Author Topic: Considering building an apartment on top of my garage.  (Read 2567 times)

rocketpj

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Considering building an apartment on top of my garage.
« on: August 14, 2016, 04:57:02 PM »
When we bought our house a friend of mine saw our detached garage and suggested building a second floor on it for the purpose of getting some rental income.

At the time our kids were young, we were on one income and I didn't really fancy the idea of having a tenant in my back yard.  Combine that with a very tight budget and some zoning restrictions and I didn't pursue it as an option.

Now it's six years later, our budget is in much better shape, and the zoning in our area has changed a little bit - to allow secondary and/or granny suites.  The kids are a bit older, and I've had some ideas about building the place to have a nice balcony facing out the back of our property (we back onto a regional park), which would effectively separate the tenants from our living space.

The garage is big enough that a second floor would make for about a 600 square foot apartment, which would likely rent for about $900-1000 per month.  It would likely cost about $25-$30K to build the place properly, maybe $4-5K less if I can do some of it myself (though my time and skills are limited in that regard).  There is a serious shortage of rental spaces in our community, so finding decent tenants would not be a challenge at all.

Having just renewed our mortgage at 2.59% I'm confident we could get a similar rate to finance the construction.  Alternatively I could just pay for it, but 2.59%<projected return on my index funds, so I think the low rate implies I should leverage the construction.

However, we already have a large proportion of our net worth tied up in real estate - the equity in our house, plus a small amount of an REIT index as part of our savings portfolio.  I have some hesitation about increasing that percentage - putting all the eggs into a single basket. 

So on the one side I have what I think may be a good opportunity to boost the value of our real estate and create some decent cash flow to boot.  On the other side I worry about over-investing in one asset class, and the potential challenges of having tenants in our back yard.

What are the typical cost-benefit calculations that go into this sort of investment?  Am I missing anything?

Kroaler

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Re: Considering building an apartment on top of my garage.
« Reply #1 on: August 15, 2016, 08:20:10 AM »
Is your lot shaped in a way that you can have minimal interaction with a tenant should you  move forward with this?

Marvel2017

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Re: Considering building an apartment on top of my garage.
« Reply #2 on: August 15, 2016, 12:23:48 PM »
If you can get $900/month and only spend $30k, sounds like a no-brainer. Especially considering it's an investment that if you sell you're house will bring value to the property.

Dicey

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Re: Considering building an apartment on top of my garage.
« Reply #3 on: August 15, 2016, 12:49:04 PM »
Another line of consideration is if this is your forever home, when you get old, you will have an easier time getting caregivers if you have separate quarters for them. By then, it will have long been paid for and then some by years of good tenants. If you do a nice job with quality finishes, decent privacy, access to laundry and parking, it will bring you steady income for years.

Another angle is if you want to travel for a while in FIRE,  you can move into the apartment and rent out the house for more income.


rocketpj

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Re: Considering building an apartment on top of my garage.
« Reply #4 on: August 15, 2016, 08:29:21 PM »
Is your lot shaped in a way that you can have minimal interaction with a tenant should you  move forward with this?

It is a typical larger sized rectangular lot.  I could build an access path along one side of the property and fence it off (the garage is in the back corner of the yard).

Another line of consideration is if this is your forever home, when you get old, you will have an easier time getting caregivers if you have separate quarters for them. By then, it will have long been paid for and then some by years of good tenants. If you do a nice job with quality finishes, decent privacy, access to laundry and parking, it will bring you steady income for years.

Another angle is if you want to travel for a while in FIRE,  you can move into the apartment and rent out the house for more income.


I hadn't thought of that.  In the nearer term I could see one of the kids living there for awhile once they are too adult to share the (sometimes clothing optional) house with us.

I like the idea of using it as a pied a terre post FIRE. 

slugsworth

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Re: Considering building an apartment on top of my garage.
« Reply #5 on: August 15, 2016, 09:13:59 PM »
I'll defer to others on the financial metrics, but $50/sqft is really cheap especially if that includes any permits, hookups, architect/engineering you might need. It sounds like you are probably in a high cost area, which usually translates to more land use process as well.

You haven't given a lot of detail on the scope of work, but you may want to make sure you've got a full accounting of costs. . . And good luck! Sounds like an awesome project!

SwordGuy

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Re: Considering building an apartment on top of my garage.
« Reply #6 on: August 15, 2016, 09:26:42 PM »
$30K (leveraged at a super low rate) on new construction to get $900 a month? 

That's sweet! 

