BRRR: large closet or 2 half baths

[James Tiu]

Hello BP,

I'm in the middle of a BRRR duplex project in San Diego. It is an identical looking duplex with approximately 720square feet each and 2 bedroom 1 bathroom. Right now, I am faced with a dilemma. Should I turn this weird hallway space that connected the 2 units into a large closet, or should I turn it into 2 half baths. Each unit would then have a half bath/powder room. The 1st unit half bath would be a little awkwardly placed inside a room. The 2nd one would have a more public access from hallway.

I believe it is worth it from a ROI standpoint. I am being quoted $7000-8500 for both half baths. According to the comps I would have an extra $100-200/month total rent from the units. My issue is I don't have much more in my construction reserves to budget this extra renovation. I would either be putting this all on credit or eating into my 6month emergency fund reserve.

My biggest question is, from a strictly ROI standpoint would you add the half baths to each unit for $7-8.5k for an extra $100-200/month. Please also share thoughts if the placement of a half bath would be awkwardly placed in a room.

Thank you BP!

[Dan H.]

Monthly rent to purchase costs above 0.75% is good (challenging to find) in San Diego at purchase.  In most markets, above 1% is considered likely to be cash positive.

If I use the lower end of your monthly rent increase ($100) and the higher end of your costs ($8.5K), because projections should be conservative, you are at 1.1% ratio.  So this is likely returning better cash flow than your purchase.  It exceeds the 1% rule.

For your refinance, closet space is just footage.  Bathroom space is both the footage and the half bath adjustment.  So a half bath (total two half baths) should result in a slightly higher appraisal than closet space (it will likely be in the adjustments area because most 2 BR/unit duplex comps will not have 1.5 Ba/unit).

Then there is a convenience factor.  How often does a bathroom go down in the evening that when there is 1 Ba you need to get emergency plumber.  With the extra toilet, the odds of needing an emergency plumber decreases.

At least for the unit that the Ba ends up in a not strange location, I think it is an easy put in the bathroom.  I suspect for both units, the bathroom option is the better option.  I typically pay ~$1K for hot water heater but one was down and tenants had no hot water so I am paying $1.3K today because tenants need hot water and I could not easily find an alternative (slight high priority so it costs extra).

Good luck