Will these numbers work to build a garage apartment to rent?

32 Replies

Hello BP!

I have been working with an architect and builder on getting drawings made and construction quote for a garage apartment and would love feedback on this deal.

I live in the Houston Heights area.  (For those not familiar with Houston, the heights is a trendy neighborhood near downtown that originated in the 1920s and is experiencing a lot of new commercial and residential builds including trendy restaurants, coffee shops, and boutique stores)

I have currently have a 5000 sqft property with a 1100sqft house (simple 2bed/1bath) built in 1930 and restored about 10 years ago. I have a detached 2-car garage and am planning on demolishing it to build a 2-story garage apartment with a 536sqft 2-car garage on the first floor, and a 764 sqft 2 bed/1 bath second story apartment.  I have an ally that runs behind my property and I plan on having my renters access their home through the back.  They would have half of the 1st story garage for covered parking, their own laundry, and a second story balcony with a downtown view. 

I am looking to rent the garage apartment out as my first rental.   

Here are the numbers:

I am looking at $110,000.00 of  construction costs. 

I plan on paying for this with a 15-year 5.25% loan.

I will have a monthly payment of approximately $884.00

I am estimating an additional $100 a month in property taxes as a result of the addition

My Insurance agent quoted me an additional $54 a month to insure the new build.

I am estimating another $150/mo for property management fees and maintenance (I am managing the property myself) Since it will be new construction, I am hoping to not have any major capex needs in the first couple of years.  

Total estimated monthly expense: $1188.00

I've seen rental comps for 2bed/1bath rentals below 1000 sqft of livable space as high as $1975/mo (high end apartment complex nearby) and as low as around $1200/mo (rundown older house nearby)

My goal is to get $1550/mo for rent 


Questions:

1. What other monthly expenses am I missing?

2. Is my PM & maintenance fee of $150 too high? too low? 

3. With a projected monthly revenue of $362.00 (1550-1188), is it worth it to take on this construction project?
4. Should I take my $110,000 loan elsewhere to invest?

5. Is a net profit of $362/mo good? bad? average?

6. Any and all feedback, analysis, advice, or general thoughts are greatly appreciated.  

Thank you in advance for sharing your wisdom with a rookie anxiously considering his first major real estate investment!

Interesting project I’m curious to see what others think. I’m new to investing so I’m not sure if my input would be helpful. I can say in the northeast where I live the taxes would definitely go up more than that!

Thankfully in Houston, TX the property taxes are somewhat reasonable. I'm currently paying about $6100 a year, so adding $1200 a year is proportional to the additional value added to the property from the construction. 

@Victor Mondragon  I don't know which Houston, TX you're talking about, but property tax here is anything but reasonable!

All kidding aside, I really think this is an interesting idea. I’ve been curious about this strategy myself, and it’s good to see some actual estimates for build, rents, costs, etc. At first glance, your numbers look reasonable. I tend to be more on the conservative side, so I would budget in something for a capex reserve fund, even though this is a new construction. If you plan to hold it for the long term, you're eventually going to need to replace the water heater, HVAC, roof, and all that - even if it's 10-20 years out.

Did you look at calculating a cash on cash return for this project? How much of your own funds would you have tied up in the project? If you actually are making $362/month in profit and say have $20k tied up in the deal, then your COCR would be 22%. Not bad!

And back to taxes: $6100 seems a bit low for a house in the Heights. Even assuming a 2% tax rate (with homestead exemptions?), that would put it at a valuation of about 300k. Does that sound about right? You might consider talking to an appraiser to see what your property would appraise at with the new garage apartment. Eventually they are going to tax you at the market value of the property, so taxes will creep up.

Another thing you might consider is if there is any way to maximize your potential rental income without increasing the build cost too much. For example, could you add 2 units instead of 1 for a similar build cost, but for a proportionally higher expected rent? Maybe a small studio that rents for $900 and a 1 bedroom that rents for $1300?

Big question is will the addition result in a property appraisal $110K higher. IF not you need to include in your expenses the additional cost above and beyond the appraised value increase.

