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?