Add the 3rd Unit or Not

[Alecia Loveless]

3 years ago I bought a duplex for $249K at 3.875% interest. The seller told me her niece wanted to rent the upstairs unit once it was renovated and I agreed to a discounted rate to help the deal along.

Turns out it was the listing agents niece not the seller. Fast forward 3 years and now she pays her rent significantly late each month and her rent is now under market rent by $700 even though I have been raising it.

The building just breaks even.

There is space above the garage to add a studio apartment. My contractor says it will cost $70,000 from soup to nuts primarily because he’d have to raise the roof and add 3 dormers.

This would get the cash flow to about $750 each month for the building and it would now meet the 1% rule.

However, I could take the same $70,000 and buy a new 3-4 unit building that would likely cash flow the same amount or better and start building equity on another property.

The existing building as is will never cash flow much and should likely just be sold but I think if I do the renovation and hold it 10 years I can make a profit off it besides all the cash flow and tax benefits.

After I finish a BRRRR in another month and a half I will have enough money to buy a few good buildings as well as do the studio apartment if people think it's a good idea. Please advise.