6:11) Here's another project we have on Reed Street in Pacific Beach. (6:19) This is going to be a four unit. (6:22) And there is four additional units that we're going to be building.(6:26) This style of construction is called R3 style construction. (6:30) All that means is it's just basically a cheaper construction style. (6:34) Typically, in San Diego, we're going to be building for around $300 a square foot, R3 style construction.(6:40) Another style of construction is called R2. (6:44) R2 is just kind of like more of like a denser multifamily structure that you're able to build. (6:52) You get more units per the structure, but it's a lot more complex when it comes to the mechanical, electrical, and plumbing and all the code.(7:03) So it typically takes longer. (7:04) Higher on construction, you're going to probably pay around $350 a square foot to build. (7:10) So we like to stick to these because they're a quicker business model.(7:13) They're a quicker turn. (7:15) Therefore, we can exit or refinance them faster.

Ginny Bolling

(7:19) So yeah. (7:20) You're building and selling these mainly, or are you keeping some for yourselves?

Nicholas Novak

(7:24) That's our typical business model is build to sell. (7:27) I mean, the holy grail is to build to refinance. (7:31) Yeah.(7:32) Yeah, the holy grail is to build and refinance. (7:36) But the debt market, I mean, you know the debt market right now. (7:39) So a little bit harder to refinance on some of these projects.

Ginny Bolling

(7:43) Yeah. (7:43) Yeah. (7:44) Well, those are exciting looking.(7:46) They really are. (7:47) I understand that you've been doing this now a couple of years, and you have a partner that's been doing it for longer too, right?

Nicholas Novak

(7:55) Yeah. (7:56) Yeah, my business partner has been in it for around 10 years now. (8:01) I myself, I've been in the real estate game probably about three years now.(8:05) So I kind of got the, I guess, fast track version of like into development, which I thank God for because it's incredible. (8:15) It's just incredible. (8:17) But yeah, he's been doing it for the last 10 years.(8:19) Started in the SDSU market. (8:21) He had a cell phone repair business that he would basically just fix people's phones, and then he would buy these like smaller properties with his fraternity brothers, and then build a couple of ADUs on the back and rent them out to fellow SDSU students.

Ginny Bolling

(8:38) That's amazing. (8:39) And you know, the thing is, if you can get passive income, enough passive income so you don't need to work a job, it's really nice, right? (8:48) So yeah, yeah.(8:50) Do you have a lot of people that are investing in these or do you all try to keep it with just yourselves or how do you do that? (8:57) Do you have other investors?

Nicholas Novak

(8:59) No, we wanna scale our ability. (9:02) So we do, we have other partners and other capital partners that we partner with. (9:10) And typically we'll structure it like a joint venture where everybody has equal ownership, equal say on these deals.(9:18) And so it's been really good to us. (9:20) And yeah, I have one capital partner. (9:24) He's really, or actually just partner in general.(9:29) He's really excited about the, what is it? (9:32) The ADU, the bonus ADU program in San Diego, the affordable housing crisis. (9:37) And actually to get into that, to switch gears a little bit, I think I was speaking about it earlier.(9:46) There's a code that we're researching right now called AB1033 in California. (9:52) It's pretty close, or no, I'm sorry. (9:54) It already has passed.(9:55) Basically what it'll allow you to do, it's the next step up where some of these are built to rent, but we're eventually going to try to condoize some of these units to essentially help with the affordable housing crisis. (10:08) So you'll be able to buy some of these ADUs like a condo.

Ginny Bolling

(10:12) Well, it's so funny you say that because yesterday I was talking to a friend of mine that's a condo king. (10:17) He is doing that right now specifically to help the affordable housing in Portland then in the Northwest. (10:26) And so you could easily talk with him and get some tips, I'm sure, on ways to look at doing that.(10:33) It's called the Home Starter Program and they're rolling it out really across the country. (10:38) So what they're doing is a little different. (10:41) They're not doing ground up, but yeah, I can connect you for sure.(10:44) But that's exciting. (10:45) That's good. (10:48) The typical, say, are most of them one bedroom or two bedroom or more?

Nicholas Novak

(10:56) Usually more. (10:57) We like the bigger unit size just because like I was saying, the college, like we have the college market here. (11:03) So we'll just build these bigger units.(11:06) And then the SDSU students love to be in Pacific Beach their senior year. (11:12) And I mean, we rent to everybody and everybody wants to be close to the beach. (11:16) So we've just seen that the SDSU students tend to pay a little bit more in rent.