East Austin investors build duplexes..look at the solds on Redfin for 78702 to see what I mean. 1 car carports and single driveways. Then you have the option to condo and sell half. This old couple of landlords next to one of my rentals built a 2 car garage themselves. Submitted a plan they drew up to city for permit, hired a slab pour, framed themselves, bought trusses and rented something to put the trusses on top, hired roofers and sided themselves. All in they said about 13k...that was off the cuff when I asked. Point being...100k? For garage apt? Maybe you should wait until contractors are looking for work. I cant post photos off my ipad, but it is nice with windows and a side door, hardie plank siding.

Originally posted by @Marian Smith :

East Austin investors build duplexes..look at the solds on Redfin for 78702 to see what I mean. 1 car carports and single driveways. Then you have the option to condo and sell half. This old couple of landlords next to one of my rentals built a 2 car garage themselves. Submitted a plan they drew up to city for permit, hired a slab pour, framed themselves, bought trusses and rented something to put the trusses on top, hired roofers and sided themselves. All in they said about 13k...that was off the cuff when I asked. Point being...100k? For garage apt? Maybe you should wait until contractors are looking for work. I cant post photos off my ipad, but it is nice with windows and a side door, hardie plank siding.

 
I don't know if I believe 13k for an entire build. Maybe in the 1970s? My concrete alone is just below 10k.  I've gotten 5 bids ranging as low as $95k and as high as $175k

I'd like to see photos of that their structures look like. 

Originally posted by @Nick Smith :

@Victor Mondragon I don't know which Houston, TX you're talking about, but property tax here is anything but reasonable!

All kidding aside, I really think this is an interesting idea. I’ve been curious about this strategy myself, and it’s good to see some actual estimates for build, rents, costs, etc. At first glance, your numbers look reasonable. I tend to be more on the conservative side, so I would budget in something for a capex reserve fund, even though this is a new construction. If you plan to hold it for the long term, you're eventually going to need to replace the water heater, HVAC, roof, and all that - even if it's 10-20 years out.

Did you look at calculating a cash on cash return for this project? How much of your own funds would you have tied up in the project? If you actually are making $362/month in profit and say have $20k tied up in the deal, then your COCR would be 22%. Not bad!

And back to taxes: $6100 seems a bit low for a house in the Heights. Even assuming a 2% tax rate (with homestead exemptions?), that would put it at a valuation of about 300k. Does that sound about right? You might consider talking to an appraiser to see what your property would appraise at with the new garage apartment. Eventually they are going to tax you at the market value of the property, so taxes will creep up.

Another thing you might consider is if there is any way to maximize your potential rental income without increasing the build cost too much. For example, could you add 2 units instead of 1 for a similar build cost, but for a proportionally higher expected rent? Maybe a small studio that rents for $900 and a 1 bedroom that rents for $1300?

 The only cash I'm putting in beyond the loan is roughly $900 for architecture and will pay another $4000 to $5000 for appliances.   

As for adding a second unit, my long term plan is to move into a larger home in about a year (to accommodate my growing family!) and rent the existing house and the new garage apartment to two separate tenants.  My realtor estimated about $1600/mo to $1800/mo in rent for my current home.

the $1300 was materials only and they built it a year ago.  I dontbremember what they paid for the slab, but 84 lumber sells kits for garages that cost a similar amount but marked up for the “kit” ...point Inwas trying to make is that it seems like a lot of money. And that maybe an actual house could be built for the same money,  but  I am old and probably too risk adverse.  Good luck and happy building)

@Victor Mondragon . Suggest you structure the financing with a 30-Year Amortization - if that's feasible with your lender. This gives you a lower Monthly Payment and More $$$ in your pocket. 

If you want to pay it off - you just increase your monthly payment to Lender without the higher monthly must pay amount.

Good Luck.

Originally posted by @Jim Cummings :

@Victor Mondragon. Suggest you structure the financing with a 30-Year Amortization - if that's feasible with your lender. This gives you a lower Monthly Payment and More $$$ in your pocket. 

If you want to pay it off - you just increase your monthly payment to Lender without the higher monthly must pay amount.

Good Luck.

 Thanks Jim,

I would have loved to do that, but Frost bank's max terms for this type of loan is 15 years.  

