Adding a third bedroom to a rental property vs converting a shed

[Gayle Eisner]

Hi all:

Thank you in advance!  Im wondering whether I would make more money converting a large shed on my rental property backyard to a grandmother unit or add a third bedroom to my rental property in Los Gatos hills.?  Not thinking of getting permit for shed. I had a $52k bid for conversion of 700 sf shed.  I do not know how much a permitted extra room would be, but square footage added to the house might be a good investment?  Thoughts? Experience? Thank you kindly!

[Jonathan Pflueger]

@Gayle Eisner

In Santa Cruz, just over the hill, a 1 bedroom grandmother unit would rent for between $1,000 - $1,800 depending on the amenities and location. For instance, I have a 1 Bedroom, 900 sq ft, grandmother unit with mid-line amenities in a quiet location rented for $1,650 a month, plus $100 for utilities. 

I like the flexibility of having more rentals than less - if one is vacant odds are the anther one is still producing. Plus, there is significant shortage of good housing in the entire Bay Area and finding a quality renter (you may have to wait a month or so) is not hard.

If you plan on selling in the next 5-10 years you may want to re-think getting permits. Without permitting the structure you will not be able to capitalize on the new structure gains at selling as easily and there is a small chance you could get red-tagged by the county. If you get red-taged any sort of refinancing or selling will be a lot harder to navigate. Your strategy will depend on your end game. 

Best of luck.