Best ROI studio, 1 bed or 2 bed?

Question

I'm looking at single family homes to rehab and want to as part of the rehab create a separate space (or two!) to rent out to help offset the mortgage. I'm wondering if anyone knows which size additions make the most sense? For example, is it better to add two small studios as opposed to 2/1 or large 1 bedroom or 2/2. Just wondering in terms of cost to build, which size makes the most sense in terms of ROI. I'm looking in the Portola and Bayview neighborhood areas.

Grace Simpson · Answer

Hi Julie, for long term rentals, go with smaller units.  You can charge more per square foot for a studio or jr. 1bd than a 2/1.

Jaysen Medhurst · Answer

@Julie Petersen, first and foremost you must determine if your zoning allows you to add additional units on your lot (let's put ADUs aside for the moment). In most cases, the answer will be no, since an area of SFH is usually only zoned for SFH.

Second, the cost of building just a unit or two is very unlikely to be justified by the additional income.

With that said, 2/1 is the sweet spot for most markets. It draws couples, small families, and roommates. It's also economical on a per-square-foot basis, since an extra bedroom doesn't require much more in terms of mechanicals.

Brian Garlington · Answer

2 Bedrooms

Johnny Hoang · Answer

@Julie Petersen I’ve always found it is better to add two separate studios so you can have  two separate units to rent out instead of one unit with 2 bedrooms.

The cost for construction are not substantially different assuming that the studios are built next to each other and the plumbing is close.  I’ve always broke it down with how much more in rent I’m getting divided by the extra construction costs.

For example, if a 2/1 rents out for 2500 vs 2, 1 bed 1 baths at 1500 each. (3000 total). The delta is $500 a month or 6K a year.

And if the cost of construction is say 50K for a 2bed 1 bath vs 70K for 2, 1 bed 1 baths. The delta is 20K.

20K / 6K = %30 ROI in construction

So the question I’d have: Is the 20K extra worth the extra 30% or 6K a year.

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You can find a lot of houses in the Bay Area that already have a set up you can add to so you don’t to have such a high cash outlay up front. Bay Area is definitely pro ADU. I feel like 1 out of 5 houses have it or some form of it.

Frederick Kuo · Answer

If your zoning allows it, I would add two separate studio units instead of a single 2 bedroom unit. I think that will allow you to optimize your cash flow. Just make sure there isn't a huge discrepancy in construction costs between the two.

Heather Wilkerson · Answer

@Julie Petersen exciting! Sounds like you are on the right track. If feasible, I would suggest adding two different units for maximum ROI. I have clients who are having good success renting their studios on Airbnb with 30-day minimum rentals to traveling nurses. Of course, this was pre-covid-19, so normal Airbnbs have flooded this market a bit, but I expect that it will return to normal once this has passed. If so, that will help you increase your ROI even further. One additional consideration is resale value. A single-family home with multiple rental units won’t always achieve the same resale price as a home with one in-law. So depending on your long term strategy and timeline, that will be a consideration. Happy to chat/brainstorm with you in more detail if interested. Good luck!

Julie Petersen · Answer

I was thinking in San Francisco, that maybe the market for studios is way higher than it would be elsewhere.  A ton of single people with good jobs...they want their own space but it's crazy expensive. So a studio if designed well could fit the bill..and perhaps would be a better return. Like if a studio brings in 2500 vs a 2/1 that brings in 3800...might make more sense to spend a little extra on that extra bath and kitchenette.

Julie Petersen · Answer

Hi Jaysen, well you area always allowed to create a separate entrance to part of your single family home. So while I can't zone it as a duplex etc., I should be able to add square footage with a separate entrance. The neighborhoods I am looking at seem to be zoned for 3 stories. So could easily say in a home in Bayview, add a unit at the back of the garage and a 3rd story. They are still considered part of the home and have the same address. Works great for Airbnb or for renting out I would think. 2/1 okay. What about studios?

Best ROI studio, 1 bed or 2 bed?

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