They will however allow me to make interest only payments (around $250 or so) during construction (4 months). 

This will enable me to minimize using my own cash to cover loan payments before I get a tenant. 

I am I am currently building an oversized 2-car garage for a client in North Houston. It's about 900 square feet downstairs, and 900 square feet upstairs. The space is insulated and sheetrocked, but otherwise empty both upstairs and down. No cabinets, no flooring, no appliances, no plumbing.

As I recall, our bid to the customer was $95,000 or so. The last time I did this in the Heights area, we had to go through the architectural association and the historic committee. Make sure you factor in all of the homeowner approval nonsense to your time and budget.

Originally posted by @Andrew Taylor :

I am I am currently building an oversized 2-car garage for a client in North Houston. It's about 900 square feet downstairs, and 900 square feet upstairs. The space is insulated and sheetrocked, but otherwise empty both upstairs and down. No cabinets, no flooring, no appliances, no plumbing.

As I recall, our bid to the customer was $95,000 or so. The last time I did this in the Heights area, we had to go through the architectural association and the historic committee. Make sure you factor in all of the homeowner approval nonsense to your time and budget.

 Thanks for your feedback Andrew.  Your bid numbers make me feel pretty good about mine!

Fortunately I am just outside of the boundaries of the historic district and do not have HOA, Historic district, or any other governing body (Besides of course City of Houston permitting department) to answer to.

Adding the garage apartment will subject your property to revaluation for property taxes.  As your homestead, the taxable value is limited to 10% annual increases but they will value 100% of the new addition.  I would plan on tax increase of $190/month.  http://hcad.org/hcad-resources/hcad-residential-pr...

Originally posted by @Nick Smith :

@Victor Mondragon Have you decided to go through with this garage apartment project? Any updates to share? 

 Hey Nick!

Sorry for the delayed reply.  A lot has happened since my last post:

- My original contractor bailed on me after 5 months of negotiation and meetings on material, design, insurance, contact terms, and so much more.  He texted me the morning we were supposed to meet at the bank to sign my closing papers and said he had made a mistake and needed to add another $3000 to his bid.  A few hours later, he told me he had been thinking about his bid and thought he would need at least another $10,000.00 to proceed.  Needless to say, we are not doing business together. 

- I found a new contractor and started all over.  He has been great so far, and I am scheduled to start construction in about 3 weeks. 

Wish me luck!!!

I just found this thread and had to look twice to make sure it wasn’t me that started it. I just finished my garage and apartment build in the heights. I rented my house (2 bed, 1bath, 1280sqft) for $2000 and garage apt for $1350. My build was that same priced right around what yours is. 1 bed, 1 bath, 530sqft, with an uncovered parking space next to the garage. How is your build going?

@Blake Wamsley

That's crazy man!!  We probably could have avoided some headaches if we would have known about each other's projects sooner.  

The build is going well.  I am in the home stretch of building and hope to be done at the end of November.  Tomorrow I get internal doors, baseboard and, windowsills put in.  



I am a bit worried about trying to place a tenant in  December.  I recently met with a friend that is big into Airbnb and has a couple of rentals going in the east end.  He is doing extremely well and I am considering going that route for a few months until I can get into the busier rental season. 

I am looking to get about $1500 a month for my 2/1/1 garage apartment, however on AirBnB I have noticed prices around $2000 a month!  

I'm curious if you had any trouble placing a tenant, as well as if you considered AirBnB?

@Victor Mondragon I considered the AirBnB route, but that was when I was living in my house. Then I met someone and well, life changes fast and now I live in Katy and have a step daughter :-). I had to get the whole place rented out and I didn’t want to deal with time an AirBnB took. I was worried about the renting in the winter months too. I actually got both my tenants to sign a lease that would end in the summer months. I did have a little bit of trouble renting, but I was showing the house and the garage apartment without the alley and fencing being completely. Low and behold I somehow got people who trusted that I will finish the alley and fence like I promised. I had to rent the house for less than I like, but I feel like they will be great tenants. I should be able to get more foe the house next year and have both be easier to rent with everything completed.