( I have to pay $45k to $50k to get $750 to $820 a month - and that's not a bad deal either!  And it's older construction so stuff is more likely to go wrong earlier so I need larger cash reserves for maintenance.)

Check out Frank Gallinelli's book on Cash Flow and other formulas.   It really covers the math.   But if $900 a month is pretty darn sure, and $30k to build the add-on is pretty darn sure (and you can handle a 5-10k overrun on costs), it's a good deal.

ncornilsen

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Re: Considering building an apartment on top of my garage.
« Reply #7 on: August 16, 2016, 07:51:12 AM »
I'll defer to others on the financial metrics, but $50/sqft is really cheap especially if that includes any permits, hookups, architect/engineering you might need. It sounds like you are probably in a high cost area, which usually translates to more land use process as well.

You haven't given a lot of detail on the scope of work, but you may want to make sure you've got a full accounting of costs. . . And good luck! Sounds like an awesome project!

I was thinking his estimate seemed low. Sewer connections can run 1/4 of that sometimes, not to mention electrical. And what kind of foundation does that garage have? And on and on it goes.

rocketpj

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Re: Considering building an apartment on top of my garage.
« Reply #8 on: August 16, 2016, 12:07:28 PM »
I'll defer to others on the financial metrics, but $50/sqft is really cheap especially if that includes any permits, hookups, architect/engineering you might need. It sounds like you are probably in a high cost area, which usually translates to more land use process as well.

You haven't given a lot of detail on the scope of work, but you may want to make sure you've got a full accounting of costs. . . And good luck! Sounds like an awesome project!

I was thinking his estimate seemed low. Sewer connections can run 1/4 of that sometimes, not to mention electrical. And what kind of foundation does that garage have? And on and on it goes.

My estimate may be low - it is based entirely on the comments of my friend, though he is probably the most well versed person in our area when it comes to real estate given his business (property appraisals) for the last couple of decades.  I certainly wouldn't go forward without a clear understanding of the exact costs.

Sewer would be the main issue for the hookups.  The building is already fully wired and up to code, so adding another floor wouldn't be a big deal (relatively).  The building is on a concrete slab (just like the house), mostly because of the high water table - all our neighbours who have basements are constantly dealing with flooding issues.

Permits may be an issue - I'm going to talk to the people at town hall for a better understanding of the process.  It helps that we are in a small enough town that I'm on a first name basis with many of the councillors and half the staff.

Pennycounter

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Re: Considering building an apartment on top of my garage.
« Reply #9 on: September 20, 2017, 08:52:58 PM »
Did you proceed and have any information to share?

rocketpj

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Re: Considering building an apartment on top of my garage.
« Reply #10 on: January 18, 2018, 12:03:24 AM »
Did you proceed and have any information to share?

We chose to delay proceeding for awhile as I ended up buying a business in our community as a career change - which tied up a fair amount of our loose capital.

That said, I met with some builders and got a good sense of the costs and benefits - in the long term it will be a good investment, so I will probably revisit the concept in a few years.  Right now our community is in the middle of a building boom, and builders are booked up and hard to find - which means their rates are also a bit higher.  Once the cycle turns a bit and things slow down it might be a more cost effective option, and my kids will be a bit older as well (and having a backyard wild zone won't be as much of an issue).


TheWifeHalf

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Re: Considering building an apartment on top of my garage.
« Reply #11 on: January 18, 2018, 11:13:03 AM »
This may not apply in your case, but if you are using a septic system, the size of the tank will limit how many bedrooms there can be.

the_fella

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Re: Considering building an apartment on top of my garage.
« Reply #12 on: January 25, 2018, 07:39:08 PM »
Based on the amount of rent you're wanting to charge, I can only assume there's going to be an additional room in the apartment for the butler?

Dicey

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Re: Considering building an apartment on top of my garage.
« Reply #13 on: January 26, 2018, 12:34:15 AM »
Based on the amount of rent you're wanting to charge, I can only assume there's going to be an additional room in the apartment for the butler?
In my area $1k for a 600 s.f. newly constructed stand alone unit would be like finding a unicorn snuggled around the pot of gold at the end of the rainbow. Were you actually trying to offer anything helpful to the OP?

rocketpj

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Re: Considering building an apartment on top of my garage.
« Reply #14 on: February 09, 2018, 10:07:01 PM »
Around here that price for rent would be a steal.  I own two apartments in a commercial building.  Neither of them are particularly nice, and the building is in an industrial zone.  The 550 sf unit rents at $850, and only because I would feel like a complete asshole if I tried to charge more for it.