Would you add units to existing or purchase new property?

7 Replies

We are debating this question.  If you had to choose one, would you rather:

A.  Add a couple units to existing properties.  Let's say each additional unit costs $25,000 (building into an existing structure like converting a garage into a one bedroom).  Total expense of $50k for two new units, with new rents of $700/mo/unit.  B to B+ neighborhood.

B.  Purchase a new property.  E.g. $200k duplex, $50k down payment.  Minor repairs, rentable as is.  $800-900/mo/unit.  B- neighborhood.

Both options cost $50k.  Adding new units to existing properties minimizes new property expenses like utilities, taxes, insurance, closing costs, etc.  However with low interest rates, maybe it would be smarter to get the new property now, then add the additional units at a later point?  Are there other factors to consider?

This seems like a question that would come up a lot for buy and hold investors...has anyone else had the same question?  What did you decide?

Still no traction on my question...I really do want advice as we are looking at this exact scenario.  Is it more complicated than what I outlined?  Or is it as simple as investment/return?

In my area I would be able to buy 2 houses including renovations for what it would cost me to build 1 of similar size and quality.  Economics are very different depending on locations.

If you are in a area with decent appreciation, I would assume adding another location would appreciate faster then an addition to a existing property. So that would be the way I would likely go after all other factors such as cash flow and carrying costs are factored in.

All units are not equal. You need to consider impact on existing units of the additional units. Will it make your current units less desirable? Less parking, less privacy? Does it change financing? Making 3 units 5 units is takes you to commercial financing. What is the resale value change if you want to sell will you have a market?

@Scott Rogers

Thanks for your input.  We have decent apprecation in Abq, nothing close to the coasts but slow steady growth.  

A pro to purchasing another property rather than increasing units is we'd have another property being paid off by renters.  However then we also have another property to manage - we do everything ourselves.  Our overall strategy is to have as few properties as possible to reach FI.  So we aren't in the path of wanting a zillion doors.  I'd rather have fewer responsibilities that cash flow higher per door. Way less work.

@Colleen F.

Good point, all units are not equal. To be more specific about our situation, we have a duplex property, and would add a third unit to make a triplex. That should bump up the property value and we can refi and pull cash out. We also have a SF, and would add a backyard ADU that could be rented separately or together with the main house. This would add to property value too, people like the option of MIL/student/AirBnb quarters. Both properties would remain conventionally financed. In both situations the existing units would not be significantly impacted - the highest impact would be on the SF, which would now have another unit on the property. But the yard is big and renters don't seem to want to use or maintain the large yard anyway.

Here are the actual numbers:

Existing Property 1:

  • Currently a Duplex
  • $235k PP, $255k appraised value
  • Put 25% down at purchase last year
  • Current rents of $1875 (one unit is slightly below market, inherited renter lease)
  • Adding a third unit into a currently unused garage would cost $25k
  • Additional rent $750; total predicted rents $2650
  • That would get us closer to 1% rule on rents
  • Guess that future FMV for triplex would be $275-280k, conservatively. Might be closer to 300k.
  • Property also has large shop which we use for our own tools/maintenance, so property provides additional value to us through that.

Existing Property 2:

  • SFR, recently refi'd at 60% LTV, appraised at $230k
  • Bought at $145k, so basically have pulled all money back out with refi
  • Currently rents for $1300
  • Adding an ADU into backyard studio - cost $25k
  • Additional rent $750; total predicted rents of $2000 (main house would reduce rent with ADU rental)
  • Not sure if ADU will shift FMV much, maybe a little bit towards mid 200's

Alternative option to adding more units - purchase property instead with 50K downpayment:

  • SFR in B/B+ or Duplex in B/B- area, around 180-200k
  • 25% down
  • Might need minor repairs, paint, etc.  Let's say $5k.
  • Rents would be around $1300 for SFR and $1500-1600 for duplex
  • Property taxes $2000/year
  • Insurance of $500-700/year

Hopefully this info will help in assessing which option might be better for us.  Thanks for the advice, it's much appreciated!

I like the adding scenario a little better if the SFR is really not significantly impacted. You would really need to check code too. If adding the units you propose would be allowed in the zoning you may have a win with that. Of course the hypothetical buy can have pluses too but it is an unknown and another location is less efficient for maintenance and costs.

@Colleen F.

We would add the ADU to the SFR without a cooktop - that is what breaks the zoning codes here. You just have to use a plug-in electric or induction cooktop in the kitchenette that can be removed for any inspections or upon sale of property.

Another detail, is that we are currently Airbnb'ing a studio casita at our primary home, and it's bringing in over $1000/mo - it would rent long-term for only $500/mo.  So both of the proposed added units could potentially function as Airbnb's for more income if that was what we wanted.  Of course that is active business income not passive rental income.  

"another location is less efficient for maintenance and costs" - that's what I was thinking too.  Seems like packing more units on each property (legally) is the way to maximize returns.  At least in a denser area where that is the norm, such as where we are located.  There is a university nearby and almost every other house has a rental casita, converted garage, etc, in the back.  

We are finding that renters really don't use much yard space other than a patio and maybe a small garden bed either. In fact, it seems like a landlord is lucky to find a renter that will even occasionally water the landscaping, let alone weed or do any maintenance. There is a lot of xeric gardening here in Abq, however even that needs some help during the hotter months. So the large backyard of our SFR is going unused. I think smaller, well-designed, low maintenance outdoor spaces are probably better for rentals.

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