Add a 3rd Bedroom or turn it into a studio?

Question

Hi all,

Thanks for stopping by to read/help. I just bought a duplex in Cleveland, Ohio and the top unit has an attic space that includes a set of stairs and doorway that leads directly outside the house. Technically, this can be turned into a studio apartment.  My question is, would it be best to turn the top floor into a 3rd bedroom for the top unit, or, would it be better to renovate the top floor into it's own single unit.

I plan to hold this property for a long time so it's not a flip. I want to make sure I add value to the home and increase my cash flow as much as possible.

Thanks very much.

James Wise · Answer

Doing anything with these attics is usually cost prohibitive. If you can buy a duplex where the previous owner has already done something to them bonus for you but doing it yourself is not a good use of your cash. You'd be best served to just leave it how it is.

If you are jonesn' to do something though you'll want to make a 3rd bedroom for the 2nd floor unit. You'll bump your rent up $100 or so per month & get a higher quality tenant. Much better than spending a much larger amount of time & money to get a 3rd tenant who will be at the very bottom of the desirability factor and pay like $450/mo at most.

James Wise · Answer

Issue with your plan above is that your estimate of the cost is less than half of the actual cost. While your estimate of cashflow on that 3rd floor unit is about double what you'd actually receive. To get a legal 3rd floor unit up there you'd need to do the following.

• Go through zoning & planning.
• Install a 2nd form of egress to the 3rd floor.
• You may need to install a dormer to provide appropriate head space. The majority of these duplexes in our market don't even have legal head clearance in the 1 existing rear staircase in the rear of the property.
• Insulation.
• Rough in plumbing to the 3rd floor. This need to tie into 2nd floor units plumbing.
• Install an additional gas meter.
• Install an additional furnace.
• Install duck work to the 3rd floor. This means that you need to go through the 1st & 2nd floor units.
• Run gas lines to the 3rd floor. This means they need to go through the 1st & 2nd floor units.
• Install a 3rd electrical meter. This means you might need to upgrade electrical service to the property.
• Install rough in electrical throughout the 3rd floor unit. This needs to come from basement & go through the 1st & 2nd floor unit.
• Install electrical for 3rd laundry setup in basement.
• Install plumbing for 3rd laundry setup in basement.
• Patch / fix any disturbance to the 1st & 2nd floor units.
• Install appropriate amount of windows for legal living space.
• Install / finish drywall on walls.
• Install / finish drywall on ceiling.
• Paint unit.
• Install flooring.
• Install kitchen.
• Install bathroom.
• Plumbing finish work in bathroom.
• Plumbing finish work in kitchen.
• Electrical finish work.

No scenario where all of that comes anywhere near $20,000. Beyond that the other factor is that we now have a tenant paying $450/mo. Yes we are scheduled to receive $5,400 annually from said tenant. In actual practice it doesn't work that way. You have repairs, vacancy, non payment, additional utility fees & on & on. At best you can expect to earn an average NET cash flow of $2,700 or so on that 3rd floor unit when factoring in expected operating costs. In addition to that, don't kid yourself on who you're putting up there. A 3rd floor $450 attic tenant ain't no high class tenant. It's going to negatively effect the lives of the other 2 tenants, which is going to negatively effect your bottom line. This 3rd unit is now an additional person who's going to ad to the noise, laundry & parking disputes that are already prevalent in these types of properties when there are 2 tenants. In short these additional issues are going to cause you to see much more frequent turnover when installing a 3rd floor unit in these duplexes as opposed to sticking with the status quo or finishing off the 3rd floor & getting a much higher quality 2 floor tenant.

James Wise · Answer

No. Bro get your mind out of Cleveland attics. There is no money to be made in attics in Cleveland. It's Cleveland man, we don't need to go into the attics or the basements for living space, this ain't New York.

Luka Jozic · Answer

@James Wise Last scenario, lets say the attic has not been fixed up at all so its just a bare attic. Is it worth fixing it up into 1-2 bedrooms and charge higher rent for the second floor unit?

James Wise · Answer

Too much for it to be smarter than just buying another duplex.

Luka Jozic · Answer

@James Wise what do you think such scenario would cost?

James Wise · Answer

No. Still cost prohibitive and way to small for a legitimate 2 bedroom unit. Just buy another duplex, they are like $100k out here.

Luka Jozic · Answer

@James Wise How about this scenario. Let's say the attic/third floor is already converted into the 2 bedrooms. That SHOULD mean that ceiling height, insulation and that stuff is done. Dry wall, paint and flooring is also done. In other words its already a livable space. Would it make sense at this point to basically just add a kitchen and bathroom (Plumbing, gas & electrical associated with that)  and whatever else safety stuff like fire escape etc.?

Michael Noto · Answer

@Matt Lorenzo The path of least resistance is to turn it into a 3-bedroom unfortunately. This is mainly because of the cost to build out the studio space the proper way, getting approvals from the city, etc. That is the way it is in CT at least and I am assuming CLE is similar.

In a perfect world I would rather deal with a 2 bedroom and a studio as opposed to a 3-bedroom, but like others have said it will be cost prohibitive.

Matt Lorenzo · Answer

Thanks very much, everyone. This gave me a lot to think about. I'll keep you all posted what happens.