Author Topic: When is it worth it to add a suite?  (Read 938 times)

Goldielocks

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When is it worth it to add a suite?
« on: August 26, 2020, 03:57:13 PM »
I have a large home that could be converted into an upper and downstairs unit, by removing or closing off the stairs and converting a large laundry area into a kitchen.  It was a suite formerly, before a major reno 10 years ago.  (Has separate entrance, 1500sqft, garden level with good sized windows, currently shared laundry). 

We are now trying to decide across three choices:

1.  Convert it back to a 3 bedroom, 1 bath suite, rent would likely be $1800 to $2000 per month. We would live upstairs, (2 bed+den, 2 bath) most likely, but could get up to $2500 for it.
2.  No reno.  Rent out individual bedrooms, at $700 each (utilities included, so estimate $600/mo each x 3).  Maybe experience higher damage and vacancies and weird people.  Room rentals do not get protection under the residential act, however.
3.  Sell the home.

Note, the unit after reno could have its own sub-panel and sub-metering for electricity calculations, but heat and other utilities are all shared.  It would not be a true fully separated suite that way. 

We are in a suburb away from downtown core, 2 miles from grocery store, but with transit access nearby.  I don't think AirBNB is the way to go.  Room rentals to international students might work, and is very common once schools fully restart, but they tend to expect laundry and cleaning services.

I am trying to decide when it is worth converting a SFH into an income property and how much to spend on a renovation.   A key issue is that we need to revisit our overall electrical service to the home, it is currently 100A, which is borderline for adding another stove plus another laundry.  Would need a sharp pencil on the electrical load calcs to make it work.  That could be expensive.

Question:


Is there a good rule of thumb for the max to spend on a suite conversion to get $1800/mo in rent?

Any cautionary words of experience?  What would you do?


Flagging @waltworks   and @Dicey  for any pearls you have.


Jon Bon

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Re: When is it worth it to add a suite?
« Reply #1 on: August 27, 2020, 05:54:40 AM »
First off I would not do #2.

Also we need more information.

What do you think the house is worth? Did you live in it? What did you pay/owe/rate etc?
So the grand plan is go get about $700 more a month? That is not very much money for what I assume is going to be a massive project. Have you priced it out at least ballpark?

I'm in the US so and if anything I see on TV is true Canada is a crazy RE place. Give us more and I can give you my American advice. I  have done similar capital improvements to increase rents to places. It is not easy.


Papa bear

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Re: When is it worth it to add a suite?
« Reply #2 on: August 27, 2020, 07:48:23 AM »
Agree with above.  Renting by the room is a total PITA. 

So the ďis it worth itĒ really just comes down to a math problem.  Whatís the house worth right now vs after repair value (ARV).  Whatís the rent as it sits now vs ARV.

What is the delta for rent between now vs ARV.  Apply your discount rate to the increase in rent.  If the repairs are less than the discount rate says, then ok, do it.  If the repairs cost more, then donít do it. 

Example: delta of rent is 700/month.  You want a 15% return on your money. 700x12=8400 / .15 = 56,000.  Your repair/capital improvement estimates are 65,000. Donít do the work.   


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theoverlook

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Re: When is it worth it to add a suite?
« Reply #3 on: August 27, 2020, 07:56:43 AM »
Correct me if I'm wrong but it sounds like you get $0 in rent from the space now, and it's not rentable as a separate unit without renovations. So the rent delta is actually $1800 to $2000/mo. Is that correct? If so, then apply Papa Bear's calcs means $1800 x 12 / .15 = $144,000 which would mean a good return on your money if you spent up to $144,000 on the renovations.

Dicey

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Re: When is it worth it to add a suite?
« Reply #4 on: August 27, 2020, 08:35:19 AM »
Thanks for the vote of confidence, but this is out of my wheelhouse.  I'll happily follow along, though, and wish you well, whatever you decide.

Paper Chaser

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Re: When is it worth it to add a suite?
« Reply #5 on: August 27, 2020, 09:00:00 AM »
Take a look at common building material prices right now. Most are at least 10% higher than they were 6 months ago, if you can find them at all. Add to that a lot of very busy trades people and you can get some pretty high prices and long timelines right now.
Not sure how much really needs to be done to convert the extra space into a rentable unit, but the price may be higher than you think.

Jon Bon

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Re: When is it worth it to add a suite?
« Reply #6 on: August 27, 2020, 09:35:11 AM »
Take a look at common building material prices right now. Most are at least 10% higher than they were 6 months ago, if you can find them at all. Add to that a lot of very busy trades people and you can get some pretty high prices and long timelines right now.
Not sure how much really needs to be done to convert the extra space into a rentable unit, but the price may be higher than you think.

