Build a garage or save my cash?

26 Replies

Hey BP members, I'm in sort of a predicament that could use some outside input. 

I'm closing on my first duplex for me to house hack in two weeks and can't decide if it'l be worth it for me to build a detached garage or not. I have a ton of tools in storage that I need to move in; welder, air compressor, wood working tools etc. It has a large basement I can put everything in, however rebuilding and flipping motorcycles and cars on the side is a hobby of mine, which I can't really do in a basement.

Now I only plan on living in this duplex for 2 years at most before I refi out of the fha loan. In the meantime I'm going to pursue more rentals using the brrr technique and hard money lending. 

For the predicament...

I see the garage as potential for extra income, I'd put a divider in it so I can keep one side for myself and rent the other out for around $125 a month. When running roi though I'm treating it as if I were renting both units out for 11 out of 12 months at $125 a side. The investment is paid off in year 3 then after that its nothing but straight cash money on top of raising my property value. Typically this would be a great investment, but I'm only 25 and trying to work towards financial freedom, so would my limited cash be spent better towards my next rental? As I stated I intend on using hard money to acquire more rentals, which the lender I have been talking with will lend 85% of purchase cost and 100% of rehab cost up to 70% of ARV. So I'll still need 15% of purchase cost and interested up front.

Typing this out it's starting to come more clear what I think I should do, but what are all of your opinions?

Thanks!

Derrick

Alex R. I should be able to build it for under $8,000. Mostly material cost, I plan on doing most of the labor myself aside from having a few friends assist with pouring the concrete pad and foundation. And yes I’d only use one side of the garage while living there then rent the other. Once I’m moved out I’d rent both sides out. As for location the duplex is just outside City of Pittsburgh limits

@Derrick Lubomski

Come on, Derrick, "just outside City of Pittsburgh limits" means that it's in one of approximately 30 independent municipalities. Are you seriously expecting that coy descriptor is going to get you a useful answer? If you're thinking about doing this in Homestead, McKees Rocks, Wilkinsburg, heck no. Fill a garage up with tools in the evening and wake up to it stripped bare in the morning.  Somebody's gonna pay $125 to rent a garage slot anywhere in West Mifflin? I doubt it. Now if this is Fox Chapel, Millvale, parts of Mt. Lebanon, Castle Shannon, you've got a chance.

You're going to need to talk to code enforcement in one of those 30 municipalities to pull your permits, and that means you're going to need plans. You get your buddies together with some beer and start pouring concrete for the kind of big shop/garage you're talking about, maybe digging a trench through your backyard to bury a 16-gauge extension cord spliced into your duplex's panel, oh Mama, you're going to be in for a very ugly surprise. 

I'd say no, some tenants won't want to pay that, and then you've got an unsellable, unrentable liability until you find a tenant who does. If there were more units or it's a nice area it'd probably be worth it, even just as a way to attract more tenants if you offer it at a lower rate/free

@Derrick Lubomski okay I think I understand but correct me if I'm wrong. You need a garage space for your current situation and you are looking to build one, divide it down the middle and then rent the other side for $125/mo. but you only plan on needing for the next 2 years, at which time your are also going to rent your side for $125+/mo. 

Since a lot can happen in 2 years, lets just play on worse case scenario, in that your future life situation requires you to use your side of the garage space for longer than 2 years (indefinitely). If you are able to collect $125/mo. on the other side, that's @ $1,500/year -- minus 8% vacancy (@29 days) --- that's a total of $1,380/year. It's a garage and you are using one side so there shouldn't be much maintenance but, lets just round it off to $1,300/year. If you can build your garage for $8,000 that's a 16+% return on just the one side alone, it'll take you about 6 years to get your full $8,000 back --- That's a good investment, especially considering that you need a garage space for yourself and you will be using it and we are only running the numbers on one side - anything extra is just a better scenario. 

My only concerns are: 1) can you really rent out the other side for $125/mo.? How confident are you in that, are there other people in your area doing that? and 2) Will you want your $8,000 back faster one day? You wouldn't be able to sell or refi. your garage (although your property value would go up slightly). 3) will the municipality allow it? what capacity are you renting out the garage? storage or living space? ---- If you did move out in year 2 as you plan, then your ROI would double to 32% (although your maint. would probably go up a bit too) and just as you mentioned you would probably get your $8,000 back in about 3 years. I understand, as well as you probably do too, that the $125/mo. can come from straight-out renting the garage space separately to a different Tenant as you propose or to your current Tenants for an additional $125/mo. in rent, there are a few options to get there; I would go for it, if it all checks out and your not going to deprive yourself other possibly bigger investment returns on other investments elsewhere, why not, it's not a big investment but, its sound and relatively low risk if it all checks out in my opinion.

Alex

No way would I allow anyone else access to the garage where I store my tools. I know you said you would "divide" it... but all they have to do is "accidentally" leave a door unlocked or open for too long and you can say good bye to your gear.

Build the garage... it adds value to your unit and will give you a reason to have higher rents later on. Since you're living on one side of the duplex, keep the garage for yourself for the next two years. You say you fix up bikes and cars on the side....  You can easily make way more than $125 a month just being a local guy doing oil changes and light work turning a few wrenches. 

I would build the garage for myself and enjoy the perks for the 2 years... you will probably increase the value in the current place for you to use a heloc for getting the next place.

What is your buying criteria for real estate? If you can reduce that down, but use the same ratios on building a garage and renting it, then go for it. If not, don't. For instance, if you use the 1% rule, if you build a garage for $15K, could you get an extra $150 a month for the garage? If it cost you $15K, could you pull that money back out quickly? If that money is locked up indefinitely, I wouldn't do it, you could use the cash to do so much more!

