[Houston, TX] What should I do with my detached converted garage?

[Murtaza Cheema]

I live in a 2-bedroom/2-bathroom single family home in the Montrose area of Houston, TX. My lot size is just over 5,000 square feet and the backyard has a detached 600 sq ft single story garage that was converted to a studio apartment about 50 years ago by the previous owner. The garage apartment is built on slab and has a history of flooding because it's built at-grade, as opposed to the main house which is elevated three or four steps above ground and has a pier and beam foundation (no history of flooding in the main house).

The converted garage apartment has been gutted from the inside and is in pretty bad shape (roof needs to be replaced, some of the wood is dry rotting, etc.).  It's essentially a wide open room at the moment with no sheetrock or anything.

For the past two years since I've owned and lived in the house, I've left the garage as-is and vacant without a tenant, since it requires quite a bit of work to make it habitable again. I'd love to get a tenant in there and I'm estimating that I can get approximately $1,200 a month on a fully rehabbed 1-bedroom/1-bath unit given its location in the city.

The part that worries me is the flooding issue. I just don't want to spend a ton of money and have it flood again, so the contractors I've spoken to have all recommended raising the foundation by a few inches. My concern doing so is that the ceiling will be even lower then (the ceiling is currently 8.5 ft). We could do vaulted ceilings to make it feel more open, but of course that'll add to the cost.

The other part that worries me is resale value.  If I spend, say $60k on a remodel, and then look to sell the house in 6 or 7 years, how much value will the remodeled garage apartment even add to the property? I've heard most buyers would rather just have a garage, but this might be different in the Montrose area.

With so much wrong with the existing structure, you might be asking yourself why not just demolish and start from scratch and maybe even build a two-story with an actual garage to park cars on the lower level? Here's the wrinkle -- the current unit is essentially built on the property line on three of the four sides, so demolishing it would meaning losing three feet on each side so that it follows city code - with a 600 sq ft footprint, I just don't think losing that kind of square footage makes the project feasible. My understanding is the current structure is "grandfathered".

Thoughts? Should I spend $60k (or however much) to get it remodeled as a 1-bedroom apartment? Or should I just convert it back to a 2-car garage?