Will a bank allow me to pull equity out AFTER I build a carriage house rental?

[J Boogie]

Hi everyone, here's my situation.

I own and occupy a duplex and my city/neighborhood allows ADU rentals. 

Currently the garage is ready to fall over, and I'd like to replace it with a new garage that has a one bedroom apartment on top.  It's got a pretty generous footprint - I think 2 bedroom would be possible but might make living area too tight.  I could get 1k/month in my market, maybe 1200 if the 2 bedroom option works.

I've owned the duplex for only a year or so, I owe 220k and it's worth about 280k as of 2016 and 242k as of 2017.  Which is strange as my neighborhood has been heating up and SFH very close with similar sqft have been selling for $400k and over.  But I don't question that which lowers my hefty tax bill.

Anyways, my father recently retired and we've talked about him offering me a short-term loan (80-140K) to get this thing built.  He'd only be interested if he's able to get his money out quickly.

Is anyone familiar with this type of arrangement, or have any suggestions?

I have around 10k in cash and the rest is invested in my 401k so my personal stache can't solve this problem.

[Hotstreak]

Apply for a construction loan and see what they say.  There will be an appraisal based on the "As Completed" value of the property (so you need to give them the building plans, etc.).  Do you require the rental income to qualify for a larger loan?  If so, keep in mind that they probably won't let you include it until you have several years of rental history.

[J Boogie]

Apply for a construction loan and see what they say.  There will be an appraisal based on the "As Completed" value of the property (so you need to give them the building plans, etc.).  Do you require the rental income to qualify for a larger loan?  If so, keep in mind that they probably won't let you include it until you have several years of rental history.

I think we should be ok, we currently have a HH income of roughly 110k with a 220k mortgage and 15k in student loans, no other debt.  I guess our income might boosted by another 10k if we included the other unit of the duplex but that's definitely not how it looked on my tax return ;) ;)

Thanks for the advice, I'll have to give that a shot.

[waltworks]

With 110k income, I would say you should be able to just save up some $ and build it with cash, or alternately qualify easily for a construction loan.

Avoid family and money/loans. It's just not worth it.

-W

[Hotstreak]

With 110k income, I would say you should be able to just save up some $ and build it with cash, or alternately qualify easily for a construction loan.

...

I agree.  You just need to save enough to re-do the garage and get the basics done upstairs.  You can build out the rooms, furnishing, etc., as cash flow allows.

[J Boogie]

I appreciate the advice!  I hope you all don't mind a little more backstory. 

I have a very good relationship with my Dad and he's gotten involved in financing real estate deals for my brother, but I tend to agree that these arrangements should almost always be avoided.  My Dad brought it up in part because he wants to see me my pursue my passion (woodworking/furniture building - I want to quit my desk job and do that full time in the next 5-10 years) and he's seen my basement/current garage setups and found them to be pretty limiting. 

The garage currently lacks a foundation (built in 1890) and I have a few workstations/tools set up on some very wavy, uneven surfaces.  It's built on an incline and the floor is basically built like a deck is.  100+ years later, there has been significant settling and wood movement.  The inspector initially said I need to tear it down ASAP and just have a parking slab poured for now.


My desire to finance as opposed to paying cash to incrementally build it little by little is because of the rent that I could start getting rental income right away - as opposed to outlaying thousands and thousands of dollars to pour a slab, build out the garage, and chip away at finishing the apartment.  Those thousands wouldn't be making me any money, and the cost of not financing would be ~$12,000 X however many years it takes me to complete it.

That being said, I haven't looked into construction loans much yet.  I guess I didn't think of it because it struck me as more of a remodel type situation and those loan terms are really bad if you don't have much home equity.  If you all suspect I could get a favorable loan situation by seeking a construction loan, it's probably my best option. 

Thanks again for all the feedback.

[waltworks]

Dude, you make $110k a year. It will not take forever to pay for it. You can pay for it over the course of a year or two, max, and just pay contractors as you go (or DIY some stuff, you're a woodworker, right?)

Seriously, if there's a HTFU situation, this is it. You have the money and skills. Do it without leaning on dad.

-W