TX: Living for free by converting the garage for me :)

[Pierce Fonville]

We all know what the BRRRR strategy and house hacking are. Now, watch closely as I do a 360 twist combo and buy/live for free in DFW Texas where duplexes are in short supply and high demand.

*I am looking for guidance primarily in the financing portion of this strategy, but if you would like to proof it for other items to be aware of, be my guest.

The idea is to buy a single family house near Fort Worth with a 2 car garage, convert the garage into a living space including a kitchen and bathroom and remove the attic space to be replaced with a loft. I am relatively fresh out of college where I am used to splitting a 400sq/ft space with another person, so this will be an upgrade for me :) 

Buy, rehab, rent, reside

The plan would be to live in the garage conversion and rent the rest of the house. I have called many cities around me and have not run into a situation where this would be a problem. The tenants would basically be renting rooms from me, but I would prefer to rent to only 1 family or person. I have not found any rules preventing that within a mortgage situation. I would almost be living for free. 

The appraisal should note the added living space and the quality of it as an added benefit of the property. This will help when it comes to owning this for free or close to free.

Now, here is where it gets a bit more complicated. In order to buy a hard money deal and refinance into a long term conventional loan, it is technically a cash-out refinance. This takes 6 months of seasoning and usually requires leaving 25% equity in the home. 

My options are:

Buy on hard money, leave 25% in, and hopefully generate ~20% via forced appreciation

FHA 203k Loan, wait 6 months and then cash out refinance (Unknown whether or not this type of renovation would be approved)

Renovation loan or 203k and no refi, just pay PMI and tons of interest and accept the higher living expenses due to a higher payment

I would love to hear from someone with more knowledge and experience than me.

[Davido Davido]

@Pierce Fonville,  I second @Dion McNeeley 's comment  "I like that you are making a deal..."  Good thinking.  Keep thinking.   In regard to attempting to force appreciation in order to repay a hard money loan, consider that there may not be as much increase in value as you need.   I would talk to an appraiser about how he/she would value the remodeled home.   You'll find that even though the home is more valuable because of the extra bedroom and/or bathroom, appraiser's also reduce their new valuation for loss of the garage. 

You are wise to add a bathroom.  In my area, (Olympia WA) room rentals with an attached bathroom bring in 50% more rent than rooms with a shared bathroom down the hall.  Also remember that cement wicks moisture and cold into the new living space.  You'll need a vapor barrier and insulation on the garage floor and stem walls.   Add radiant floor heat if you can afford it.  

In regard to creating a loft, it is likely that you'll need to re-roof the garage in order to make a usable loft space.  The least expensive attic trusses are usually used in garage roofs and the roof trusses will almost certainly be in the way of creating a usable loft.

In my experience your costs are going to be near $50,000 for even a modest garage remodel that adds a bedroom, bathroom and kitchen.  Consider that an appraiser may take $30,000 to $40,000 off his/her new valuation of the finished home for the fact that it now lacks a garage.  Garage remodels are tricky that way.  Bear in mind that without a garage, you'll need extra room for parking outside and considerably more storage space elsewhere in the home.   You may then need an additional storage shed outside.   Plus, you may need/want to build a covered area to work on vehicles and projects.  So my best advice is to run a spreadsheet and/or the BP rental property calculator  https://www.biggerpockets.com/buy-and-hold-calculator to understand clearly what costs and income are needed for your plan to be profitable.  Best wishes.