Advice on which route to take.

[Derek Mihlfeith]

Hello all,

First time investor here looking for some advice from the pros.  Please correct me if this is the wrong forum to post.

My wife and I are in a position to invest in our first investment property. We're likely going to be using the BRRR method, with some possible short-term renting mixed in with this second property (pardon if my vernacular isn't correct).

We have a couple of options available to us, but can't quite decide on the best route.  

Option 1: - Finish our basement and convert it to a rental unit,  which based on comps, we believe we could get close to $1800/month.  This is enough to cover our mortgage on the note of the total house.  The caveat here is that it would require about $40-$50k capital, which would lower our purchasing power on the second property. This would likely take 3-4 months to finish, and likely another few weeks to find a renter. Our primary residence for the time being would be the upstairs portion of this house.

Option 2: - Purchase the second property, preferably a 2 unit rental. One unit would be a short term rental, so that we could use it when we want, and the other unit a a mid to long term rental. If we went this route, we could live here, and turn our original house into a 2 unit rental house. The problem is that we likely wouldn't have the capital to finish the basement on anytime soon on the original property if we went this route.  Unfortunately, I don't have the numbers on the potential second property yet, as we're still looking, and deciding the best route to take.

Any guidance, pointers, opinions, clarifying questions or things I might be missing are greatly welcomed and appreciated.

Thanks!

[Kevin Sobilo]

@Derek Mihlfeith, here are some things to consider.

Option 1: Have you investigated if zoning will allow you to add an additional unit to your home? For example in R-1 single family zones additional units aren't typically permitted and even in R-2 or R-3 zones there may be requirements such as lot size, parking, etc.

Also, with a basement unit, have you considered egress? Typically in basements, egress windows need to be added so that there is a 2nd way to exist in case of a fire. That could involve excavation on the exterior and making a larger window opening.

I presume you have considered other common issues with basement units such as moisture, separate entrance, etc.

Option 2: I personally don't do short term rentals, but part of the reason is the commitment and continuous active nature of investment. It is closer to starting a business than it is a passive investment if you plan to manage it yourself. Also, as with any real estate venture I would recommend planning to acquire at least a few units in a reasonable time period because you won't become proficient managing it with just 1 unit and there will be more highs and lows with just 1 unit.

Also, I can understand the draw of "we can use it when we want it", because everyone feels that way, but that shouldn't be part of the calculus in making an investment decision because then you are mixing your wants and feelings with what needs to be a rational analytical decision.