How to Develop this Property

Question

Hi all!

I've been following BiggerPockets for a while now and finally signed up because ran into a situation that I can't seem to find info on.  My wife and I bought a deal in Denver, CO.  We jumped on the deal at the time because of the lot size (about 17,000 sqft), the zoning of the area (allowing multiple dwellings), and because there wasn't really any required work to do on the house (but many quality of life things we could do IF we wanted).  Overall, we're thrilled with the deal and think we got some amazing value.

When we bought it, our plan was to use the abundance of space to build a second dwelling and rent (or possibly AirBnB) one dwelling or the other, while still living on the property.  The market was moving so fast, we didn't really have time to develop a clear plan for how/where this dwelling would fit on the property before signing our contract (we were one of 8 offers on the table within 36 hours of listing).  However, now that we're starting to make serious plans for this second dwelling we feel like we're stuck with a few ok/good options and no great options for how to do it.  I'm looking to crowdsource a few ideas from the community- no wrong answers.  To keep it simple, let's leave building code/legalities out of the conversation for now except to say that we CAN build 2 stories and CAN build a multi-unit structure.

I attached a rough image of our property's setup.  Here are some extra bits of info:

• --The red box indicates a few things.  That part of the property is currently irrigated and has nice grass coverage.  In the backyard, it is currently enclosed with a split rail fence.  Our best idea so far is to put up a more private fence around this, rent out the current house (tenants park on street), then have the rest of the property, including the entire driveway, to ourselves. Just not sure where to build.
• --The garage was built in a way that with minimal effort, we could use the stall at the end of the driveway more like a carport and drive straight through to the back, but we would need to add at least 1 more garage space elsewhere if we did this.
• --The back of the property has a 25ft easement in case the city ever wants to add an alleyway.  Although I don't see this ever happening, we obviously can't build here.
•

I suppose the first question is whether we should be looking at this problem to begin with.  From a strategy point of view, we assumed that adding a second dwelling to the property would be more cost effective, but would it be smarter to just use the construction money toward a new deal on a different property instead?

Any insight you have would be most appreciated!

Bill S. · Answer

@Brennan Stephenson with all due respect, ignoring the code requirements is a waste of time. The code drives the answers like @Milton Rivera said. Everything is driven from the zoning code in Denver. There are architects that spend their days and nights working to maximize the usage of land and who know the Denver zoning code inside and out, by memory. Find a few of those and pay them some money for a few hours of their time to give you their thoughts on what your options are.

Generally speaking, your lot with the building layout is difficult to add an separate structure ADU to. The City has zone lot coverage requirements as well as setbacks. The simplest would be to add on to the existing home to create an ADU. Max that out in terms of your business plan for AirBNB or as a rental. Know this, if your zoning only allows an ADU and not a second unit, then it severely limits your exit plan (sale or move and rent out). The ADU requirement, means you have to live in one of the units to rent the other, either AirBNB or as a long term rental. You could rent it to someone who occupies one unit and rents the other but you have to know that is a rare tenant that would do that. Same is the case for a sale. Most home buyers are not looking for properties with ADUs so your buyer pool is significantly smaller and the properties are harder to comp and get financing for as well.

Milton Rivera · Answer

@Brennan Stephenson

There are quite a few moving parts on the deal.  You mentioned leaving the building code/authorities out for now but unfortunately, they will be a big factor and could be the driving force on the deal.  A few random thoughts:

• I am assuming the smaller rectangle to the 3 car garage is the driveway. 
• I would start off by looking at the existing survey to understand where the utilities are and what other easements you may have.
• The fire department will most likely require a driveway all the way to the back to the second building.  The garage would need to be adjusted to allow egress and potentially demo on the south section and re-added to the north end. 
• You will also need to understand typical lot size requirements for the given dwelling.  A single-family house (SFH) may require 0.25 acres vs. a townhouse or duplex may need something different. 
• You will also need to understand what the standard setbacks are.  That is the minimum distance allowed between buildings.  
• Answers to all these items will begin narrowing down the size and exact location of where the building pad will be and also help determine the overall size of the second building.  You can get most of these answer by speaking to a local surveyor or civil engineer (the surveyor will be much cheaper).   
• If you are allowed multi-family homes I would consider two townhomes or duplex (depending on what is typical in your local market) since those construction costs will be about the same or lower than erecting an SFH.  That could increase your overall cash flow and RIO.
• Good luck,
• 
•

Davido Davido · Answer

Congratulations on your already successful purchase in a highly competitive market! Well done.  If you decide to Air BnB then an ability to accomodate larger families and groups can be a significant advantage in maximizing your income.

Since you've mentioned no financial limitations I would maximize the income potential of the property by building the maximum number of living spaces that are allowable and appropriate (for the neighborhood and property), enlarge the existing house, create a living unit above the existing garage, create a multi-unit building, and build a second garage.

• 1st, I'd look into maximizing the size of the existing home with an eye toward adding one or two appropriately sized bedrooms each with its own bath (this depends on how the home is laid out);  
• 
• 2nd I'd create another 2 bed 2 bath Air BnB space above the existing three car garage with a separate stairway entrance to each bedroom.  For income, I'd do this even at the cost of having to reinforce the garage walls and/or foundation;  
• 
• 3rd build a new 2 story multi-unit structure for yourselves behind the existing garage so as to maximize rental income from the extra unit(s).  Design the multi-unit with the minimal backyard setback allowed by code and plan to use the alley easement as the main portion of your backyard.  Be sure to determine a design appropriate to your neighborhood and the property -orient the bedrooms to face the morning sun;
•   
• 4th build a new garage with a livable space above it for the existing house between red box and current garage. If the code does not allow for construction of yet another living unit call it an ADU, or just permit this 2nd above a garage space as an Art Studio or other area.  Be sure it has a bathroom (or two), a kitchenette (Sink, refrigerator and micro but no built in stove), and be sure to include flexible sleeping area (rooms) with sliding doors or curtains for openness or for privacy.  Use this area above the 2nd garage as overflow for your Air BnB clients and/or as a multi purpose room for clients or yourselves.  Make sure the driveway into the second garage is at 90 degree angle to existing drive way so access is easy.

At a minimum provide off street parking for the existing house in the area between the red box and the existing garage.  In regard to your question:

"From a strategy point of view, we assumed that adding a second dwelling to the property would be more cost effective, but would it be smarter to just use the construction money toward a new deal on a different property instead?"You'll need to run the figures.  I'd do a rough design of your added spaces to get approximate sq footage of the new construction, then look up your local construction costs per square foot and you'll have a rough estimate of cost.  Add in costs for the time necessary to permit and build.  Then get comparative figures for the monthly and short term rental rates of the additional spaces that you've designed.  Also get figures for typical occupancy rates in your area (both monthly and short term), from your projected rental rates and occupancy rates you can determine projected income.

Run the overall project figures through the BP "Fix & Flip" and "BRRRR" calculators. Then run the figures for renting the additional spaces monthly through the BP "Rental Property" calculator, and run the figures for renting the additional spaces on a short term basis through the BP "Air BnB" calculator.

From the calculators you can determine the ROI from selling, from refinancing and holding, from using your spaces as monthly rentals and from using the property as Short Term Rentals.  Choose the results that suit your financial goals, then compare those results to the return your likely to get on "a new deal".   If maximizing this deal is best, then maximize it. If a new deal provides a better ROI, then do the new deal, sell it at a profit, and repeat.  If you're good at finding deals, then stick to finding new deals -you can always hire someone else to construct this property.

Best wishes.

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