Will these numbers work to build a garage apartment to rent?

[Victor Mondragon]

Hello BP!

I have been working with an architect and builder on getting drawings made and construction quote for a garage apartment and would love feedback on this deal.

I live in the Houston Heights area.  (For those not familiar with Houston, the heights is a trendy neighborhood near downtown that originated in the 1920s and is experiencing a lot of new commercial and residential builds including trendy restaurants, coffee shops, and boutique stores)

I have currently have a 5000 sqft property with a 1100sqft house (simple 2bed/1bath) built in 1930 and restored about 10 years ago. I have a detached 2-car garage and am planning on demolishing it to build a 2-story garage apartment with a 536sqft 2-car garage on the first floor, and a 764 sqft 2 bed/1 bath second story apartment.  I have an ally that runs behind my property and I plan on having my renters access their home through the back.  They would have half of the 1st story garage for covered parking, their own laundry, and a second story balcony with a downtown view. 

I am looking to rent the garage apartment out as my first rental.   

Here are the numbers:

I am looking at $110,000.00 of  construction costs. 

I plan on paying for this with a 15-year 5.25% loan.

I will have a monthly payment of approximately $884.00

I am estimating an additional $100 a month in property taxes as a result of the addition

My Insurance agent quoted me an additional $54 a month to insure the new build.

I am estimating another $150/mo for property management fees and maintenance (I am managing the property myself) Since it will be new construction, I am hoping to not have any major capex needs in the first couple of years.  

Total estimated monthly expense: $1188.00

I've seen rental comps for 2bed/1bath rentals below 1000 sqft of livable space as high as $1975/mo (high end apartment complex nearby) and as low as around $1200/mo (rundown older house nearby)

My goal is to get $1550/mo for rent 

Questions:

1. What other monthly expenses am I missing?

2. Is my PM & maintenance fee of $150 too high? too low? 

3. With a projected monthly revenue of $362.00 (1550-1188), is it worth it to take on this construction project?
4. Should I take my $110,000 loan elsewhere to invest?

5. Is a net profit of $362/mo good? bad? average?

6. Any and all feedback, analysis, advice, or general thoughts are greatly appreciated.  

Thank you in advance for sharing your wisdom with a rookie anxiously considering his first major real estate investment!

[Nick S.]

@Victor Mondragon I don't know which Houston, TX you're talking about, but property tax here is anything but reasonable!

All kidding aside, I really think this is an interesting idea. I’ve been curious about this strategy myself, and it’s good to see some actual estimates for build, rents, costs, etc. At first glance, your numbers look reasonable. I tend to be more on the conservative side, so I would budget in something for a capex reserve fund, even though this is a new construction. If you plan to hold it for the long term, you're eventually going to need to replace the water heater, HVAC, roof, and all that - even if it's 10-20 years out.

Did you look at calculating a cash on cash return for this project? How much of your own funds would you have tied up in the project? If you actually are making $362/month in profit and say have $20k tied up in the deal, then your COCR would be 22%. Not bad!

And back to taxes: $6100 seems a bit low for a house in the Heights. Even assuming a 2% tax rate (with homestead exemptions?), that would put it at a valuation of about 300k. Does that sound about right? You might consider talking to an appraiser to see what your property would appraise at with the new garage apartment. Eventually they are going to tax you at the market value of the property, so taxes will creep up.

Another thing you might consider is if there is any way to maximize your potential rental income without increasing the build cost too much. For example, could you add 2 units instead of 1 for a similar build cost, but for a proportionally higher expected rent? Maybe a small studio that rents for $900 and a 1 bedroom that rents for $1300?