Florida Investment Property/Boston Basement ADU/Boston Vacant Lot

[Calvaire Paschall]

I am trying to determine the best decision for my next real estate move. I am considering purchasing another investment property in Jacksonville, FL (2 families) ($120k), converting my basement in Boston, MA, into an ADU ($80K), and building on a vacant lot that I own next to my primary home.

Basement ADU Renovation: My Boston home is a two-family that I want to convert into a three-family. I live in one unit and rent the 2nd for $2200. The basement ADU quote I received was for $80k, and once completed, this unit will rent for $2200, and the home value should increase from $1.01 to $1.4 million as that is what three families are going for in my area.

Florida Investment Property: I currently have a 4-unit in Jacksonville, FL, in Historic Springfield. I want to purchase a 2-unit property in this same area that is around $120k. I should be able to rent for around $800 each.  

Building on a vacant lot in Boston: When I purchased my primary home in Boston, it came with the vacant lot next door. The lot next door is zoned for a three-family home. 

Of all the opportunities, I wonder which would be the best move to make right now. I have a feeling the basement would be the best move but I want to confirm before I spend $80k+

[Tom Wagner]

This is a great question! I think it is important to look at it from both a return-on-cost and risk perspective.

ADU: While you may be able to get it done for $80k, I would recommend adding a buffer for cost overruns so let's use $100k. If the new ADU costs $100k and brings in $2,200 in rent, the annual incremental net operating income (NOI) will likely be ~$20,000 ($26,400 x 12 months = $26,400 x 75% (25% expense ratio) = $19,800). Your *unlevered* yield to cost / return on investment will be ~20% (20k / 100k), which is virtually unheard of in real estate. Finally, your true ROI will be infinite if you refi the entire property and pull out $200k+ (perhaps suboptimal because of increased interest rates) or if you due a HELOC / home equity loan.

Jacksonville investment: Hard to quantify this one without more details. I took a look at Redfin and it seems unlikely that you'll be able to find a turnkey 2-unit for $120k, but if you can that seems like a pretty good investment as well. However, you could also do this after the ADU project, and realistically I would be exploring financing sources that would allow me to tackle both of these projects at the same time.

Building on vacant lot: I cannot stress this enough --> this type of ground-up development project is significantly more complicated, time consuming, and risky. It will likely be stressful and challenging throughout, and if you haven't done ground-up development before I would start with the ADU project as a training-wheels version of what this project would be. Some other options with the vacant lot include selling it off to a developer (what I would probably do) or finding a partner and rolling the lot into the project as your contribution to a joint venture. If you are going to do the latter make sure the lot is fairly valued, spend significant time vetting potential partners and retain a great attorney for the paperwork.

Good luck and please keep us posted on what you decide!