Rental Rehab - 3/2 vs. 4/2

[Sean Wilson]

I am closing on another rental rehab project in Chattanooga, TN next Friday, and I could use some advice. 

The house is in a B class suburban neighborhood built in the 50s.  The house is legally a 4/2, as a result of a permitted garage conversion that was done years ago to add a bedroom and a laundry room.  I normally write off properties with converted garages or tacky additions, but this one was surprisingly well done and looks seamless to the untrained.  Years after the 4th bedroom was built, it was combined with the master bedroom via a 6ft wall opening between the two rooms to make a large master suite.  

So, I basically have 2 options.  A 3/2 with a large master suite, or a 4/2 with a smaller 1950s size master bedroom with master bath.  What would be more appealing and/or a better return on investment?  

I'll have to do framing & drywall work anyway to separate the laundry from the bedroom and create a hallway, so the cost is negligible either way.  If I go with the 4/2, the 4th bedroom entrance would be via that short hallway off the kitchen that also contains the laundry room and a rear entry door, rather than through the master bedroom door in the living room as it is currently.  The property would definitely flow better with the 3BR layout.

From a market perspective, there aren't currently very many 4 bedroom houses for rent. The ones I did find available were mostly C- section 8 properties or pretty high end large properties, not much in the middle where this would fall. Looking at the HUD fair market rent for Hamilton County, there is an over $200/mo difference between a 3br and 4br ($1081 vs $1305). I only have one other 4 Bedroom rental, and it has been consistently hard to rent. However, it is in Nashville (different market), and I think that may be more due to layout, location, and size.

If this was your project, what would you do?

[Charles Jabaley]

@Sean Wilson hey Sean! I’m a Realtor here in Chattanooga and very familiar with the rental market. It’s a great market for savvy investors and I believe it has plenty of room to grow, so good choice investing here 😎

To address your question: If it was my project I would definitely go ahead and make it a 4 bedroom, especially considering you have to do the framing/drywall work anyway separating the laundry room from the bedroom. As a B class 4 bedroom, I honestly don’t see vacancy being a problem for you. I don’t want to say it couldn’t happen, and obviously I haven’t seen the house, but what you mentioned about most 4 bedrooms here being bad areas/section 8 is spot on. You have very little competition right now, and Chattanooga has a lot of renters and it sounds like your 4 bedroom would really jump off the page ahead of the competition to a larger group of renters.

Which area of town is it in if you don’t mind me asking?