How to value a studio addition over a garage in Denver

4 Replies

I am currently under contract for a house in Denver. The current house is a 2 bed 2 bath with a detached 3 car garage. The property is in a great neighborhood in Denver, new community projects with retail and dining within walking distance. Also very close to a hospital.

The plan is to add a 400 sqft addition over the detached 3 car garage. It will be a studio apartment (bed, bath, small dining area). Thinking it will be a good addition for Airbnb, or short term rentals. Could also make a great long term rental since it will have its own access and garage space.

The problem I am having is how to value the addition. There is nothing in the neighborhood I can find that is similar. 

Would you value the addition with the same price per square foot as the main house, is it more valuable, less valuable?

Any help or insights are appreciated! TIA

@Jake Adams so time to take a deep breath. Start with zoning. Zoning must allow for what you are planning. Just as a hint, the fact that there are no other homes in the area with this type of unit means it's probably not allowed.

Next building permits. You will likely need a structural engineer to sign off on the modifications. Most garage foundations are not designed to carry the load of a 2nd story. What about utilities such as water and sewer? Is there a cost effective way to get water to the unit and sewer into the sewer system? Remember there is a cold garage between the ground where the utilities are and the 2nd story where the unit is.

Finally, does the local municipality or county allow for STR or Airbnbs for this type of setup?

Now to your question, a quick way to value is to figure the net income it will generate and then do a net present value of that income at the interest rate you would be paying for money to construct the project.

@Jake Adams . @Bill S. is correct to say you should make sure this is allowed by zoning and that the structure can handle the load.

Why wouldn't the addition be valued in terms or ROI or cash-on-cash just like a normal SFR investment? This is how I would do it. You're basically creating a rental property by adding the living space above the garage so I would analyze on it's own to see if the investment on this portion of the property is justifiable by itself and meets the return you expect from your regular SFR investments.

FYI: may be helpful for determining the AirBnB income you can expect from the property. Don't forget to account for Denver's short term rental fees or a company you may use to manage the short term rentals! 

Thanks @Bill S. and @Gavin Estenssoro

Zoning is the main issue, it is zoned U-SU-C which looks like there are no additional detached dwelling structures allowed. I will be going to the city this week to verify. 

@Gavin Estenssoro SFRs are normally valued via comps, no?

@Jake Adams If you can't get your plan through planning with the addition detached, consider attaching the over-the garage addition, or doing a garage conversion and attaching that to the main home. 

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