Add a 3rd Bedroom or turn it into a studio?
Rental Property Investor · San Jose, CA · Member since 2018 · 17 posts · 4 votes
Hi all,
Thanks for stopping by to read/help. I just bought a duplex in Cleveland, Ohio and the top unit has an attic space that includes a set of stairs and doorway that leads directly outside the house. Technically, this can be turned into a studio apartment. My question is, would it be best to turn the top floor into a 3rd bedroom for the top unit, or, would it be better to renovate the top floor into it's own single unit.
I plan to hold this property for a long time so it's not a flip. I want to make sure I add value to the home and increase my cash flow as much as possible.
Thanks very much.
I gonna go ahead and disagree with @James Wise - I would 100% turn the upstairs into a 3rd unit. I am actually doing this with a property right now so I can give you specifics if you DM me.
Overall though you submit some forms to the city for a minimal fee. You will then need some drawings for a site plan which is relatively minor as well (<$1,000) then depending on the renovation that amount will vary. You will need to add a small kitchen, bathroom, and second exit if there isn't one. But overall let's say it costs $20,000.
You will EASILY make that back in value. Look at the difference in sales price between 3-units in the area and duplexes. That alone is worth $20K. Then if you are getting $450 a month in rent that is $5,400 a year on a $20K investment which is 27% return. Even if my $20K estimate is low a 20% return is still great and adding value. Way better than an extra $100 a month in my opinion.
If you don't have the cash or appetite for that then make it a 3 bedroom in the short term. Or if you have other investment opportunities to earn more than 20-27% then take that.
Issue with your plan above is that your estimate of the cost is less than half of the actual cost. While your estimate of cashflow on that 3rd floor unit is about double what you'd actually receive. To get a legal 3rd floor unit up there you'd need to do the following.
No scenario where all of that comes anywhere near $20,000. Beyond that the other factor is that we now have a tenant paying $450/mo. Yes we are scheduled to receive $5,400 annually from said tenant. In actual practice it doesn't work that way. You have repairs, vacancy, non payment, additional utility fees & on & on. At best you can expect to earn an average NET cash flow of $2,700 or so on that 3rd floor unit when factoring in expected operating costs. In addition to that, don't kid yourself on who you're putting up there. A 3rd floor $450 attic tenant ain't no high class tenant. It's going to negatively effect the lives of the other 2 tenants, which is going to negatively effect your bottom line. This 3rd unit is now an additional person who's going to ad to the noise, laundry & parking disputes that are already prevalent in these types of properties when there are 2 tenants. In short these additional issues are going to cause you to see much more frequent turnover when installing a 3rd floor unit in these duplexes as opposed to sticking with the status quo or finishing off the 3rd floor & getting a much higher quality 2 floor tenant.
Hi all,
Thanks for stopping by to read/help. I just bought a duplex in Cleveland, Ohio and the top unit has an attic space that includes a set of stairs and doorway that leads directly outside the house. Technically, this can be turned into a studio apartment. My question is, would it be best to turn the top floor into a 3rd bedroom for the top unit, or, would it be better to renovate the top floor into it's own single unit.
I plan to hold this property for a long time so it's not a flip. I want to make sure I add value to the home and increase my cash flow as much as possible.
Thanks very much.
Another unit would mean additional income but additional tenant headache and turnover. If the extra bedroom will allow for rent increase enough to bring better cash flow without the extra cost of finding and keeping renters as another unit would, seems easier. But if the area rents a single flat for 500$ a month that might be worth the headache. You could make it a extra bedroom raise the rent and see how that goes and always switch to a separate unit down the road or vise verse. Good luck !
Lewis
Hi all,
Thanks for stopping by to read/help. I just bought a duplex in Cleveland, Ohio and the top unit has an attic space that includes a set of stairs and doorway that leads directly outside the house. Technically, this can be turned into a studio apartment. My question is, would it be best to turn the top floor into a 3rd bedroom for the top unit, or, would it be better to renovate the top floor into it's own single unit.
I plan to hold this property for a long time so it's not a flip. I want to make sure I add value to the home and increase my cash flow as much as possible.
Thanks very much.
Doing anything with these attics is usually cost prohibitive. If you can buy a duplex where the previous owner has already done something to them bonus for you but doing it yourself is not a good use of your cash. You'd be best served to just leave it how it is.
