Real estate rate of return?

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ianferrel
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Real estate rate of return?

Post by ianferrel » Mon Apr 17, 2017 5:05 pm

We're considering adding a small 1-bedroom apartment above our detached garage, initially for use as a rental.

Estimates we've gotten for construction are between $120k and $200k (we're in pretty early planning stages), and based on the local rental market, I expect we could rent it for $1700-1800 a month currently. We (obviously) live in a HCOL area.

The high-end of the build estimate and the low end of the rent estimate show a (gross) return of over 10% a year. We'll lose 1% in additional property tax and some more in maintenance and repairs and vacancy and (until we pay it off) financing, but my gut feeling is that this is a good plan.

Are my intuitions right? What else should I be thinking about?

renue74
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Re: Real estate rate of return?

Post by renue74 » Mon Apr 17, 2017 5:26 pm

Make sure your estimates are rock solid. Check out biggerpockets.com for more real estate info, but the "going rate" for a back of envelope estimate is 1% of total price = rent then it's a feasible rental. But you'll need to confirm the other expenses such as insurance, etc.

NotWhoYouThink
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Re: Real estate rate of return?

Post by NotWhoYouThink » Mon Apr 17, 2017 5:26 pm

What is your tax rate? Will this be taxed as ordinary income for federal and state purposes?

How would you be taxed if you put the money into tax advantaged accounts, or even an after tax account?

How will the apartment affect the resale value of the property? Is this something people are willing to pay extra for in your neighborhood?

bubbadog
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Re: Real estate rate of return?

Post by bubbadog » Mon Apr 17, 2017 5:47 pm

What is it worth to you to not have some stranger living on your property above your garage?

ianferrel
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Re: Real estate rate of return?

Post by ianferrel » Mon Apr 17, 2017 5:52 pm

NotWhoYouThink wrote:What is your tax rate? Will this be taxed as ordinary income for federal and state purposes?

How would you be taxed if you put the money into tax advantaged accounts, or even an after tax account?

How will the apartment affect the resale value of the property? Is this something people are willing to pay extra for in your neighborhood?
Federal Marginal Rate 28%, California State Rate 9.3%.

Tax advantaged accounts are already maxed, so the alternative is an after tax account, which would likely end up being taxed at long-term capital gains rates in 5-0 years. I obviously have idea what that rate will be.

I expect this will increase the resale value of the property by approximately the cost of building. This sort of thing is quite common in our area, and when we looked at houses that had a similar unit, they sold for more.
bubbadog wrote:What is it worth to you to not have some stranger living on your property above your garage?
Ha ha. Great question. Doesn't bother me a bit. As far as proximity, the neighbor above the garage will be our third-closest neighbor. :)
Last edited by ianferrel on Mon Apr 17, 2017 5:54 pm, edited 1 time in total.

aristotelian
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Re: Real estate rate of return?

Post by aristotelian » Mon Apr 17, 2017 5:53 pm

So...Same as long term return on the S&P but a lot more work.

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jimb_fromATL
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Re: Real estate rate of return?

Post by jimb_fromATL » Mon Apr 17, 2017 6:23 pm

How high is up? No way to make even a wild guess without knowing how you're going to pay for it.

So ... what kind of funds will you be liquidating for the down payment? and how much have they been earning?

Have you talked to any lenders? How much do you expect to have to pay down, and what rate might you expect?

How long would you finance it?

I suspect you'd have to take out a HELOC or personal loan, since it's not likely that you can get a separate first mortgage for a rental property that is part of your own residence.

For that matter, do you have a mortgage on your current home?

If you do have a mortgage, do you have a huge enough income that would make it possible to qualify for the extra mortgage payment? The taxes and insurance for your current mortgage plus taxes, insurance, etc -- and possibly an allowance for maintenance and repairs -- plus all other debt obligations can typically only allow a maximum DTI (Debt To Income) ratio of perhaps 36% of your gross income. (Mortgage lenders are not in the business to speculate on rental income. So they typically will not consider potential income in your qualifying for the additional money per month.)