There's plenty of listings, especially in the city where storage is tight, that have separately rented garages. However, (without actually analyzing your area) I'd say $125 is pretty steep, especially if it's only half of a garage. Around here at least, most full garages rent for about $40/month, so you might want to run the numbers again with a lower rent projection. Good luck!

@Jim K. area is Crafton. As for plans and building permits, that won't be an issue. I'm a civil engineer who has been part of teams that managed the construction of 40+ million dollar buildings. I already have right of way/easment information from the borough and know my property line offset. My buddies, are all professionals in the industry, the concrete will be poured by friends who do this on a daily basis, and the electric will be done by my roommate who is currently an electrician in the union. No need to worry about a half a** garage being built

Hey @Megan Clancy, the garage would be in Crafton less then half a mile away from the busway that takes you into town. I've search Craiglists looking at storage for rent and there were quite a few garages in the area with people asking that much. I figured with a new garage that has an electric door, that $125 would be achievable. Most of these garages I saw for rent were your typically Pittsburgh garage that you could barely open a car door in once your vehicle is inside. To me, $40 sounds very cheap, I paid more then that for outdoor storage on a fishing boat before.

@Derrick Lubomski OK, Crafton and you actually know people. Now it makes sense. I apologize if I offended you, but YOU KNOW the kind of Pennsyltucky residential construction fun and games I'm talking about. :)

I think you'll find plenty of takers for $75, certainly nibbles for $100. $125 might be doable. But I'd bet plenty of money that sooner or later if you go on in this life you'll be renting the duplex and using the garage yourself for storage. Depends on what sort of investing you'll be doing...I know that garage would never be rented if I were using it. I have similar plans to dig out a hillside and put in a garage behind a large duplex in Munhall. And I own a three-car garage in Greenfield. Every time I'm working up there someone wants to know if I'd be willing to rent a bay or two of it.

I'd made sure the divider was removable, too, for the obvious reasons you make clear about your hobby or if you want to store a bigger utility trailer in there.

@jim k. No worries Jim. My plan was build the garage first, then frame in the divider wall so it could be removable. Maybe I should just build a 3 car garage because I agree, having the extra storage is always nice

I say go rent yourself a garage where you will be allowed to do the things you want to use that garage for.

If you insist on building it, I think you really need to give proper thought to how the electrical service to the garage will be handled, especially since you will have two halves potentially. If you think you will have two sub-panels, with each of them tapping off one side of the duplex main panels, then when you use the entire garage yourself you will be potentially stealing electricity from the other side's tenant. If you use a single sub-panel, then creating two halves carries a similar dilemma. And you can't find a separate tenant to just rent a garage because electric is tied to the housing tenants.

So then you need to have two separate electric services brought to the garage. Once you do that, the electric company has a monthly minimum charge just to have service, even if no electricity is used.

Without electricity, the garage doors could be an effort to open for the elderly or women, for example. And there is no lighting then either, so parking late at night, or going there early in the morning, could be more of an adventure than one wants to endure.

The other thing to consider is access. If you rent it seperately later. Typically a garage is at the end of the driveway. if the current tenant parks in the driveway how dies the farage tenant get in?

@Derrick Lubomski

If it's going to cost you 8k to build the garage why not refinance out of your FHA after 6 months to a year and take that 8000$ and put it down on another property that will generate more cashflow. I honestly don't think the garage will bring you that much value

125$/month on an 8k investment is essentially an 18% return which sounds terrific however it doesn't sound like it's guaranteed. I would save your cash and invest it in another property 

Good luck

@Derrick Lubomski

How are you sir?

With questions like these, I have to constantly remind myself when considering making additions to a property: "refer to the comps."

Refer to the comps, my friend. 

Does having a garage increase your property value? If so, by how much? 

Does having a garage increase your rental income? If so, by how much?

Do those increases in value and rent justify the cost of building the garage over a period of time? 

You almost have to look at it as an investment within an investment. If the garage pays itself back in 5 years, and everything is gravy after that, I'd say absolutely do it.

Also, I'm in Chicago where having a garage during the winter season has great value. I would imagine in PA it would be similar, no?

Look into the comps, and do the math. Does it make sense or not?

Hope that helps!

@Derrick Lubomski ,

If you're living there for 2 years, absolutely not IMO.      No one else will really see the value in what you want, so I say be patient, and focus on real estate for the 2 years, and then when you move to your forever (or at least +7 yrs) home, build the garage you want!

We were debating that exact topic, have TONS and tons of tools, woodworking stuff, etc.. and since our current home will be a rental in 3-5 years.. we decided to get a used storage shed, $3K vs. $8K ($12K was our lowest quote for a 2 car garage)...  so I say check out CL.. and find a used shed, and transport it to your house and make due for the 2 years!   

Get your dream garage when it's for you, not for tenants! 

If you can do the sweat equity & all it really costs is materials, I'd say go for it. There's no way it can hurt the resale value and it could be a selling point in the future.

@Derrick Lubomski with you doing the labor yourself, that $8000 will turn into $15,000 worth of value in the property. That means if you want to refinance, you can pull that money out later. You will easily double that $8000 when you go to sell, plus as you already said it will break even after 3 years. A structure like that lasts over 50 years so assuming you hold the property, you will make your investment back multiple times.

The other factor is your side business flipping cars and motor cycles, which will net you additional income.

Sounds like a pipe dream . Your not going to make squat on that garage . That potential income does not technically exist and may never exist .Don’t waste anytime in that

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