If you are jonesn' to do something though you'll want to make a 3rd bedroom for the 2nd floor unit. You'll bump your rent up $100 or so per month & get a higher quality tenant. Much better than spending a much larger amount of time & money to get a 3rd tenant who will be at the very bottom of the desirability factor and pay like $450/mo at most.
@Matt Lorenzo I agree with Lewis - if the additional unit allows for enough rent to make a better return on making it separate go for it. Otherwise if there is a decent enough rent increase for the 2nd unit then that’s easier to manage.
I think personally it depends on the space - if it is nice space for an additional unit and can get $400-500 a month then I would make an additional unit.
Find out the costs for turning it into a studio. Costs to comply with fire regulations may be high. Similarly if there is no inside staircase, it may not work as a 3rd bedroom.
@Matt Lorenzo I would think that you would have a better tenant in a 3 bedroom unit as opposed to taking on an additional tenant that wants an attic studio. I would do a cost benefit analysis. To include it in the 2 bedroom unit, do you have to add a stair case? What code issues would each scenario bring up? You would need to add a lot of electrical, plumbing and hvac to add a new unit.
Which scenario brings in more cash flow?
I gonna go ahead and disagree with @James Wise - I would 100% turn the upstairs into a 3rd unit. I am actually doing this with a property right now so I can give you specifics if you DM me.
Overall though you submit some forms to the city for a minimal fee. You will then need some drawings for a site plan which is relatively minor as well (<$1,000) then depending on the renovation that amount will vary. You will need to add a small kitchen, bathroom, and second exit if there isn't one. But overall let's say it costs $20,000.
You will EASILY make that back in value. Look at the difference in sales price between 3-units in the area and duplexes. That alone is worth $20K. Then if you are getting $450 a month in rent that is $5,400 a year on a $20K investment which is 27% return. Even if my $20K estimate is low a 20% return is still great and adding value. Way better than an extra $100 a month in my opinion.
If you don't have the cash or appetite for that then make it a 3 bedroom in the short term. Or if you have other investment opportunities to earn more than 20-27% then take that.
I gonna go ahead and disagree with @James Wise - I would 100% turn the upstairs into a 3rd unit. I am actually doing this with a property right now so I can give you specifics if you DM me.
Overall though you submit some forms to the city for a minimal fee. You will then need some drawings for a site plan which is relatively minor as well (<$1,000) then depending on the renovation that amount will vary. You will need to add a small kitchen, bathroom, and second exit if there isn't one. But overall let's say it costs $20,000.
You will EASILY make that back in value. Look at the difference in sales price between 3-units in the area and duplexes. That alone is worth $20K. Then if you are getting $450 a month in rent that is $5,400 a year on a $20K investment which is 27% return. Even if my $20K estimate is low a 20% return is still great and adding value. Way better than an extra $100 a month in my opinion.
If you don't have the cash or appetite for that then make it a 3 bedroom in the short term. Or if you have other investment opportunities to earn more than 20-27% then take that.
Issue with your plan above is that your estimate of the cost is less than half of the actual cost. While your estimate of cashflow on that 3rd floor unit is about double what you'd actually receive. To get a legal 3rd floor unit up there you'd need to do the following.
No scenario where all of that comes anywhere near $20,000. Beyond that the other factor is that we now have a tenant paying $450/mo. Yes we are scheduled to receive $5,400 annually from said tenant. In actual practice it doesn't work that way. You have repairs, vacancy, non payment, additional utility fees & on & on. At best you can expect to earn an average NET cash flow of $2,700 or so on that 3rd floor unit when factoring in expected operating costs. In addition to that, don't kid yourself on who you're putting up there. A 3rd floor $450 attic tenant ain't no high class tenant. It's going to negatively effect the lives of the other 2 tenants, which is going to negatively effect your bottom line. This 3rd unit is now an additional person who's going to ad to the noise, laundry & parking disputes that are already prevalent in these types of properties when there are 2 tenants. In short these additional issues are going to cause you to see much more frequent turnover when installing a 3rd floor unit in these duplexes as opposed to sticking with the status quo or finishing off the 3rd floor & getting a much higher quality 2 floor tenant.
Couple points
So like I said, I may have been low on my $20K estimate but at $30K in costs you're still at 15% return if you account for a small bump in water bill. The entire unit would be new, what on earth would you need to repair? There are also plenty of single nurses or sales people that would rent a really nice studio or 1 br. As many people on BP "there are good and bad tenants everywhere."
But to each their own, I would go the 3rd unit route because I think it adds a lot of value to the property in addition to a good return.