Seems like it would further complicate matters to try to figure out how to depreciate the structure, since it's part of an existing structure. Also seems like it would be awfully complicated to separate and pro-rate the write-offs for taxes, insurance, maintenance and repairs for the addition to offset the rental income.

Yet another question is how long you expect to live in the home. Bear in mind that a lease goes with the property. So you can't easily sell it until the current tenant's lease is up. Also, a tenant has the "right to quiet enjoyment" just as if they owned it. That means a tenant does not even have to let you bring prospective buyers into the property to show it unless you have some kind of agreement in the contract.

All problems considered, a capitalization rate of 10% or so, plus the leveraging of a mortgage, and --with any luck at all-- additional appreciation in value could give you a great return for the money -- in exchange for a lot more hassle and complications.

Got more details?

jimb

ianferrel
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Re: Real estate rate of return?

Post by ianferrel » Mon Apr 17, 2017 6:58 pm

Yes, we'd have to take out a loan, and we do currently have a mortgage. I haven't yet talked to bankers, but that sounds like the next step.
(Mortgage lenders are not in the business to speculate on rental income. So they typically will not consider potential income in your qualifying for the additional money per month.)
This is not what I would have expected, but good to know. Surely people who build apartment buildings aren't building them for cash, right? But maybe that kind of financing isn't available for single-home-owners.

Some of this stuff I've thought about, some I haven't. Thanks to all for the good questions and suggestions so far.

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jimb_fromATL
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Re: Real estate rate of return?

Post by jimb_fromATL » Mon Apr 17, 2017 7:29 pm

ianferrel wrote:Yes, we'd have to take out a loan, and we do currently have a mortgage. I haven't yet talked to bankers, but that sounds like the next step.
(Mortgage lenders are not in the business to speculate on rental income. So they typically will not consider potential income in your qualifying for the additional money per month.)
This is not what I would have expected, but good to know. Surely people who build apartment buildings aren't building them for cash, right? But maybe that kind of financing isn't available for single-home-owners.

Some of this stuff I've thought about, some I haven't. Thanks to all for the good questions and suggestions so far.
Developers/builders typically use short term commercial/construction loans or lines-of-credit. Not single family mortgages, and not for rates as low, LTV ratios as favorable, or terms as long as homeowners can get for their own residences. Lenders are like any other investor, and want a better return for their money when there's more risk. And there's a lot more risk that a borrower may default on a loan when it's not where they live and where their stuff is. -- or if the borrowers don't have enough of their own money invested in it, or if the business fails or the market for the property crashes, or the home/building does not sell at a profit, or the rent not come in as hoped.

Not sure what kind of loan you can get for a rental property that is already part of your residential property. I'd guess a HELOC (Home Equity Line Of Credit) or HEL (Home Equity Loan) might work ... provided the cost of the addition plus your current mortgage are no more than about 80% of the value of the property.

How much is your current home worth, and how much do you owe on it?

jimb

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knpstr
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Re: Real estate rate of return?

Post by knpstr » Mon Apr 17, 2017 7:37 pm

Not exactly enough info here on projections but:

From a pure investment perspective...seems a little too risky given relatively modest potential reward.
From a lifestyle perspective... seems less than ideal.

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Re: Real estate rate of return?

Post by freebeer » Mon Apr 17, 2017 8:11 pm

ianferrel wrote:We're considering adding a small 1-bedroom apartment above our detached garage, initially for use as a rental.

Estimates we've gotten for construction are between $120k and $200k ...The high-end of the build estimate and the low end of the rent estimate show a (gross) return of over 10% a year. ...
Presumably your apartment would be legal or at least tolerated in your community. Many communities have authorized "mother-in-law" aka Accessory Dwelling Units (ADUs) but some have not. And when allowed, there are rules and regulations.

Anyway your numbers seem overly conservative. Presumably the MIL unit will add to the value of your home, not 100% of build cost but even if it's worth $80K to $120K more then your sunk cost would be only $40K to $80K. So your gross return on $80K even higher.

