Hi everyone, I am a long time lurker but this is my first post. I am located in a very hot rental and tourism market in location with high airbnb activity. I am considering using home equity in my primary residence to construct (on the property) a garage on with a detached accessory dwelling unit over the top and airbnb it, with backup plan of renting as a standard rental if Airbnb is not a success. I would have to pull out the max equity allowed by my bank to construct the unit and that makes me nervous, and I'd appreciate any advice you all have on whether this is a good or bad idea. Here are some numbers I am considering:
Cost of constructing unit: $125,000 for a 2 car garage with 1 bedroom, 1 bath apartment over top w/ 700 sq. ft. of living space.This includes cost of design, permitting and a contingency for cost overruns, but does not include furnishing unit (estimated at $5,000).
Potential airbnb income - gross $30-32,000 year (after local occupancy taxes) based on my research into comparable units in my area, less 15% for a property manager as I cannot run it myself, so income before expenses of $25-27k.
Potential backup rental income - I estimate $1500k/month as a regular rental, and would not use a property manager for a long-term rental, so $18,000/year gross before expenses.
I should be able to finance construction completely with a HELOC at 1.5% over prime, though may have to come out of pocket for furnishing the unit.
What gives me pause here is that my wife and I currently have 75k in consolidated student loans at 2.5% interest as well as $24k in student loans at 5% interest. We have no other debt but our mortgage ($450k, house worth $700k), and we have current retirement savings of 375k and a cash emergency fund of $30k. We plan to wipe out the 5% loan by the end of 2019, and were planning on letting the remainder ride due to their low interest rates.
Taking out another $125k in relatively high-interest debt feels bad and I worry we'd be putting too much of our assets into our primary residence. However, I don't think there is another investment I can make that would have the same potential return (especially given the power of leverage) as the airbnb income potential on the unit, and it seems like even in the fallback position of long-term rental it would pay for itself while we also have a garage to use for ourselves. Once paid off, Long-term we'd use the income to fund more property investments in hope of accelerating journey to FIRE.
What do you think? Should we pursue this opportunity? Or are there additional things I should consider?