Also a good point, probably the most expensive time ever to try to do a construction project. Materials are way more expensive and subs will give you their "I dont want the job price"

spending 50k to get 700 a month is probably about right, but I would DIY a bunch so my price to get that extra $700 would be much lower.

Do you guys get the primary residence capital gains exclusions like us yanks do?








Goldielocks

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Re: When is it worth it to add a suite?
« Reply #7 on: August 28, 2020, 12:25:02 AM »
Correct me if I'm wrong but it sounds like you get $0 in rent from the space now, and it's not rentable as a separate unit without renovations. So the rent delta is actually $1800 to $2000/mo. Is that correct? If so, then apply Papa Bear's calcs means $1800 x 12 / .15 = $144,000 which would mean a good return on your money if you spent up to $144,000 on the renovations.

That's right, we took out the separate suite years ago to make one home.   The only way to rent it now is by the room as the living spaces are not separate.  If we put in the separation and add an oven and maybe dishwasher (already have a sink, fridge, counter and LAUNDRY where the stove would go), we could rent for $1800, maybe more.

I am not sure I agree with the calculation -- seems aggressive and doesn't include all the deducts.  That calc (roughly 1% of capital costs as rent per month makes adding a door worth it), would be more for a decision to buy an entire property, that would retain value due to land, etc.   

The suite reno would depreciate faster than a whole apartment would.   ...

I will keep reading...

Goldielocks

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Re: When is it worth it to add a suite?
« Reply #8 on: August 28, 2020, 12:40:19 AM »
Take a look at common building material prices right now. Most are at least 10% higher than they were 6 months ago, if you can find them at all. Add to that a lot of very busy trades people and you can get some pretty high prices and long timelines right now.
Not sure how much really needs to be done to convert the extra space into a rentable unit, but the price may be higher than you think.

Also a good point, probably the most expensive time ever to try to do a construction project. Materials are way more expensive and subs will give you their "I dont want the job price"

spending 50k to get 700 a month is probably about right, but I would DIY a bunch so my price to get that extra $700 would be much lower.


Good points.   Separate suite would need:
1.  Take out laundry, put in stove.  Needs rewire.
2.  Sink needs a bit of fix up (minor), maybe add a small dishwasher adjacent.
3.  Figure out if we add back in laundry somewhere.  Maybe a single wash/dry unit, under counter could work.
Here's a question - what would be better laundry or a dishwasher?
4.  Remove most of a non-loadbearing wall to open up the kitchen -- this gets the fridge in the same area as the sink and stove, creates room to add a tiny laundry machine.  Patch and close up opening. 
5.  Patch floor where wall came out, and put down new vinyl or a creative patch job.   It's high end vinyl, but I don't care for it much.
6.  Box in or take out stairs.  Drywall opening/ fill in hole in floor. Paint.
7.  The biggest question --- rewire the electric panels so that the suite is entirely on one subpanel and the rest of the house is on the adjacent one, add a sub meter with remote read out for the sub-panel.   This one may result in the issue of 100A.  We already have the two panels, well, three....   The 100A service is costly to upgrade, however, it may be cheaper to convert upstairs stove to a gas one to reduce total load.
8.  Figure out new laundry for upstairs -- I have room in a 9x10 bathroom for it, but it would need to be plumbed and electric connection put in.

Quote

Do you guys get the primary residence capital gains exclusions like us yanks do?

Actually, I think we get a better exemption, as the total gain is unlimited, for one house per married couple when delcared as a primary residence...  but we can not deduct mortgage interest on our annual taxes... although most of the US now does not itemize so it doesn't matter so much.

Goldielocks

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Re: When is it worth it to add a suite?
« Reply #9 on: August 28, 2020, 12:55:30 AM »
Thinking more about that calculation.

The question (to fit the calculation) would be:  how much would the home rent for as two suites versus one entire home?

Then, that difference is the amount that adding a suite would be worth  (using the 15%).

so -- Whole home, $3400/mo, optimistically.   Two suites $4200.  $800 /mo increase in rental potential..?  Maybe that $50k wasn't so far off.

tthree

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Re: When is it worth it to add a suite?
« Reply #10 on: August 28, 2020, 03:04:33 AM »
We recently redid our basement suite.  Our situation is slightly different as the house was built to be a suite (had separate electrical panels) but did not have a complete separate entrance.  Also even though the existing basement suite was only half the basement square footage, the "upstairs" side of the basement had no usable living space and we still shared laundry.