In Seattle area even totally illegal MILs add considerably to value of homes, legal ones more so.

Finance-MD
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Re: Real estate rate of return?

Post by Finance-MD » Tue Apr 18, 2017 12:13 am

How many square feet is the construction?
$200k sounds like an incredibly expensive build for a garage apartment. $200k will build 3-4 bedroom houses in a lot of the country. I know you're in a HCOL area, but you already have the land. It sounds like a retail builder is trying to rip off an affluent client one time... which is how many builders/contractors make a living, fleecing a client for as much as possible on a single job, knowing there will be no repeat business regardless.

As for the 1% rule, I wouldn't violate that' at all in this situation. Ideally, your rent is 2% of the costs.

You should be able to run comps to find out how much value the apartment actually does add. If lots of others have them, that should be easy to calculate.

Is AirBnB legal in your area? As a garage apartment, if you think you can get $1700/mo on a long term renter, you can probably fetch twice as much as an AirBnB. one nice benefit is you can rent it only half as much, get the same yield, and still use it when you need it -- e.g. Guests coming in town

CurlyDave
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Re: Real estate rate of return?

Post by CurlyDave » Tue Apr 18, 2017 1:48 am

I have owned rental real estate for over 40 years, much of that in the SF Bay area an extreme HCOL region.

If MIL units are allowed, I would build the biggest one I could legally build. Once they are in, there are grandfathered, and if they are ever not allowed yours will become more valuable.

When I started out, a back of the envelope estimate for the price of an existing unit was 100 months rent. This has crept up over time and in an HCOL area 150 to 200 times one month's rent is almost normal these days.

This is not as much of a sunk cost as many think, you will get it back, probably appreciated when you sell your house.

Time and inflation are your friends in the real estate business. If you raise the rent by $100/month, you just added $15k to $20k to the value of your house.

Plus, you borrow the money to make the addition, and your tenant pays off the loan for you. How nice is that. Depreciation is not nearly as complicated as it sounds. 100% of what you pay for the improvements is depreciable. You already owned the land so there is no correction to be made there.

The only reservation I would have is that you need to watch construction costs like a hawk. A $120k estimate will turn into a $200k reality in the blink of an eye. And a $200k estimate can become $300k in a heartbeat. Get references on all the builders bidding and check them carefully. Do not let yourself be pressured to upgrade anything over the plan.

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Pajamas
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Re: Real estate rate of return?

Post by Pajamas » Tue Apr 18, 2017 1:55 am

It may or may not be an issue for you, but at least consider the fact that you will be shifting more of your net worth into a single asset, your house, which concentrates risk, and even taking out a loan to do so.

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Re: Real estate rate of return?

Post by abuss368 » Tue Apr 18, 2017 6:51 am

CurlyDave wrote:I have owned rental real estate for over 40 years, much of that in the SF Bay area an extreme HCOL region.

If MIL units are allowed, I would build the biggest one I could legally build. Once they are in, there are grandfathered, and if they are ever not allowed yours will become more valuable.

When I started out, a back of the envelope estimate for the price of an existing unit was 100 months rent. This has crept up over time and in an HCOL area 150 to 200 times one month's rent is almost normal these days.

This is not as much of a sunk cost as many think, you will get it back, probably appreciated when you sell your house.

Time and inflation are your friends in the real estate business. If you raise the rent by $100/month, you just added $15k to $20k to the value of your house.

Plus, you borrow the money to make the addition, and your tenant pays off the loan for you. How nice is that. Depreciation is not nearly as complicated as it sounds. 100% of what you pay for the improvements is depreciable. You already owned the land so there is no correction to be made there.

The only reservation I would have is that you need to watch construction costs like a hawk. A $120k estimate will turn into a $200k reality in the blink of an eye. And a $200k estimate can become $300k in a heartbeat. Get references on all the builders bidding and check them carefully. Do not let yourself be pressured to upgrade anything over the plan.
Nice and informative post.
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WJW
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Re: Real estate rate of return?

