STR House Hack - do these numbers make sense?

Question

Greetings friends! Wondering if I could get a sanity check on this. Here's what I'm looking at:- Currently purchasing a primary residence, closing soon

- There is a detached garage which can be converted to a living space. I'm considering converting it into a cottage and doing monthly STR rentals to local travel nurses (that's a big thing near me). It looks like I could get around $1200-$1500 per month for it.

- The estimates I've received have been around 25k total to convert, so let's say 35-40k if we factor in contractors going over budget and then furnishing it afterwards.

My mortgage will be around 2k a month, so if I did this it would cover a big chunk.

*Where I'm stuck*: 40k could go towards a down payment to another actual property, vs adding a small one onto my primary. That's a big chunk. I'm also getting a bit nervous, as I don't *know* for certain that it'll rent. I searched online and it looks like other's do this, but with STRs you never really know for sure.

Does this seem like it's worth doing? Or should I put that 40k into a net-new property entirely?

*Note*: this would be legal/permitted to do where I live. I'm not in California or a state that has strict ADU regs.

Ross Bowman · Answer

I think you are spot on Joe, thanks for the feedback. The plan seemed like a no brainer at first and now that we're actually coming to closing, I've gotten analysis-paralysis about actually converting the ADU! I really like your suggestion of running comparable numbers on a property @ 40k down. I'm going to do that and circle back, which will probably remove emotion from the equation. Thank you sir!

Dan H. · Answer

By the way CA has very lenient ADU rules, but the hands off cost of a garage conversion ADU in my So Csl market is more than double what you indicated.

In my market, the ADUs do not appraise for as much as the hands off costs so they only work for cash flow and do not work as a value add.

To your market, if you can invest $40k to get $1200 that would be great.  We have regular STRs and they are a lot of work.  I suspect your month long STR would be much less effort, but still more effort than LTR.

Even using maintenance/cap ex of a few hundred a month, this would be totally paid off in significantly less than 10 years (closer to 5 years).

If your expectations are realistic (not a value add, not extremely passive, correct numbers), it could be good investment.

Good luck

Joel Calkins · Answer

Hey Ross,

I think you may be falling into "analysis paralysis" mode which I'm guilty of as well. Look at other ADUs for rent in your local market. With you being in a sort of 'nursing community' I don't think you would struggle with renting it out.

Having that said the choice of ADU or SFR or MFR is completely up to you and your goals as an investor. Maybe run some numbers on the ROI of a 200k rental property in your area and see if this deal would make sense.

Feel free to contact me with any other additional REI questions. Good luck!