Turning your garage into living space is not as difficult as you think. I believe it is a great strategy for those who are looking to get into real estate investing using a home they already possess. You can transform a space that you merely use for storage into a cash-flowing rental to subsidize your mortgage, your bills and other household expenses.
My journey to house hacking
In Spring 2022, my neighbor mentioned he had started renting out the Accessory Dwelling Unit (ADU) on his property on AirBNB. When he shared the numbers with me, I knew instantly that it was the opportunity I was looking for to start my real estate investing journey. You see, we lived in a great market that offered ample opportunity
1) There are three major universities/colleges within a 5 -mile radius. College students and their parents were constantly visiting the area.
2) There are two major hospital systems within a 10-mile radius. Traveling nurses and other medical professionals are in demand. As a matter of fact, my family moved to that location because my wife happens to work at one of those major hospitals.
The issue is we didn't have an ADU as my neighbor did. Around the same time, BP started posting YouTube videos of the ADU Guy, Derek Sherrell (see video below) which planted the seed of converting my garage into livable space. My garage was a similar foot print; he shared the blueprint he followed; I was sure I could do this.
But self-doubt crept in: Could I do it? Would my wife be onboard with that idea? How would I finance it? What if this business doesn't work? I had failed at multiple business ventures before.
All these questions swirled in my head as I contemplated this project. I came up with the framework below for making the decision to pursue the project. I'm hoping this framework helps you out as well.
1) I assessed impact of garage conversion on the value of the property
2) I determined whether it is legal to convert the garage into a living space.
3) I assessed the financial viability of the project with available sources of funding.
Assessing impact of garage conversion on the value of the property
Before I started, I assessed whether the garage conversion would be advantageous for us. I reached out to a real estate agent asked the following questions:
When I'm done with this project, and after adding 400 square feet to my house
Question 1 - What can I expect it to sell for if I decide to sell?
Question 2 - What do similar houses that have a garage sell for?
In my case, my real estate agent ran comparables that showed the sale price of a house without a garage could justify the investment, meaning the amount I was planning to invest plus the current value of the house was less than or equal to the ARV. Furthermore, the difference in sale prices between houses with garages and those without was minimal. These two factors were strong indications that we would gain additional equity, and maybe even increase our net worth.
While it might be tempting to think that there is no way a house with an extra mother-in-law suite will be less valuable than a house with parking, it is worth making sure that you will have adequate equity when the project is done, and that you are not overbuilding the house.
Assessing the financial viability of the project with available sources of funding
I ran this analysis by comparing my net worth before and after the project was complete, with estimated values is whether my net worth increased when I move the dollars in my bank account into the property. If the funds are in HELOC, a retirement account of some sort, run a similar analysis.
Net worth = Assets - Liabilities
In my case, I made sure value of my house increased (Asset) relative to the funds I took for a cash-out refinance I did to access the funds for the renovation (Liability). The goal was to increase my equity into the property by more than the cash I took from the house. I can share numbers in a different post.
Determining whether it is legal to convert the garage into a living space.
I contacted the city planner to determine whether the construction was allowed. I wanted to know if there were restrictions that would keep me from making the conversion of the garage. I was informed that Accessory Apartments for a member of the family was permitted, and that they have to be located within the dwelling. What that really means that I can't claim the suite as a separate apartment (a.k.a. not a duplex); I could not add a range/oven for cooking. That was ok with me since we weren't interested in converting the house into a duplex anyway; we just wanted a space that was separate from the main house to rent out.
All these factors worked out and led us to make a move to do the garage conversion. We currently rent the unit out as an MTR during the slow season and an STR during the spring and summer.