Post by WJW » Tue Apr 18, 2017 7:22 am

ianferrel wrote:What else should I be thinking about?
Having a tenant living on your property and dealing with the tenant. My least favorite part of my rentals are dealing with the 'personality' variables of my tenants.

ianferrel
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Re: Real estate rate of return?

Post by ianferrel » Tue Apr 18, 2017 2:08 pm

I agree that $200k seems absurd for a ~500sq ft above-garage apartment. Yet, I have an actual estimate for that amount. I also have much lower estimates. I don't have any quotes. No one will give me an actual quote until I have plans and a permit, and the plan/permit process is several thousand dollars at least, so I want to make sure this at least is likely to make sense before I pay that sunk cost.

As far as building the largest legally allowed unit, that would increase costs right now and might look pretty ugly and dominate the yard. If this were an investment property, I might be more inclined to do so, but it's our home, so there are other considerations.

AirBnB/short term rentals are not legal at my location (and it is enforced). It's not impossible that the city council will eventually end up making it allowed when the owners live there as well, but I'm not counting on that.

The addition is allowed under the law and will be properly permitted.

Current house value is $920k by Redfin estimate. Mortgage is $650k.

aristotelian
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Re: Real estate rate of return?

Post by aristotelian » Tue Apr 18, 2017 2:22 pm

Why not a) buy a separate condo or cottage house that you rent out, without going through the trouble of construction and permitting and having a stranger live in your back yard, or b) invest 200K in Total Stock Market index?

ianferrel
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Re: Real estate rate of return?

Post by ianferrel » Tue Apr 18, 2017 4:33 pm

aristotelian wrote:Why not a) buy a separate condo or cottage house that you rent out, without going through the trouble of construction and permitting and having a stranger live in your back yard
A separate condo or cottage house in this area would cost at least twice as much as our highest estimate. I definitely could not get financing for that.
b) invest 200K in Total Stock Market index?
I think constructing a guest house is a much more lucrative option. I'm trying to figure out if I'm right about that.

WJW
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Re: Real estate rate of return?

Post by WJW » Tue Apr 18, 2017 4:43 pm

ianferrel wrote:I agree that $200k seems absurd for a ~500sq ft above-garage apartment. Yet, I have an actual estimate for that amount.
That's $400 a square foot. You should be able to get it built for $250- $300 a square foot depending on material selections. That will put the cost between $125-150k.

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Re: Real estate rate of return?

Post by letsgobobby » Tue Apr 18, 2017 5:28 pm

ianferrel wrote:
aristotelian wrote:Why not a) buy a separate condo or cottage house that you rent out, without going through the trouble of construction and permitting and having a stranger live in your back yard
A separate condo or cottage house in this area would cost at least twice as much as our highest estimate. I definitely could not get financing for that.
b) invest 200K in Total Stock Market index?
I think constructing a guest house is a much more lucrative option. I'm trying to figure out if I'm right about that.
I don't know if it's much more lucrative, but consider the known downsides:

- far greater concentration of risk (a single property, in a single market, as opposed to owning shares in thousands of companies who do business around the world);

- far higher expenses - taxes, insurance, routine maintenance, repairs, vacancies

I'd say you need to be compensated at much more than the expected rate of return on TSM to make it worthwhile taking on the additional risks and expenses.

Note I own a rental property. It does not have as favorable figures as you post, but I kept it anyway because I like the income diversification. However, it is not a major part of our portfolio and I look at it more for its risk attributes (diversification) than return attributes.

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Re: Real estate rate of return?

Post by DVMResident » Tue Apr 18, 2017 6:09 pm

WJW wrote:
ianferrel wrote:What else should I be thinking about?
Having a tenant living on your property and dealing with the tenant. My least favorite part of my rentals are dealing with the 'personality' variables of my tenants.
Having been both landlord on site and at a distance, I have a different perspective: my least favorite part is the time cost. Time costs are greatly diminished by having an adjoining unit. Moreover, you can build the entrance/exit separate from the main residence. This keeps the interactions minimal. I prefer tenants on site with separation.

