Build 3rd suite, how to calculate if it's worth it?

[Miles Thompson]

Hello,

Firstly, I'm a bit of a noob so please excuse if my question a bit all over the place.

Backstory:

I have a 1960's house in a small ski town where the real estate is booming. My wife and I moved out 3-4 years ago after a bit of a reno to turn it (back) into a 2 suite rental (2 bdrm upstairs, one down).

The house cashflows nicely (about $700/m) and has would probably now sell for close to 500k. We bought it for 362k 5 years ago.

We've decided not to move back there and want to keep it as a rental. 

I'm keen to refinance and build a 3rd smaller rental suite under the existing house as it's on a hill and there's a small workshop space with some rock retaining wall that needs to be replaced with concrete foundation anyway. This would get that job done (which is a big job) but at the same time increase the property value.

The new rental suite will likely rent for $1500/m but to get city approval, the whole house as a duplex/triplex needs to be bought up to code  (fireproofing, electrical, plumbing) which will likely make the whole build cost close to 300k (contractors estimate). I've had a structural engineer in there today and am waiting for their report.

At the end of the day, the property as a legal triplex would be worth around 800-900k, possibly more.

So my question would be, what's a good way to figure out if it's worth it?

Things I imagine will be an issue:
- City approval as house is currently a legal duplex
- City may force me to rent it as a single family home right away
- Parking - another car park may be needed to get approval from council but I've heard exceptions can be made
- Entire project going over estimate by a lot
- Not being able to get financing then having to turn it into a single family home rental which won't cash flow so well.

Geez, writing it up like that makes it sound like a terrible idea! 

Current numbers:

Current mortgage rate: 1.73%
Current monthly mortgage payment $1,200
Current monthly rental income: $2,800
City Taxes: $3,000
Water/Sewer: $1000
Property Manager: $200
Insurance: $800

Estimated numbers after reno/build if it costs 300k:

Current mortgage rate: 1.73% (hopefully stays the same)
monthly mortgage payment $1910
Current monthly rental income: $4,950
City Taxes: $5,000 ?
Water/Sewer: $2000 ?
Property Manager: $350
Insurance: $1300

I'm also looking to turn the what-would-be middle suite into a 2bdrm which would mean I could increase rent further.
Ok, it's seems like a good idea again.. 

Thoughts please.