Knock Down Garage for rental income or Preserve for Refinancing

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Knock Down Garage for rental income or Preserve for Refinancing

Matthew Miller
Oakland, CA · Member since 2018 · 14 posts · 6 votes

I am perplexed...I own a house in Oakland CA which has an attached studio that I rent on Airbnb. When times are tight I will rent the front house as well. In my backyard is a single car garage that was built in 1959 via permit after the construction of the house in 1924.

Due to the consistent and successful Airbnb income, I am contemplating tearing down the garage to put in an Airstream which I am pretty certain will rent comparably to my studio for $2k gross/mo.

I am doing all of this to pay down debt, increase lending options and eventually refinance my home to pay off debt and invest in another property.

The downside is that my mortgage broker stated a 'non-confirming' property, as a property would be defined if it's garage no longer existed within a neighborhood of homes with garages, is harder to refinance and may cause issues when the time comes.

Do I knock down the garage to take rental cash flow while I can (I have a great deal with an owner of a new Airstream who will Rent the Airstream to me for $500/mo.) Or Preserve the eventual financing opportunity?

Has anyone had a similar experience? I appreciate any insights out there. Many thanks!

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Mike Giallanza
Property Manager · Centennial, CO · Member since 2019 · 95 posts · 63 votes
7y

Can you convert the garage into living space? Is this allowed in your area, and if so, what would the cost be to get plumbing and more power into the garage. I would personally want to compare the cost of converting the garage vs buying an airstream.

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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    7y

    If you plan to refinance or sell anytime soon sounds like you have your answer in that tearing down the garage will cause you future problems with refinancing.

    0Reply
  • Michael O'Brien
    Saint Louis, MO · Member since 2017 · 30 posts · 8 votes
    7y

    Could you refinance now and then tear it down a bit after? It would be something just like a home owner making a switch / build I would think. You can always rebuild the garage later on before selling the house too. 

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  • Mike Giallanza
    Property Manager · Centennial, CO · Member since 2019 · 95 posts · 63 votes
    7y

    Can you convert the garage into living space? Is this allowed in your area, and if so, what would the cost be to get plumbing and more power into the garage. I would personally want to compare the cost of converting the garage vs buying an airstream.

    1Reply
  • Matt Andrews
    Rental Property Investor · Windsor, Ontario · Member since 2016 · 55 posts · 33 votes
    7y

    Hey Matthew,

    The way that I would obectively look at this would be to run the numbers like so:

    1. Determine total costs to tear down and purchase an airstream, and divide by your additional Net Income that you gain by doing that. This figures out your break even timeline. Take the inverse (Net Income/cost) to figure out your ROI going forward (only applicable after you break even)

    2. Determine the best you can what size impact on refinance that this would have on your refinancing goals (eg. $20k less, $50k, less etc.) and apply a reasonable rate of return that you would expect to make on that amount of money if you were to refinance. Be sure to subtracting your financing rate from that. eg. 20% ROI - 5% Cost to Borrow = 15% Annual Opportunity Cost. On $50,000 this is an opportunity cost of $7,500 per year. How does this compare to an increase in net income?

    3. Compare Your Findings for your Break-Even Calculation, Your Refinancing Opportunity Cost, Net Income for Airstream, ROI for Airstream, with your goals and timelines.

    If you really wanted to, you could chart or graph your findings, which might help show you interested trends such as if your timeframe is less 3 years it makes sense to refinance, but if it's longer than you'd want to do the Airstream, or something like that. Ultimately this is just a numerical approach with a medium degree of guesswork involved, and there are definitely other factors to consider outside this scope. Hopefully this method and doing these calculations might provide some insights or objective information for your decision.

    1Reply
  • Daniella Sanchez
    Real Estate Broker · Melrose Park · Member since 2015 · 68 posts · 44 votes
    7y

    I like the idea of turning the garage into a living space. My neighbor has a two car garage with a loft/studio that he rents out to his nephew. Why not try having the best of both worlds? 

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  • Lauren Kormylo
    Rental Property Investor · Phoenix, AZ and Rehoboth Beach DE · Member since 2019 · 1k+ posts · 1k+ votes
    7y

    I would not tear down a garage to put in an Airstream that goes down in value like any RV. I would convert the garage to an Airbnb.  

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  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    7y

    Hey @Matthew Miller. I think you have your best answer. Convert the garage to a living space. An Airstream is cool and all, but why waste money on something that will continue to devalue. The converted garage should add value to the property.

    You will need to check the zoning before converting.

    0Reply
  • Matthew Miller
    OP
    Oakland, CA · Member since 2018 · 14 posts · 6 votes
    7y

    @Michael Baum, thank you for your reply . The one detail I failed to mention is that an Airstream owner who did the same idea last year (sans garage challenge, just bought an Airstream and placed on big lot behind his house) sold his house and will rent me his Airstream for $500/mo. versus paying to store it. My studio Airbnb revenue is $2k/mo. gross. Quotes to convert the garage to a living space with plumbing etc is $80k on the low end. I do not have that nor would want to spend that in lieu of the Airstream rental. Building the livable unit later may be an option once I ramp up cash flow.