Most tenants and landlords desire the same level of interaction: near zero.

ianferrel
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Re: Real estate rate of return?

Post by ianferrel » Tue Apr 18, 2017 6:51 pm

WJW wrote:That's $400 a square foot. You should be able to get it built for $250- $300 a square foot depending on material selections. That will put the cost between $125-150k.
Like I said, I have estimates for that whole range. I will obviously do my research when it comes to hiring a contractor, but at this point, I can't tell if the low end are low-balling me, or the high-end is trying to get me to overpay.

One contractor did point out that the per-square foot costs for smaller places tend to be higher. Like, a 500 sq foot one-bedroom needs the same stove, washer/dryer, plumbing and electrical runs, etc. that a 600 sq foot one-bedroom does. An extra 100 square feet of roof and flooring cost a lot less than all the other stuff.

ianferrel
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Re: Real estate rate of return?

Post by ianferrel » Tue Apr 18, 2017 6:56 pm

DVMResident wrote:Most tenants and landlords desire the same level of interaction: near zero.
My impression is that many people worry more about having someone living on the same property than I do. I live in a (relatively) dense semi-urban area. There's always somebody living nearby. I've had someone living in my backyard or have lived in someone's backyard 8 out of the 13 years I've lived here. It's never been a problem. Sure, there's a risk, but there's a risk a jerk could move in next door too.

The rental vacancy rate is very low here, so it's likely I will have both low vacancy and the ability to select tenants from a large group and find someone I'm compatible with.

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Re: Real estate rate of return?

Post by CurlyDave » Tue Apr 18, 2017 11:46 pm

ianferrel wrote:...One contractor did point out that the per-square foot costs for smaller places tend to be higher. Like, a 500 sq foot one-bedroom needs the same stove, washer/dryer, plumbing and electrical runs, etc. that a 600 sq foot one-bedroom does. An extra 100 square feet of roof and flooring cost a lot less than all the other stuff.
I think he is right.

A few points: do not overpay for more "energy efficiency". Set this up from the beginning so the tenant pays the utility bills. If you do, within reason, you don't care how big they are. And neither will the tenant. At least not while they are looking.

Think if there is any possible way to make it a 2-bedroom.

Can you increase living space by putting some items in the garage below? Washer/dryer, hot water tank, possibly furnace are all candidates. With limited square feet this could be a big deal.

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Re: Real estate rate of return?

Post by Finance-MD » Tue Apr 18, 2017 11:50 pm

ianferrel wrote: AirBnB/short term rentals are not legal at my location (and it is enforced). It's not impossible that the city council will eventually end up making it allowed when the owners live there as well, but I'm not counting on that.
Is there a minimum rental period they specify? In many places, you can do month-to-month furnished rentals at a significant premium.

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Re: Real estate rate of return?

Post by WJW » Wed Apr 19, 2017 7:25 am

ianferrel wrote:
WJW wrote:That's $400 a square foot. You should be able to get it built for $250- $300 a square foot depending on material selections. That will put the cost between $125-150k.
Like I said, I have estimates for that whole range. I will obviously do my research when it comes to hiring a contractor, but at this point, I can't tell if the low end are low-balling me, or the high-end is trying to get me to overpay.

One contractor did point out that the per-square foot costs for smaller places tend to be higher. Like, a 500 sq foot one-bedroom needs the same stove, washer/dryer, plumbing and electrical runs, etc. that a 600 sq foot one-bedroom does. An extra 100 square feet of roof and flooring cost a lot less than all the other stuff.
That's correct, so at least you are in the correct range of costs. If those fit within your budget, then I would suggest you start by retaining a reputable, licensed and insured contractor, that you feel comfortable with and ask him to be involved in the design process. For a project this size, any reputable contractor should be able to give you a detailed proposal and scope of work, along with cost allowances for undecided material selections.

