Advice for a business plan involving renting large portions of primary residence

[Ricky Teachey]

Hi all, brand new to the forum and to BP. Heard about it a long time ago but got more interested from @Scott Trench's recent appearance on the Money Guy podcast. I have no previous rental business experience, although my dad did rentals for 25 years so I have some indirect experience through him, so I do feel like I have an appreciation for how tough being a landlord can sometimes be.

First some financial details: five years ago we did a home upgrade- 5,500 sq ft in downtown Dayton, OH- for 160k. We put 20k (12.5%) down, refinanced to a 30 yr @ 2.75% in 2021, and got rid of PMI. Mortgage balance today is 135k and our PITI is 1k/mo (580 of that is P and I). Additionally as a Money Guy listener we are debt free except for the mortgage, I have a 6 month emergency fund saved, and we are saving 25% for retirement. My credit score is above 800. We're a two income household but my wife's income only accounts for about 15%. On the not so great side, at 42 yo I'm very behind in my retirement savings (we only have about 70% of our annual gross income saved), so I do not feel like I can put off saving for retirement.

But after meeting our retirement savings goals, and after all expenses, giving, taxes etc., we still have between $5k and $9k/yr (depending on semi-annual bonuses at work) that I would like to invest. My preference would be to create rental income using the old servant's quarters behind our home. It is 1400 sq ft, two stories. It's structurally sound, but needs to be totally gutted, plumbing and electric installed, everything except a roof. I anticipate we can turn it into 4 single bedroom units generating about $3000/mo. To create tenant parking, I intend to obtain two empty lots next door (cost: about $1000 - probably $100/yr in additional property taxes) and put spaces off the alley behind the house. Will fence it all so that the kids will have a separate, safe additional yard to play in too.

I feel like it's a good long term plan, and that the property and neighborhood is worth putting money into. But my problem is figuring out how to get the cash to do all of this. To get all of this set up, I think I will end up spending at least 100k, but maybe 150k to get all 4 units fully completed. I looked into just getting started with a 20k to 40k fixed rate home equity loan at the local credit union, but hit a roadblock there (I am still unsure why and will call them when I get time next week).

Anyway, I'm just looking for general criticism of my plans here, and any suggestions about how to solve the cash crunch for getting this ball rolling. I believe our home's current value is probably in the realm of $220k, so I believe we do have about $85k in equity... But with the recent rejection from the credit union, tapping into it seems to be more difficult than I thought it would be.