Adding an Extra Bedroom. Worth it for a Rental?

Question

Has anyone bought a 2/1 and added an extra bedroom to increase rents? I know every market is different, but in general is it worth the extra investment to bring higher rent amounts? Any Denver peeps have experience with this? If you're in another market I'm interested in your take as well. What kind of cost can you expect with adding on an additional average sized bedroom and what is the ROI?

Bill S. · Answer

@Kyle Doney more bedrooms rent for more. The question is, how much does it cost you to add that bedroom and how much more rent do you get? My rule of thumb is it must pay for itself in 4 years. Meaning if it increases the income $100 per month then I have $4,800 to spend to get it in place. If you are talking an addition (foundation, framing and etc) to get this space it is typically cost prohibitive. If you are needing to add and egress window in an old unfinished basement, it might work.

Adding a 3rd bed and 2nd bath gets a big rent bump but again usually it's really hard to make those pencil out.

Bill Gulley · Answer

Bill S. is on the right track.

Cost it out, enter that as the PV as a loan amount, your cost of money is your interest rate (i) the difference in rental income is the payment (pmt) and solve for the term (n), that is your payback period. That goes for any project. Larger projects get more complicated, when funds are actually used can be brought back to a present value. Longer terms may have rent increases to shorten the term.

But, it's not just cash flow, the forced appreciation as to the value needs to be assessed as well, the difference can be applied to that initial cost and reduce the term. However, as an asset it only shows on your books, not in the bank, so you can look at holding periods and estimate a time of sale and use the annuity approach to adjust the initial cost and payback period.

We can go further as to tax implications, but that's overkill here.

Is it worth it? Only you can answer that. Be careful in assessing diferences in rents in the market in the annuity approach, may want to consider raising rents in the market.

If it's a DIY job, don't forget that you need to be paid too in arriving at your costs. Good luck :)

Mike F. · Answer

Oh dang, I change my vote. No way. That's a very long pay back, probably 20 years.... (as long as there was also appreciation)

I'd spend the extra cabbage you're going to spend on doing this as a down payment on your next property, which will be a 3 bedroom.

Caitlin Stein · Answer

I would follow Craigs list to get an idea of the difference in rental revenue.  I have a house in Sonoma and I rent to students, the sweet spot for them is a four bedroom.   Five bedrooms rent for a small amount more because it is  hard for people to come up with five room mates.    So see what the sweet spot is in your area.

David Krulac · Answer

we've added a 2nd br to a 1 br house, we've added a 3rd br to a 2 br house.  we've added 2 brs to a 2 br house to make a 4 br house.  we've added 2 br to a 3 br house to make a 5 br house.  We've added 2 br to a 1 br to make a 3 br house.

But we also changed a 3 br house to a 2 br house to increase its value!

The evaluation is to compare the costs to the increase in rent or value.  Some conversions will make sense, others will not.  The neighborhood standard and value of the neighborhood are factors.  If all the houses in the neighborhood are 2 br, that will hold down the value of your conversion to 3 br.

Account Closed · Answer

Do it all the time!  It's a no brainer.  I try to pop in a bath as well.  Relaying out old homes is awesome!  Knock out walls and make great rooms.  Move kitchens into dining rooms! Give them a wet bar where you had an old over sized closet. People love it and it's fun!   So what if you increase your rent potential 20-25% and increase the house value several thousand.  Go for it and take cool pics/video for your website.

Kyle Doney · Answer

@Michael Noto  Its a SFH.

@David Krulac  There are quite a few 2 bedroom houses on the same street, but also some 3 beds. Then you go up a block or two and you see anywhere from 3-7 bedroom houses. I would say its a neighborhood where things are slowly changing, like many other Denver neighborhoods.

Steve Vaughan · Answer

Yep. Wouldn't consider it if had to build out or go out of the roof footprint.  Worth a cost/benefit analysis if it won't make your place an outlier in your neighborood.

Kyle Doney · Answer

@Mitch H.  Yup, its the house I was telling you about. I start on it this Saturday. I closed almost a month ago and have been renting it back to the sellers until they move. Good way to put a little cash back into my pocket before I start.

Thanks for the feedback everyone. The house definitely has no room to add another bedroom without building out, and there is no basement. Its a 2/1 that is 780 sq ft. in Lakewood. I think rent would go up by a couple hundred dollars adding a third bedroom. I cant find any hard numbers, just judging by CL prices. One way I thought about doing this was by converting the one car garage into a bedroom and building a garage out of the front of the house.

I guess the only way to really know is to get some contractors out to get an idea of what it would cost. Any recommendations??

Mitch H. · Answer

@Kyle Doney , I'm hoping this is the place we chatted about at the last Denver Meetup?  If so, congrats on closing.

Regardless, it seems like the biggest variable is wether or not you are looking to do foundation work etc.  Otherwise, its just cosmetic plus a wall.  I mean, they do this all the time on Income Property and their numbers always seem to come out in the green...!

Adding an Extra Bedroom. Worth it for a Rental?

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