Would you add units to existing or purchase new property?

[Tandi H.]

We are debating this question.  If you had to choose one, would you rather:

A.  Add a couple units to existing properties.  Let's say each additional unit costs $25,000 (building into an existing structure like converting a garage into a one bedroom).  Total expense of $50k for two new units, with new rents of $700/mo/unit.  B to B+ neighborhood.

B.  Purchase a new property.  E.g. $200k duplex, $50k down payment.  Minor repairs, rentable as is.  $800-900/mo/unit.  B- neighborhood.

Both options cost $50k.  Adding new units to existing properties minimizes new property expenses like utilities, taxes, insurance, closing costs, etc.  However with low interest rates, maybe it would be smarter to get the new property now, then add the additional units at a later point?  Are there other factors to consider?

[Tandi H.]

@Scott Rogers

Thanks for your input.  We have decent apprecation in Abq, nothing close to the coasts but slow steady growth.  

A pro to purchasing another property rather than increasing units is we'd have another property being paid off by renters.  However then we also have another property to manage - we do everything ourselves.  Our overall strategy is to have as few properties as possible to reach FI.  So we aren't in the path of wanting a zillion doors.  I'd rather have fewer responsibilities that cash flow higher per door. Way less work.

@Colleen F.

Good point, all units are not equal. To be more specific about our situation, we have a duplex property, and would add a third unit to make a triplex. That should bump up the property value and we can refi and pull cash out. We also have a SF, and would add a backyard ADU that could be rented separately or together with the main house. This would add to property value too, people like the option of MIL/student/AirBnb quarters. Both properties would remain conventionally financed. In both situations the existing units would not be significantly impacted - the highest impact would be on the SF, which would now have another unit on the property. But the yard is big and renters don't seem to want to use or maintain the large yard anyway.

Here are the actual numbers:

Existing Property 1:

• Currently a Duplex
• $235k PP, $255k appraised value
• Put 25% down at purchase last year
• Current rents of $1875 (one unit is slightly below market, inherited renter lease)
• Adding a third unit into a currently unused garage would cost $25k
• Additional rent $750; total predicted rents $2650
• That would get us closer to 1% rule on rents
• Guess that future FMV for triplex would be $275-280k, conservatively. Might be closer to 300k.
• Property also has large shop which we use for our own tools/maintenance, so property provides additional value to us through that.

Existing Property 2:

• SFR, recently refi'd at 60% LTV, appraised at $230k
• Bought at $145k, so basically have pulled all money back out with refi
• Currently rents for $1300
• Adding an ADU into backyard studio - cost $25k
• Additional rent $750; total predicted rents of $2000 (main house would reduce rent with ADU rental)
• Not sure if ADU will shift FMV much, maybe a little bit towards mid 200's

Alternative option to adding more units - purchase property instead with 50K downpayment:

• SFR in B/B+ or Duplex in B/B- area, around 180-200k
• 25% down
• Might need minor repairs, paint, etc.  Let's say $5k.
• Rents would be around $1300 for SFR and $1500-1600 for duplex
• Property taxes $2000/year
• Insurance of $500-700/year

Hopefully this info will help in assessing which option might be better for us.  Thanks for the advice, it's much appreciated!