Ginny Bolling

(11:24) And so- So are you doing like four or eight bedrooms with one or two kitchens? (11:31) Is that what you're doing?

Nicholas Novak

(11:33) We'll go like four bed, two bath, one kitchen, five bed, maybe three bath, one kitchen. (11:42) Yeah, I mean, I've also been researching like the co-living style where, yeah, there's like multiple kitchens and stuff. (11:49) Right now we're just sticking to that.(11:51) But yeah, I mean, that could be a good move in the future.

Ginny Bolling

(11:55) That's really cool, yeah. (11:56) And how much, okay, so for one bedroom, how much is the rent typically in San Diego in one of your desirable areas for like what you rent, one of those?

Nicholas Novak

(12:08) You're not gonna believe this, okay? (12:11) Check this out, okay. (12:12) We just got, it was a, yeah, it was a four bedroom, two bath, three street, prime location, like a block away from the water.(12:21) We just got a signed lease for 8,500. (12:24) So if you break that down on a per bedroom basis, 8,500 divided by four, what is that? (12:30) Now I'm not saying you can get that everywhere.(12:32) That would like square it away, prime location. (12:36) I mean, that's insane. (12:38) Like that's, I've never seen- Per bedroom, yeah.(12:41) I've never seen that before.

Ginny Bolling

(12:43) How big are these bedrooms?

Nicholas Novak

(12:46) They're, that's a good question. (12:48) I mean, they're just like your standard bedroom.

Ginny Bolling

(12:51) I- 10 by 12? (12:53) 12 by 12?

Nicholas Novak

(12:54) Yeah, yeah, around there, exactly.

Ginny Bolling

(12:57) Wow, yeah, geez. (12:59) I know. (13:01) I'll have to show this video to my brother.

Nicholas Novak

(13:03) He may become one of your- Yeah, typically if you're going a couple blocks away from the beach, you'll probably get like, anywhere from like, the farther you go away from the water, the lower the rent goes. (13:17) So like back, the super back pocket of Pacific Beach, we try to aim and underwrite to around 1,500 a bedroom. (13:24) Closer you get to the water, we'll go like 16, 17, maybe 18.(13:30) Usually we'll cap out at like 18, usually. (13:33) But yeah, 2,100 a bedroom, that's, I've never seen that before. (13:38) But we've got a signed lease, so.(13:41) And that was for, that wasn't short-term either. (13:43) That was a long-term rental, so.

Ginny Bolling

(13:47) Yeah, that's a sweet deal there. (13:48) Might be, well now, are you furnishing these units too?

Nicholas Novak

(13:52) What we've seen is we've done some fix and flips and stuff. (13:56) And what we've seen, we try to match kind of what we're doing. (13:59) A lot of, we try to be a step above like other, like, I won't say other developers, but just what we see in the market.(14:06) Typically some developers on their units, they're just doing standard white shaker cabinets. (14:11) They're doing your just basic amenities. (14:15) But what we'll do is we'll try to include like some nicer design features, maybe European-style cabinets, maybe some nice like modern oak, just some like nice coloring, some nice styling.(14:29) To answer your question, we're not furnishing them, but we are putting higher-end finishes in like the shower, the kitchen, doing nice LVP flooring, stuff like that, just so we can generate these premium rents.

Ginny Bolling

(14:43) Right, yeah, very good. (14:45) All right, well, so how many projects are you working on right now?

Nicholas Novak

(14:50) So right now I have six active projects right now. (14:54) Some are in pre-construction. (14:56) Some are a couple months away from stamp plans.(14:58) Others we've just tied up. (15:00) Some are in the remodel phase. (15:02) So all in kind of different spaces.(15:06) Like I said, I'm a little bit greener to the game, so I haven't officially started my first ground-up development, but we're getting close. (15:14) I got one of my projects is about two months away from stamped and approved plans. (15:19) That is a sweet location on Diamond Street in Pacific Beach.(15:24) So that will be that. (15:27) And yeah, we're just super stoked. (15:29) But yeah, to answer your question, kind of lean on my, what is it, my business partner's track record.(15:37) And yeah, I'm just very lucky. (15:40) It's been able to fast track me into the development space. (15:43) And so yeah.

Ginny Bolling

(15:44) And he stays pretty involved too?

Nicholas Novak

(15:47) He does. (15:47) He's the main partner. (15:48) I'm partners with him on all my deals.(15:51) But it just got to the point where he's like, all right, it's time for you to step up. (15:56) If you want to become a general partner, you need to learn how to operate these deals. (16:00) And so I remember when I got my first project, he's like, here you go.(16:03) You're going to run the reins on this. (16:05) Like, okay, cool. (16:06) Like started knocking out all the pre-construction stuff, started talking to the architects, started running the remodels and made it happen.(16:15) So yeah.