Couple points
So like I said, I may have been low on my $20K estimate but at $30K in costs you're still at 15% return if you account for a small bump in water bill. The entire unit would be new, what on earth would you need to repair? There are also plenty of single nurses or sales people that would rent a really nice studio or 1 br. As many people on BP "there are good and bad tenants everywhere."
But to each their own, I would go the 3rd unit route because I think it adds a lot of value to the property in addition to a good return.
Lol, you don't think you get your name on as many buildings as I do without knowing how things work in the space do you?.....Come back to me on this after you've gone through a few more deals, properties & tenants...It's just not profitable dude. That's why 99% of the 1,000's of duplexes in Cleveland remain unfinished 100 years or so after they've been built. But by all means knock yourself out. It's not my money at play.
Ok I will circle back and let you know how it goes!
I'm with @James Wise on this one. I wanted to do this in my area, but decided not to. The list James provided is exactly what's needed. Not to mention insulation will need to be spray foamed which is around $10k just for that. Also, older home's attics are not built to support a whole apartment, which means you'll need to get an engineer and might end up sistering/reinforcing 2nd unit's ceiling. While rent in my area is double of what you can get in OH for the attic studio, I'm still not moving forward due to all the headaches (and easily closer to 80k-100k expense for this project).
So to answer @Matt Lorenzo question - I personally recommend letting your upstairs tenants use that attic space as a bonus room, ie storage or ping pong table etc.
Thanks very much, everyone. This gave me a lot to think about. I'll keep you all posted what happens.
@Matt Lorenzo The path of least resistance is to turn it into a 3-bedroom unfortunately. This is mainly because of the cost to build out the studio space the proper way, getting approvals from the city, etc. That is the way it is in CT at least and I am assuming CLE is similar.
In a perfect world I would rather deal with a 2 bedroom and a studio as opposed to a 3-bedroom, but like others have said it will be cost prohibitive.
@James Wise How about this scenario. Let's say the attic/third floor is already converted into the 2 bedrooms. That SHOULD mean that ceiling height, insulation and that stuff is done. Dry wall, paint and flooring is also done. In other words its already a livable space. Would it make sense at this point to basically just add a kitchen and bathroom (Plumbing, gas & electrical associated with that) and whatever else safety stuff like fire escape etc.?
@James Wise How about this scenario. Let's say the attic/third floor is already converted into the 2 bedrooms. That SHOULD mean that ceiling height, insulation and that stuff is done. Dry wall, paint and flooring is also done. In other words its already a livable space. Would it make sense at this point to basically just add a kitchen and bathroom (Plumbing, gas & electrical associated with that) and whatever else safety stuff like fire escape etc.?
No. Still cost prohibitive and way to small for a legitimate 2 bedroom unit. Just buy another duplex, they are like $100k out here.
@James Wise How about this scenario. Let's say the attic/third floor is already converted into the 2 bedrooms. That SHOULD mean that ceiling height, insulation and that stuff is done. Dry wall, paint and flooring is also done. In other words its already a livable space. Would it make sense at this point to basically just add a kitchen and bathroom (Plumbing, gas & electrical associated with that) and whatever else safety stuff like fire escape etc.?
No. Still cost prohibitive and way to small for a legitimate 2 bedroom unit. Just buy another duplex, they are like $100k out here.
@James Wise what do you think such scenario would cost?
@James Wise How about this scenario. Let's say the attic/third floor is already converted into the 2 bedrooms. That SHOULD mean that ceiling height, insulation and that stuff is done. Dry wall, paint and flooring is also done. In other words its already a livable space. Would it make sense at this point to basically just add a kitchen and bathroom (Plumbing, gas & electrical associated with that) and whatever else safety stuff like fire escape etc.?
No. Still cost prohibitive and way to small for a legitimate 2 bedroom unit. Just buy another duplex, they are like $100k out here.
@James Wise what do you think such scenario would cost?
Too much for it to be smarter than just buying another duplex.
@James Wise Last scenario, lets say the attic has not been fixed up at all so its just a bare attic. Is it worth fixing it up into 1-2 bedrooms and charge higher rent for the second floor unit?
@James Wise Last scenario, lets say the attic has not been fixed up at all so its just a bare attic. Is it worth fixing it up into 1-2 bedrooms and charge higher rent for the second floor unit?
No. Bro get your mind out of Cleveland attics. There is no money to be made in attics in Cleveland. It's Cleveland man, we don't need to go into the attics or the basements for living space, this ain't New York.