You can then interview and hire an architect that will be able to draw the plans based on you and your contractors scope of work. You must be confident in your builder and be willing to pay for his time. You could always get other estimates after the plans are drawn, if you still need to double check that his costs are fair and reasonable. If you get a much lower comparable estimate from an equally reputable builder, then you are in a position to better negotiate.

Full disclosure: I am a contractor that offers design/build services. If you are in Northern NJ, I would be available to help.

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Re: Real estate rate of return?

Post by ianferrel » Wed Apr 19, 2017 12:00 pm

Finance-MD wrote:Is there a minimum rental period they specify? In many places, you can do month-to-month furnished rentals at a significant premium.
30 days.

We might end up doing that. It would give us more flexibility to use it as a personal guest-house sometimes, though it would also require more work. A good thing to consider.

As far as the estimates, I think it works out well at $250-300/sq ft, but it's a questionable investment at $400/sq ft.

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Re: Real estate rate of return?

Post by WJW » Wed Apr 19, 2017 2:57 pm

ianferrel wrote:
Finance-MD wrote:As far as the estimates, I think it works out well at $250-300/sq ft, but it's a questionable investment at $400/sq ft.
All the more reason to work with a contractor early on, as there are different levels of finishes that affect costs. For example; wood siding vs. vinyl siding; wood windows vs. vinyl windows; wood floors vs. carpet; stock vs. custom cabinets, and on and on...

It all depends on what you want it to look like and how much you are willing to spend.

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Re: Real estate rate of return?

Post by Finance-MD » Wed Apr 19, 2017 4:03 pm

ianferrel wrote:
Finance-MD wrote:Is there a minimum rental period they specify? In many places, you can do month-to-month furnished rentals at a significant premium.
30 days.

We might end up doing that. It would give us more flexibility to use it as a personal guest-house sometimes, though it would also require more work. A good thing to consider.

As far as the estimates, I think it works out well at $250-300/sq ft, but it's a questionable investment at $400/sq ft.
Yeah - would give you lots of flexibility. You can furnish it relatively inexpensively at first just to see how it goes. I know using AirBnB, you can set a minimum rental period of 30 days; I expect with HomeAway and VRBO you can do the same as well... if these services aren't specifically outlawed in your area.

I live in a HCOL area, the lowest a duplex gets down to is $250/sf; but of that price, about 20-25% of that price is land value. Of course, smaller properties will cost more per SF. $400/sf still sounds outrageous to me... i'd shoot for no more than $200/sf personally.

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Watty
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Re: Real estate rate of return?

Post by Watty » Wed Apr 19, 2017 8:53 pm

One thing that has not been mentioned is that you need to look into if you have parking for an additional car or two for a single tenant or a couple. Having parking for their guests could also be an issue. Being able to rent a place with limited or no parking can be a problem.

In some areas there are strict laws or HOA restrictions on how many cars can be parked outside the garage or on the street.

As others have mentioned check in the taxes since having the rental could affect the homeowners capital gains exclusion and local property tax exclusions for owner occupied homes.

You should also check to see how much your home insurance and umbrella policy would cost with the rental.

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Re: Real estate rate of return?

Post by BanditKing » Wed Apr 19, 2017 11:31 pm

Curious, since the OP has maxed their tax-advantaged accounts, is there an advantage to washing income through an LLC to do a solo 401k pre-tax contribution (assuming they do not already max the entire $53,000/$59,000 total limit). This might afford a little more tax-advantaged space (often overlooked if you don't run your own business).

$120k to 200k seems ridiculously high for a garage apartment. Even in a HCOL area, I can't see it being more than $50k to 70k since the garage is already there. It's just insulation, plywood, electrical and plumbing and then finishing. In California you can get by with a combo in-wall A/C heater. I'd get many more quotes, and look at keeping the costs simple rather than a ritz-level apartment. For $120k you could just demo and build a new (larger) garage.

