Looking for rehab advice on 1st brrr project

[Joshua Smith]

First time post 

Im currently under contract for a 2/1/1 728 sq ft home here in Lubbock Tx for $22000 cash with 40K budget for rehab. I own the home next door and it's identical but they turned garage into bedroom and added laundry room totaling 942 sqft. which I currently rent at $1000 a month. Could probably get up to 1200 with updates. This is a class C neighborhood and looking to BRRR this property under contract.

My question for all of you is I’m debating on added another bathroom and laundry room which would create master bedroom and allow the garage to stay or turn garage to another room and adding bathroom plus laundry which would turn it to a 3/2/0 at 995 sqft. Find another 5K for this route assuming probably closer to another 10K 
I can’t decide which creates more value on appraisal and rent? 

Bids on 2/2/1 830 sqft 

34K labor and material

Bids on 3/2/0 995 sqft 

45K labor and materials 

TIA

[Michael Garofalo]

First off, just a rule of thumb, but I budget more like 20% for overages in terms of unexpected costs. If you have real bids and numbers from contractors then 10% may be reasonable but in my experience, things always come up and they always end up costing more than you would hope or expect. I can't tell you the number of times I had written estimates and everything was agreed on, then once we got into the project the contractor came back (on multiple occasions) to request change orders for things that would never have been known without opening up walls, ripping up flooring etc. 

As far as re-sale goes, 3 beds and 2 baths is much more desirable than a 2 bedroom 2 bath. You should quantify how much more in rent you can stand to make from adding the 3rd bedroom but if it was me, as long as your rent is at least $100 more per month, that's an extra $1,200 per year which is a 12% ROI if your estimate on the cost to convert the garage is actually 10k. To me, that's a no-brainer to add the 3rd bedroom, however that 10k number seems low to be honest. I assume you'd need to go through zoning/permitting process for the conversion, run new electrical and plumbing, add insulation and drywall before you could do flooring and paint. If all of that is required, it's most certainly going to be more than $10k unless you are going to do a lot of that work yourself.

Another option is to just fix it up as a 2BR, refinance to pull your money out, and in a few years when the first set of tenants leave, then convert the 3rd bedroom once you have some additional cash reserves built up.