An increasing number of owners are turning into landlords with extra residential items

A lot was scarce in the Corona crisis, including living space.

When the country was locked down, the Americans were on the move. The sudden shock caused home prices to rise.

Even now, potential buyers continue to be excluded from the property market as prices keep getting higher.

At the same time, the pandemic-induced run on living space has put even more pressure on the demand for rents, which are usually cheaper than property.

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Anyone who has a little more space can turn this space into a rental apartment. For some, this is an investment opportunity.

As the country’s housing crisis intensifies, more and more homeowners, especially in high-priced areas, are converting a piece of their property into a garage apartment, granny flat or guest house for short-term or long-term rent.

According to a recent research note by Freddie Mac, accessory homes, or ADUs, are now a popular way to add an income-generating rental property on the same lot as a single-family home.

“We are in the middle of a huge housing crisis; that leads to classic economic supply and demand, ”said Caitlin Bigelow, CEO of Maxable, a startup that connects homeowners with the resources to build rental units from start to finish. “Homeowners see ADUs as low hanging fruit.” (Every Maxable project starts with a valuation for $ 199.)

Amy O’Dorisio, 40, turned a self-contained garage in Normal Heights, San Diego into this one bedroom, one bath rental unit.

Photo: Tyson Wirtzfeld

In 2018, Amy O’Dorisio, 40, turned a self-contained garage into a one bedroom, one bath unit. In the past year, demand for this type of apartment has only increased, said O’Dorisio – especially in San Diego, where she lives and works as a real estate agent.

“I knew it would prevail, and it did,” she said.

O’Dorisio said she spent $ 130,000 on the remodel, including permits and some furniture. Now she rents the apartment for around $ 2,000 a month. She is currently working on converting another portion of her property into an additional ADU.

“My goal is to have enough rental income so that I don’t have to work so hard,” she said.

An interior view of Amy O’Dorisio’s one bedroom rental unit.

Photo: Tyson Wirtzfeld

In fact, after a year of record low interest rates and soaring home prices, real estate has become the most popular form of investment over the long term, at the top of savings accounts or certificates of deposit and the stock market, according to a recent report from

But there are many factors to consider. Whether you can add an additional housing unit initially depends on the ordinances or rules in your jurisdiction. The lack of affordable housing is driving more and more cities to pass ADU-friendly laws, making these units legal in many parts of the city; however, it is not across the board.

And converting guest rooms into rental apartments doesn’t come cheap. Garage conversions start at around $ 100,000, according to Maxable’s Bigelow. Building a separate stand-alone structure is even more.

Once a unit is built, there are two main ways to make money: cash flow and appreciation, according to Tendayi Kapfidze, chief economist at LendingTree, an online loan marketplace.

“If your goal is cash flow, you need to know if you can lease the property for enough to earn more than you spend on the mortgage and maintenance,” he said.

The rental income should cover your monthly expenses, including insurance and some vacancy.

“That has to make up for everything,” said Kapfidze.

“If you are more interested in appreciation, you need to assess whether the property will be worth more in several years,” added Kapfidze.

As with all things with real estate, a lot depends on location, location, location.

Notoriously expensive cities like Chicago, Miami, and Seattle have seen a growing number of these rental units over the past decade, while homeowners using ADUs in cheaper cities like Austin, Texas; Nashville and Phoenix could benefit from a sudden increase in rental prices due to Covid in the future.

Vacation spots can be even more lucrative.

Properties in exclusive enclaves such as Kiawah Island near Charleston, South Carolina; Key Biscayne, Florida; Park City, Utah; Rehoboth Beach, Delaware; Nantucket, Massachusetts and the beach towns of Stone Harbor and Avalon, New Jersey, have the highest investment value, according to another report from MagnifyMoney.

Still, potential rental income can vary from block to block, too, warned Kapfidze.

“It’s something that is very, very local,” he said. “Before figuring out the finances, it’s very important to understand demand in a very small geographic area that your home is in.”

Understanding demand in a very small geographic area is very important.

Believe repentance

Chief Economist at LendingTree

Additionally, your cash can be difficult to access if you’ve locked it in real estate. Nowadays, “even if the property is increasing in value, you usually cannot access the equity with a home equity loan or line of credit,” said Kapfidze.

Since the beginning of the pandemic, the banking industry has tightened lending standards to reduce risk, and several major banks have stopped offering HELOCs or cash-out refinancing altogether.

There are also tax and insurance law consequences. “Your insurance needs will also be different, so you should evaluate these costs in advance,” said Kapfidze.

On the flip side, some of those additional insurance costs could be tax deductible, on top of the potential tax benefits of home renovations, he added.

“This is definitely something you want to talk to a tax professional about.”

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