Last year we priced a new construction 4-bedroom home (about 23000 square feet) and I discussed with the builder what it would take to make the garage area bonus room into an actual apartment. The contractor estimated an additional $20k to $30k to up the insulation, add an external set of stairs, address its own heating and cooling (Wisconsin), add a 3/4 bath, over-under laundry, its own tankless hot water (if we didn't want it off the main-house water), and a kitchenette. Also included separate meters for electric, gas and water if I wanted them. This didn't include appliances. So all in cap was maybe $35k. It would have been a nice little studio apartment and we could have rented it for an easy $700/mo. Granted, this is Wisconsin, but we have much harsher winters to work into the mix. Building materials were simple - Home-depot level stock cabinets and countertops, and mid-level manufactured hardwood floors and tile in the bathroom.

If you can get construction costs reasonable and get rents at 2% or 3% of your all-in cost, this is probably a pretty good idea. Would probably help with resale too, or when the in-laws come for an extended stay if you got tired of being a landlord. Assuming the rest of the garage is in great shape, there should be little or no maintenance needed, except cleanings between tenants, for a while.

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Re: Real estate rate of return?

Post by WJW » Thu Apr 20, 2017 7:21 am

BanditKing wrote:$120k to 200k seems ridiculously high for a garage apartment. Even in a HCOL area, I can't see it being more than $50k to 70k since the garage is already there. It's just insulation, plywood, electrical and plumbing and then finishing.
OP has several quotes in that ballpark so it is not unreasonable. Remodeling an existing garage into a livable space is a lot different than building new, in combination with a new home. You are leaving out lot of the necessary structural/framing work in your assumptions.

Valuethinker
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Re: Real estate rate of return?

Post by Valuethinker » Thu Apr 20, 2017 7:49 am

ianferrel wrote:We're considering adding a small 1-bedroom apartment above our detached garage, initially for use as a rental.

Estimates we've gotten for construction are between $120k and $200k (we're in pretty early planning stages), and based on the local rental market, I expect we could rent it for $1700-1800 a month currently. We (obviously) live in a HCOL area.

The high-end of the build estimate and the low end of the rent estimate show a (gross) return of over 10% a year. We'll lose 1% in additional property tax and some more in maintenance and repairs and vacancy and (until we pay it off) financing, but my gut feeling is that this is a good plan.

Are my intuitions right? What else should I be thinking about?
Apologies if already covered but property investors:

- tend to assume 1 month vacant a year, or 4 weeks anyways (1/13th)

- there may be costs for getting tenants through an agency, plus fees for the due diligence. You could do that yourself but would include credit checks etc. Although movies like Pacific Heights are just that, movies, it behooves to do a bit of checking

- local planning/ zoning approval. Where I have lived there are parking wars, and neighbours and ratepayers associations *fiercely* resist basement apartments, granny flats etc.

- can you corrupt your capital gains tax position on your whole home (US tax question-- Federal and State tax codes?). In Canada and the UK where principal residence is CGT exempt, you could (by deducting expenses for a home office or other income producing asset)

- position of mortgage lender

- insurance - home insurance changes totally if you have a tenant and if you don't disclose and the tenant causes loss or damage, they will disallow (loss adjusters are B* on this sort of thing)

Valuethinker
Posts: 33377
Joined: Fri May 11, 2007 11:07 am

Re: Real estate rate of return?

Post by Valuethinker » Thu Apr 20, 2017 7:58 am

WJW wrote:
BanditKing wrote:$120k to 200k seems ridiculously high for a garage apartment. Even in a HCOL area, I can't see it being more than $50k to 70k since the garage is already there. It's just insulation, plywood, electrical and plumbing and then finishing.
OP has several quotes in that ballpark so it is not unreasonable. Remodeling an existing garage into a livable space is a lot different than building new, in combination with a new home. You are leaving out lot of the necessary structural/framing work in your assumptions.
Also Building Codes for residential?

- insulation, damp proofing, ventilation, fire safety (fire doors, alarms), electrical & safety? Ventilation for garage away from structure?

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