Ginny Bolling

(16:16) And I totally forgot to ask you in the beginning to give the takeaway. (16:19) So this is the perfect time. (16:20) What do you want the listener to take away from this?

Nicholas Novak

(16:24) Anyone can do real estate development. (16:27) And whether it's real estate development or multi-family value add or anything you want to do in life, I know it sounds super cliche, but you can do it. (16:35) And you can do it whether you're, however old you are.(16:39) If you think you're too old, you're not too old. (16:41) You can do it. (16:42) If you think you're too young, you're not too young.(16:44) You can do it. (16:45) You can learn. (16:46) I'm 30.(16:47) I have six active development projects right now. (16:50) My business partner is 37. (16:51) He's been in the game since 27.(16:53) We're competing against larger developers that do big, these are huge developers, but to answer your question, you can do it.

Ginny Bolling

(17:04) All right. (17:05) That's terrific. (17:06) Okay.(17:06) Well, and towards the end, I always ask people if there's a pivotal person or event that brought them to where they are today or pushing you towards a goal. (17:15) Is there someone or something for you?

Nicholas Novak

(17:18) Yes, it is. (17:19) So I gotta give props to two people in my life. (17:24) First person is Jesus Christ.(17:27) I became a Christian about three years ago and he's totally changed my life and I give him all the glory and I wanna serve the people and I wanna serve God through this apparatus of development. (17:41) So that's the first person. (17:42) And the next person is Chris, my business partner.(17:46) He's given me a massive opportunity and a massive shot to do this at a big level. (17:52) So massive props to him.

Ginny Bolling

(17:54) All right. (17:55) What's his last name?

Nicholas Novak

(17:56) Chris Luna.

Ginny Bolling

(17:57) Luna?

Nicholas Novak

(17:59) Yeah, yeah, Luna. (18:00) Chris, yeah. (18:00) Okay.

Ginny Bolling

(18:01) All right. (18:01) So like I was saying, you can let him know that you've nominated him or we can call and say that you nominated him. (18:09) If he comes on the show, we promote him as a pivotal person and he goes on the newsletter forever and we send a lapel pin that says he's a pivotal person.(18:18) So we try to honor those pivotal people that really give to others. (18:22) So very good. (18:24) Thank you.(18:25) Well, so, and I want you to get a second chance to say what the takeaway is. (18:28) Go ahead, repeat it, would you?

Nicholas Novak

(18:30) Cool. (18:31) Yeah, so my takeaway is you can do it. (18:34) That's it.(18:35) No matter how old you are, no matter how young you are, you can do it. (18:39) You can get into real estate development. (18:41) You can go get large multifamily development deals.(18:45) It doesn't matter. (18:45) You can break through your limiting beliefs. (18:47) You can do it.

Ginny Bolling

(18:48) Awesome. (18:49) Very good. (18:50) All right, so tell people how they can reach you too.

Nicholas Novak

(18:52) Yeah, my Instagram is real, R-E-A-L, Nick, N-I-C-K, Novak, N-O-V-A-K. (19:03) Again, that's R-E-A-L, N-I-C-K, N-O-V-A-K. (19:10) And my number is 805-975-5066.(19:16) You can call me or text me anytime if you have any questions. (19:19) And yeah.

Ginny Bolling

(19:21) That's terrific. (19:22) And we met through a community we both belong to. (19:26) So you're out there and you're networking with other people, hearing what's being done around the countryside.(19:31) That's a real important thing for us to do because it helps us to be sure that we're tuned in to best practices. (19:38) We know what's happening. (19:40) We're not gonna be blindsided on things.(19:42) So I commend you for being part of different communities and taking that time. (19:47) It's hard when you're in development to make time, I know. (19:51) But yeah, you're doing the right thing.

Nicholas Novak

(19:53) I'm working on a Saturday, but it's all good. (19:55) Yeah, yeah, yeah. (19:55) I love what I do.

Ginny Bolling

(19:57) Well, if you're an entrepreneur, there's a lot of Saturdays we work, right? (20:01) Yep. (20:02) Yep, well, good for you.(20:04) Thank you. (20:05) And I want to say that your contact information and whatnot, we can probably link some pictures if you want to the show notes. (20:12) So yeah, very good.(20:15) Well, thank you again.

Nicholas Novak

(20:16) Thank you, Jenny. (20:17) I really appreciate it. (20:18) Thank you for having me on.