Looking for some guidance on converting my house for hacking

[Kelvin Branson]

Hello BP Friends!

This is my first post and I am excited to be a part of the community.  I currently live in my first home and am looking to move to my next home/pre-investment property and I want to see if anyone can offer some advice on how to get my current house ready for some house hacking.  

A little back story is, we have a good situation that can result in a net positive rental situation. Rental rates are high and I have a manageable mortgage on the property. With rental rates as high as they are, it was suggested to me that it may be easier to rent it out by rooms to make it more desirable to renters. With some work my 3 bed 2 bath could be modified to a 4 bed 3 bath as well as a potential to convert the detached garage in the back to an ADU.

My question is two parts: first, would this be a good idea at all and if so, what would be a smart way to go about it.  I am completely new to real estate outside of buying my first home, but I want to capitalize on situation and am in need of some guidance. 

I would consider the garage to be basically a ground up build (it already has a dedicated yard and private entrance.) and the house I have taken care of, but would need a little work to accomplish my goals.  All this would have to be done while being able to purchase my next property for my family and I to live.

I know its a bit to chew, which is why I am asking, but I am grateful for any help or insight!

[Kelvin Branson]

Quote from @Nathan Grabau:

Welcome to the community! I would run a 2 option return on equity, and see how much more money you are actually making from the renovations. Most of the time, house conversions, without an addition, do not really add a ton of value, which makes that value harder for you to extract. Since it sounds like you have great financing terms, I would also be mindful of either losing the rate to a cash out refi, or having to pay the costs associated with a HELOC. Neither of these are bad, because you should be able to earn a higher rate of return on your money than the bank is charging you, but you want to include that in your numbers. I would also encourage you to consider running the numbers with ADU as a STR and seeing how that impacts your return. I personally know people who pay their whole mortgage with a STR ADU.

I would then look at what return you can get deploying that money else where. A STR is probably the best way to maximize that return, and it probably ends up driving a higher return on equity than a fourth room in your house.

My guess is you have a diminishing return for the 4th bedroom/ 3rd bathroom at your primary when you consider the amount of money you spend on that vs the increase in equity in your home. If you are willing to take on that kind of a project, I would really encourage you to look for something that you can BRSTRRR, which is Buy, Renovate, Short Term Rental, Refinance, and Repeat. If you are equity constrained, this might actually be your best approach, even better than reconverting your ADU into an STR because you can reuse your cash.

You just have to work through the numbers on what this looks like. You can definitely use rough estimates as you start to work through the numbers, and then get more "real" numbers from Realtors, contractor, lenders, etc as your figure out what strategy you want to deploy. 

Nathan,

Thank you so much for taking time to offer your input. I'm still in the phase of trying to figure out how to run all these calculations using the calculators.  I know they are probably much simpler than I make them out to be in my head, but because I am not familiar with them and some of the terms, they seem a little daunting.  

The house conversion I feel would be relatively simple, I could probably do it myself with not much trouble.  If I rented the house out by the room, the extra room would add a huge amount of rental revenue due to the fact that it would be the largest room in the house by nearly 50%. Currently I could rent just 2 of the rooms and that would essentially cover the mortgage. The 3rd room is the original master with a private bathroom.  My research shows that each room could go from $800-$1200 depending on room size and if it had a bathroom etc. I think where it would get costly would be adding the additional bathroom to the converted room.  I still need to get bids together to get some ballpark numbers.  This would be additional rental income value.  

So to sum it up, the 2 standard rooms rented out, even on the low end should cover the mortgage (includes insurance and property taxes), the 3rd existing room with a bathroom would be added profit; and adding the 4th would be even more.  I think that could be done relatively inexpensively if I didn't add the bathroom.  But that would depend on the cost to do that bathroom I guess... 

The issue I'm running into is how to manage the ADU costs along with getting the next house at the same time. I have kids and would need to move to make this a reality. Getting the proper strategy with the financing is where I am getting stuck. I do currently have a HELOC that I used to make the garage a bit taller to make it a better option for an ADU, so I have some options there. I'm just struggling to see how to finance the ADU project and be able to move. I haven't considered the STR ADU, I am not too sure how that works, but if renting the house out alone could result in a net positive, that could be a real benefit. I will look into doing that!

Also the BRRRR is a new concept to me as well. I will have to look into that too. SO much valuable information! I am very grateful for your input! I just need to hone my numbers and calculations game. I am still in the "broad strokes", not so accurate calculations phase with limited experience to fine tune the numbers. This is a great place to start. Thank you again!