More and more owners are becoming owners of secondary suites
Much was lacking during the coronavirus crisis, and that includes housing.
When the country went into lockdown, the Americans were on the move. The sudden upheaval caused house prices to soar.
Even now, potential buyers continue to be excluded from the property market as prices continue to rise.
At the same time, the pandemic-induced housing race has put even more pressure on demand for rentals, which are generally more affordable than home ownership.
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Anyone with a little extra space can convert this room into a rental. For some, it is an investment opportunity.
As the housing crisis in the country escalates, a growing number of homeowners, especially in high-cost areas, are converting part of their property into a garage, grandma’s apartment or guesthouse to rent. short or long term.
According to a recent research note from Freddie Mac, so-called accessory housing units, or ADUs, are now a popular way to add an income-generating rental property on the same lot as a single-family home.
“We are in the midst of a huge housing crisis; this is leading to classic economic supply and demand,” said Caitlin Bigelow, CEO of Maxable, a startup that connects landlords with resources to build rental housing. from beginning to end. “Owners see ADUs as handy fruit.” (Each Maxable project begins with an assessment for $ 199.)
Amy O’Dorisio, 40, transformed a freestanding garage in Normal Heights, San Diego, into a one-bedroom, one-bathroom rental unit.
Photo: Tyson Wirtzfeld
In 2018, 40-year-old Amy O’Dorisio transformed a freestanding garage into a one bedroom and one bathroom unit. Over the past year, demand for these types of apartments has only grown, O’Dorisio said, particularly in San Diego, where she lives and works as a residential real estate agent.
“I knew it was going to spread and it is,” she said.
O’Dorisio said she spent $ 130,000 on the conversion, including permits and some furniture. She now rents the unit for about $ 2,000 per month. She is currently working on converting another part of her property into an additional ADU.
“My goal is to have enough rental income that I don’t have to work so hard,” she said.
An interior view of Amy O’Dorisio’s one bedroom rental unit.
Photo: Tyson Wirtzfeld
In fact, after a year of record interest rates and soaring house prices, real estate has become the preferred way to invest for the long term, according to a recent study. Bankrate.com Report – top up savings accounts or certificates of deposit and the stock market.
But there are many factors to consider. For starters, whether you can add secondary accommodation depends on the ordinances or rules of your jurisdiction. The scarcity of affordable housing is pushing more and more cities to adopt ADU-friendly legislation, making these units legal in many neighborhoods; however, this is not generalized.
And turning guest rooms into rental doesn’t come cheap. Garage conversions start at around $ 100,000, according to Maxable’s Bigelow. Building a separate stand-alone structure is even more.
Once a unit is built, there are two main ways to make money: cash flow and appreciation, according to Tendayi Kapfidze, chief economist at LendingTree, an online lending marketplace.
“If your goal is to generate cash, you will need to know if you can rent the property enough to earn more than what you spend on the mortgage and maintenance,” he said.
Rental income should cover your monthly costs, including insurance and a certain amount of vacancy.
“It all has to be average,” Kapfidze said.
“If you are more interested in appreciation, you need to estimate whether the property will be worth more in several years,” Kapfidze added.
Like all things in real estate, a big part of it comes down to location, location, location.
Notoriously expensive cities like Chicago, Miami, and Seattle have seen an increasing number of these rental units over the past decade while homeowners with ADUs in more affordable cities like Austin, Texas; Nashville and Phoenix could benefit in the future from a sudden increase in rental prices due to Covid.
Vacation towns can be even more lucrative.
Properties in exclusive enclaves, such as Kiawah Island near Charleston, South Carolina; Key Biscayne, Florida; Park City, Utah; Rehoboth Beach, Delaware; Nantucket, Massachusetts and the New Jersey seaside towns Stone Harbor and Avalon have the highest value as investments, according to another report from MagnifyMoney.
Nonetheless, potential rental income can also vary from block to block, Kapfidze warned.
“It’s something very, very local,” he said. “Before determining finances, it is very important to understand the level of demand in a very small geographic area where your home is located.”
It is very important to understand the level of demand in a very small geographic area.
Chief Economist at LendingTree
Plus, it can be difficult to access your money once you’ve locked it in real estate. These days, “even if the property’s value goes up in value, you usually can’t access equity with a home equity loan or line of credit,” Kapfidze said.
Since the start of the pandemic, the banking industry has tightened lending standards to reduce risk, and several large banks have completely stopped offering HELOCs or cash refinances.
There are also tax and insurance implications. “Your insurance needs will also be different, so you need to assess this cost in advance,” Kapfidze said.
On the flip side, some of those extra insurance costs could be tax deductible, in addition to the potential tax benefits associated with home renovations, he added.
“This is definitely something you’ll want to talk to a tax expert about. “