Additional Unit - Estimating Additional Value?

Question

When considering adding a new unit (garage conversion, likely one bed one bath) to an existing building (triplex), what methods do you use to estimate the value add to the property at time of next sale?

Mack Benson · Answer

If I read right you are looking at turning a 3 unit property into a 4 unit property? If so then this will still qualify as a residential sale and will be valued based on comparable properties.

On the other hand if you are looking at the cost benefit of adding it for a long term hold then things get a bit trickier. You'll want to take your cost of the conversion, including the permitting and calculate that versus how much you will receive in added revenue. There's also considerations to be made if you take our a mortgage to help complete the conversion.

Here's a simple way to look at it assuming no mortgage. Assume the conversion costs you $50k our of pocket and the rent is $750 per month, that is $9k per year, we'll also assume 50% of that will go to expenses so you are left with $4,500 per year of cashflow. To recoup your initial investment of $50k it will take about 11.1 years.

If you use a mortgage at 25% down you have $12,500 capital into the conversion rather than $50k but you also have about a $200 mortgage or about $2,400 per year which decreases your cashflow to $2,100 per year. To cover the initial investment of $12,500 it will now only take you about 6 years.

In the end, know your goals, run the numbers and trust the numbers.

Jessica O. · Answer

Thanks @Mack Benson. I'm considering an ARV appraisal as running the numbers from an NOI perspective puts out one appreciation number, but am concerned that because it will be a 4 unit it will still be evaluated residentially (even though our loan is commercial at the time).

Appreciate your reply!