Author Topic: Build a rental apartment on our personal property?  (Read 2503 times)

FrugalInTheBigSky

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Build a rental apartment on our personal property?
« on: October 28, 2013, 07:22:36 AM »
I am a long time reader of MMM and the forums, but a first time poster..

We are considering building a small apartment attached to our garage to rent out. We live in the country, so the rental market is unique-- not like in town, near the university, jobs, etc. The cost to build we are roughly estimating to be $55-72k (still working on the numbers)- my boyfriend is a carpenter so we do all of the work ourselves but will need to pay for some items-- septic addition, electrical service. Given this, we will add value to our property, but will give up privacy having renters so close to our little slice of paradise here. Some of the cost improves our own residence such as upgrading the electrical to 200 amp. Tough to know how much we could rent it for-- $600-900?? Still trying to get an idea of what some other people in our valley are getting. We will always be very choosy in the tenants. It is very close to our house, we spend a lot of time outside on our property, people need to understand living in the country/on a farm... We are in Montana. Incomes are low, real estate is high.

But the idea is still attractive because it adds a chunk to our income which will allow us to work less. Is this enough return on our investment? Or should I just get over my inexperience and uncertainty of investing in the markets and put idle cash there? We have been landlords before with positive experiences.

Does the return make sense? Thanks in advance for your comments.
« Last Edit: October 28, 2013, 08:09:21 PM by FrugalInTheBigSky »

monarda

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Re: Build a rental apartment on our personal property?
« Reply #1 on: October 28, 2013, 12:35:12 PM »
Your numbers are in the rough ballpark of what we're doing, fixing up the attic of our rental property. The predicted rents and cost of improvements are roughly similar. We're trying to do a lot of the work ourselves. You said you have idle cash.  Are you paying cash for all the improvements, or do you need to add a loan into the mix?

Take the worst case, rent is 600 per month, and it costs you $72K for the improvements. Easy arithmetic that way.
$7200 income per year, so it'll have 10% ROI and pay for itself in 10 years, assuming you keep the unit filled.

Although your property taxes and insurance will go up some, sounds like a pretty good investment to me.  If you're conservative and follow the 50% rule (though your expenses will almost certainly be lower than that), it's still a worst case 5% ROI.  Your listed best case is 900 per month ($10,800 annually) and $55K, that's nearly 20% ROI, and 10% with the 50% rule.

So it depends if you think you'll be able to keep it rented pretty consistently. I'd wonder about that out in a rural location. And how are your other investments performing?? A range of 5-20% yield is pretty wide, but not so different from other options out there, right? I'd crunch the numbers and revisit, to see if you could narrow down this range some.

Is this something you're also considering doing as a mother-in-law apartment? As your parents are getting older, might one of them someday live in this apartment?

« Last Edit: October 28, 2013, 01:08:40 PM by monarda »

Johnny Aloha

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Re: Build a rental apartment on our personal property?
« Reply #2 on: October 28, 2013, 05:32:07 PM »
We did exactly as you are planning, for similar reasons.  My tips for you would be:

1. Develop a good understanding of the rental market.   This is probably the most important step, as it should drive the project costs.  There's a big difference between $600 and $900/month in rent!  Once you know what the new apartment will rent for .... see #2.

2.  plan the construction so you minimize cost, and don't overbuild for the rental price point.  If you think it will rent for $600, I wouldn't be willing to spend $72k for the renovation.  Ways to decrease your construction costs: don't build a second story if possible, re-purpose existing space instead of adding to the building footprint, and be thoughtful about building materials (example: stained concrete floors instead of tile or carpet).

3.  Consider the loss of privacy.  You might be able to hear your tenants.  They might be able to see you as you hang out in your back yard.  Do you have a minimum ROI to compensate for this?  10% wouldn't be enough for me.

Keep us posted!

FrugalInTheBigSky

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Re: Build a rental apartment on our personal property?
« Reply #3 on: October 28, 2013, 08:22:05 PM »
Thank you for the replies.

monarda: We are paying cash for all of the improvements, which is part of the reason vacancy doesn't terrify us. Other investments... that could be the face punch. I have been sitting on what to me is a "mountain" of cash because of indecision. Wanted to make a career/job change, or just quit altogether, wondered about starting a business, wondered about buying a rental in town, felt not fearful but uneducated about investing when I wasn't sure what I wanted to do in the long term-- resulted in the 'stash just sitting there. And sitting there. But that is for another post...
Mother in law? Yikes- don't scare me, but yes, in the very long term, I suppose that could be a possibility, although both of our families are on the East coast.

Johnny Aloha: The rent market is just not a known thing. It is a small valley, there is the commute, but some of the allure of Montana is just that things going differently here. Good and bad. My research today showed $550-600 for similar sized units, with a little more privacy, but older more needy (higher utility) accommodations than what our brand new space will be.
Yes, we will work hard on the construction costs. There is a great thrift-store like place here for construction stuff- toilets, doors, fixtures, paint. And we have done a complete remodel on our home over the past 11 years, so we know what to expect. The existing space has some foundation issues so that is why a new footprint/foundation cost is needed.
The privacy is an issue- but one I can deal with for the freedom of working part-time-- which is how this income can help us since we keep our living expenses down. But if I had a better handle on investment options for income (see above) I might be better able to weigh that decision.