Renovating the space allowed us to fix some maintenance items:
Replacing disintegrated sewer line
Updating the electrical panels

The new space includes:
Legal one bedroom suite: separate entrance (accessible from the outside of the house), separate laundry, living/dining/kitchen, bedroom, bathroom

Useable space for us: laundry, bathroom, rec room (doubles as spare room for guests) and storage

For us we were going to do the reno regardless.....it was just the matter of whether we needed all the space or just some of the space in the basement.  The additional cost for the suite related expenses was less than $20,000 dollars.

ETA: the suite rents for $850/month
« Last Edit: August 28, 2020, 06:32:30 AM by tthree »

Jon Bon

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Re: When is it worth it to add a suite?
« Reply #11 on: August 28, 2020, 12:35:17 PM »
I would wager that this house is worth way more as a single family than a duplex?

If that is the case just sell it and buy a house that is meant to be a rental. Lots of people fall into the trap of shoehorning a house into being a rental when they would be much better served as someones SFH.

Whats its current value right now?


Evie

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Re: When is it worth it to add a suite?
« Reply #12 on: August 28, 2020, 02:37:50 PM »
Why not just drop a pre fab granny cottage or small unit onto the property?  Or consider a garage conversion?   

Dicey

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Re: When is it worth it to add a suite?
« Reply #13 on: August 28, 2020, 03:38:10 PM »
@Goldielocks - Just sent you a PM with an interesting link.

Goldielocks

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Re: When is it worth it to add a suite?
« Reply #14 on: September 07, 2020, 04:28:17 AM »
I would wager that this house is worth way more as a single family than a duplex?

If that is the case just sell it and buy a house that is meant to be a rental. Lots of people fall into the trap of shoehorning a house into being a rental when they would be much better served as someones SFH.

Whats its current value right now?
It was set up as a duplex up/down when we bought it.  Approx 1/3 of sfh here in my area are that way.  We renovated and took out the lower kitchen for a large laundry room and opened up the stairs, but with an eye to putting an income suite in later and just living in the rancher level when kids were gone.
Talked with a realtor.  Removing stairs is not a good idea for future resale but blocking them off works.  We could have a challenge even as sfhbas the upper is just 2and den and lower is 3bedrooms.  Not enough beds upstairs on the main level for most buyers (with kids). Of course, it used to have just 1bedroom up, but took a long time to sell (to us). Home value is about the same if set upbas sfh or duplex/suite, just depends on the buyer.  Most buyers want a 1-2 bed suite to help the mortgage but also want 3-5 bedrooms in the main home... So no instant wins.

Radagast

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Re: When is it worth it to add a suite?
« Reply #15 on: September 07, 2020, 02:12:59 PM »
A few thoughts: I would want a payback period of 5 years or so. Assume 2000 per month, 2000x12x5 = 120,000 max. Lower if you expect lower rent.

I would certainly value laundry more than a dishwasher, and I think most would. It is easy to wash a few dishes by hand, but clothes are harder. Clothes have more universal appeal as well, as some people only eat prepared (by others) or simple meals.

If possible wall off the stairs with a good looking solid sound proof door, that way you can easily convert the space back and forth by opening and closing the door. It will have the widest appeal when you sell it that way. You can put furniture and things against the door for extra privacy.

Goldielocks

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Re: When is it worth it to add a suite?
« Reply #16 on: September 08, 2020, 06:05:08 PM »
A few thoughts: I would want a payback period of 5 years or so. Assume 2000 per month, 2000x12x5 = 120,000 max. Lower if you expect lower rent.

I would certainly value laundry more than a dishwasher, and I think most would. It is easy to wash a few dishes by hand, but clothes are harder. Clothes have more universal appeal as well, as some people only eat prepared (by others) or simple meals.

If possible wall off the stairs with a good looking solid sound proof door, that way you can easily convert the space back and forth by opening and closing the door. It will have the widest appeal when you sell it that way. You can put furniture and things against the door for extra privacy.

Thanks, this makes a lot of sense.   We are still debating.

The last discussion ended off with reviewing the pro's for renting it in a shared family situation (no suite needed) and just adding in a second "light" kitchen (cooktop, sink, fridge, microwave)  to give everyone more privacy / space options while still sharing as needed.

In our area it is very expensive to find a nice 3 bedroom with fenced yard accommodation (for a dog) for reasonable rates, and a shared space does not fall under the difficult tenancy act requirements.