Remodeling and Developing Triplex into 4 or 5-plex

[Anton Gerondine]

Hi folks, first timer here!

My wife and I have entered the market this year with our first purchase. We're located in Berkeley, CA, and own a parcel that has a 1000sqft house (2bed/1bath) in the front and a 2x800sqft unit (1bed/1bath each) building in the back. We're occupying the house and plan to keep the property for 5-6y, after which we would either move and hold it or sell it. In the meantime, we're wondering if it would make sense to (1) remodel the house to increase its size to 1100 sqft and turn it into a 3bed/2bath, (2) turn a detached garage on the parcel into a 2bed/1bath ADU and (3) build a JADU under the main house (or finish and expand the house downstairs). Doing all 3 scenarios here would cost about 1M$ to 1.2M.

The numbers are:

- Purchase price: 1.5M$

- Current mortgage: 65% LTV, 2.55% 30y fixed

- Property taxes: estimate 25k$/y

- Current rental income from two 1bed/1bath units: 2200$/m each

- Previous rental income from the 2bed/1bath house: 3600$/m

- Property mgmt: 12%

- Quote for garage ADU conversion: 500k

- Quote for remodel: 400k

- Quote for JADU: 300k

- Estimated rental income from ADU conversion: 3500-4000$/m.

- Estimated rental income from remodeled house: 5000-5500$/m.

- Estimated rental income from JADU: 2500$/m.

Concerns we have:
- There's no comp in the area that sells for more than 2.5M for a setup like this. This price range is all low range commercial rental around us.

- I'm not sure we can rent the JADU in 5y when we move abroad. I think JADUs need to be adjacent to an owner-occupied unit?

- Moving beyond 4-plex turns into commercial mortgage loans, which I think will reduce the pool of potential buyers.

- If we play to hold, I'm not sure if the rental income will make this a worthy enough investment, but I could be wrong.

What do you think of this situation here? Our heart wants to go ahead with the work, but I'm not sure if the math makes sense. And I'm not sure if we should do all the work, or just some parts of it. To note is that Berkeley has very low housing supplies and a strong rental market driven by UC Berkeley.