Should I convert my 3/1 rental to a 4/2?

[Shalaye Camillo]

Good Afternoon,

This is lengthy...thank you in advance for your thoughts and insights!

I own a 2 family home in Boston Ma. I've owned the home for 8 years. It was built in 1930 and a total fixer upper. I've been doing remodels at intervals. I live in one unit and rent the other. In 2018, I started renting the unit on Airbnb. When covid hit, I pivoted to renting it mid term. The apartment is 3 bedrooms, 1 bath with living room, dining room and large eat-in kitchen totaling 1500 sq ft. Last year I rented it furnished with utilities included for 4350/mo. The property is located in a desirable neighborhood in the city of Boston. I believe it would be a B/C class neighborhood.

When I purchased the home, I did alot of work and spruced the unit up to section 8 standards...all my budget could afford at that time. The apartment cleans up nice and was in pretty good condition, but I have a rodent problem (old home, lots of holes), the floors need to be professionally redone, walls needed plastering and new paint, the kitchen needs to be updated, adding ceiling fans in all bedrooms, recessed lighting in living room and kitchen, replacing doors, and there's no laundry for this unit in the building.

I want to continue doing mid term renting, but also, want to attract the absolute best tenants and get the most money if I have to pivot and go with section 8. My mid term tenants moved out last June. I did a cash out refinance as I have tons of equity. The refinance (60% LTV for 3.75%) took 3 months! Closed in October, started exterior renovations in November. The cost for these renovations to date are 57k including all fixtures and materials. I got 200k. My goal was to spend 50k on my house and save $150k for new property investing.

Now onto my confusion...I got the idea to turn this 3/1apartment into a 4/2. My kitchens are big and I can convert it to a master suite! Then I would move the kitchen forward to the dining room and open the wall to the living room. Since my contractor is already doing alot of work here, he gave me a price of 8k to do the work, which is awesome! The plumbing is going to be 8500, electrical probably another 3k, kitchen cabinets and quarts countertops 5500. That's an extra 25k which does not include fixtures, tile etc which may be another 2k. So I'm estimating 27k on top of that 57k already spent = 84k.

Keeping it a 3/1 and sticking with the plan to just paint the current kitchen cabinets, renting to a long term tenant, market rent is 2900-3200. Section 8 pays up to 3200, depending on tenants income. If I'm blessed to rent it mid term, I can rent for 4350-4500. 

I can also use the living room as a 4th bedroom in this scenario. Just would not have the 2nd bath or best floorplan. I feel like 4 bedrooms is alot with only 1 bath. BUT, in Boston, the homes are older and usually have only 1 bath unless renovated.

Converting to a 4/2 and renting to a long term tenant, market rent is conservatively 3200-3500. Section 8 pays up to 3500, depending on tenant income. Mid term I can rent for 4500-4800.

Pros of 4/2 conversion: More cash flow long term, totally new kitchen renovation, new 2nd bathroom. If I ever decide to sell the property, it's more valuable with a 4/2 unit, can be converted to a condo without additional renovations, limited supply of 4/2 apartments in my market.

Cons of 4/2 conversion: 27k additional investment, will take an extra 3-4 weeks to complete, more tenants in the unit, more children in the unit, more wear and tear on property, higher water bill, extra bathroom fixtures to maintain, 4/2 tends to stay on the market longer than 3 bedroom apartments, harder to find tenant who can pay higher market rent without section 8. And I will have less money to invest in other real estate.

I'm literally going back and forth in my brain, need to make final decision asap. I'm trying not to be shortsighted just thinking about the upfront investment and additional vacancy time. But also don't want to drain more money I had planned for other investments. Is converting to the 4/2 worth it?

What do you think?

Kind Regards,

Shalaye