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  • Shawn Coverdell
    Investor · Clatskanie, OR · Member since 2014 · 212 posts · 233 votes
    7y

    Keep garage. Refinance. buy more boxes. No regrets. I have a system of utilizing the existing floor plan the property comes with at purchase. I might add a wall or cut a wall out to frame in a quick closet to claim a room as a bedroom but don't get carried away with it. 

    It is more important in the long run to be able to get your funds back out and back into play Via. refinance. ALWAYS, look at it through the eyes of your banker. 

    to not do so is to put 80% of your buying power at risk.

    Shawn Coverdell

    Homes in the Hood

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  • Matthew Miller
    OP
    Oakland, CA · Member since 2018 · 14 posts · 6 votes
    7y

    @Lauren Kormylo, thank you Lauren. I didn't mention that I am renting the Airstream for $500/mo. so my expenditures are low to gross an estimated $2k/mo. for the airstream.

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  • Matthew Miller
    OP
    Oakland, CA · Member since 2018 · 14 posts · 6 votes
    7y

    @Daniella Sanchez, I do to. Airstream evolved as an idea because quotes start at $80k to build a unit...I would also be renting the Airstream for $500/mo.

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  • Matthew Miller
    OP
    Oakland, CA · Member since 2018 · 14 posts · 6 votes
    7y

    @Matt Andrews, thank you for these analytical points. I am charting them now. Much appreciated.

    0Reply
  • Matthew Miller
    OP
    Oakland, CA · Member since 2018 · 14 posts · 6 votes
    7y

    @Mike Giallanza, I can do that conversion and in fact, the city of Oakland had encouraged this due to shortage of housing. It's at least $80k whereas I can rent the Airstream for $500/mo.

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  • Matthew Miller
    OP
    Oakland, CA · Member since 2018 · 14 posts · 6 votes
    7y

    @John Underwood, I agree. The truth is I need this cash flow now and the Refinancingt cannot happen now so might need to gamble I suppose. Thank you for you reply

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  • Matthew Miller
    OP
    Oakland, CA · Member since 2018 · 14 posts · 6 votes
    7y

    @Michael O'Brien, I wish I could refinance now. School debt and credit cards have my scores inversed so the airstream play is for cash flow to pay down debt.

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  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    7y

    @Matthew Miller, I hear ya, but I think it is a bad decision to rent an Airstream for $500 a month. You are just tossing it out the window. You don't even own it. I just don't think it is the best idea.

    I would get a few bids on the work and see if you can do better. If Oakland is looking for more folks to add a second building for a living space, are they offering some municipal funding with low interest rates? Of course there could be strings attached to that.

    You are telling us that you will get 2k per month in STR income from the Airstream. You will be getting 66 per night with 100% occupancy. Just taking a quick look at Oakland AirBNB and I think you could get 66 a night but not at 100% occupancy. Most likely it will be more like 50-60%.

    There is a glamping trailer that is $89 a night, and another glamping camper at $50 per night. Those are direct competitors and their calendars sit at about 65% occupancy. Overall the nightly is around $55.

    Anyways, I would check those numbers and also check on insurance as that could be problematic. Just my 2 cents.

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  • Matthew Miller
    OP
    Oakland, CA · Member since 2018 · 14 posts · 6 votes
    7y

    @Michael Baum, those are good points. The ideal scenario would be to rent the Airstream and my studio and pay my mortgage each month and continue to pay debt. If the airstream doesn't rent, I would stay in it and rent out my house which goes for $189-$209/night. I know that is a lot of moving parts. Previous financing options have not been available to me due to my current credit issues. Overall, it's a short term fix that is one of few options.

    0Reply
  • Lauren Kormylo
    Rental Property Investor · Phoenix, AZ and Rehoboth Beach DE · Member since 2019 · 1k+ posts · 1k+ votes
    7y

    Don’t forget to factor in costs for water, sewage, and electrical connections for the Airstream. 

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  • Hans Christopher Struzyna
    Real Estate Broker · Oakland, CA · Member since 2015 · 67 posts · 51 votes
    7y

    Since the garage was permitted, you should not tear it down. That permit gives you a bit of a fast track to converting it into an ADU. This is definitely more costly than tearing down and parking an airstream in place, you are exempt from lot-line setbacks and other restrictions that would exist if you were to try and build something from scratch. Though, since you already have a studio on the property, you may not be able to add density on your lot based on the zoning. A quick call to the city will give you that answer.

    Generally, though, Oakland wants to see more legal dwelling units so there may be a way to work through this. I'd be happy to connect you with a few of my contacts and clients who have built ADUs and know the process. Feel free to DM me if you would like. 

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