More Homeowners Converting Portion of Property to Rental Units

Key Highlights

• Rental unit demand is through the roof
• More homeowners converting portion of their property to garage apartments, ADUs, guest houses

Demand for Rental Units Off the Charts

Over the last 15 months, home prices have headed higher and higher as home supplies have plummeted to record lows.

This spike in home prices and downward spiral in inventory has created a huge demand for rental units for both short- and long-term time frames.

More Conversions of Existing Properties to Proportional Rental Units

As this now-considered national housing crisis intensifies, more and more homeowners are converting portions of their properties to rental units.  These rental units can be adding an apartment over a garage, an accessory dwelling unit (ADU) or a guest house on the same lot as the single-family home, according to new research by Freddie Mac.

Caitlan Bigelow, CEO of Maxable, a startup that connects homeowners with resources to build rental units on existing lots of single-family properties, said, “We’re in the midst of a huge housing crisis; that leads to classic economic supply and demand.  Homeowners are looking at ADUs as low-hanging fruit.”

Multiple Factors to Consider Converting Portion of Property into Rental Units

One of the first things to research when thinking about converting a portion of a single-family home/lot into an income generating rental unit is whether or not it is permissible under the homeowner’s jurisdiction or ordinances.  More and more cities have already and are continuing to adopt rental unit- and ADU- friendly legislation to make these units legal BUT, such legislation is not across the board in all locations.

Cost is another factor.  Maxable indicates that a garage conversion starts at approximately $100,000.  Building a stand-alone ADU or guest house is obviously more.

Also, don’t forget about cash flow and home appreciation.  According to Tendayi Kapfidze, chief economist with LendingTree, “If your goal is cash flow, you’ll need to know if you can lease the property for enough to earn more than you spend on the mortgage and maintenance.  If you’re more interested in appreciation, you’ll have to estimate whether the property will be worth more several years down the line.”

Potential Rental Income Varies by Location

Kapfidze also cautions homeowners to totally understand the level of rental unit demand in the myopticly small area in which their property is located.

Propeties in exclusive enclaves such as Park City UT, Key Biscayne FL, Rehoboth Beach DE and New Jersey beach towns have the highest investment values, according to MagnifyMoney.  And areas such as Austin TX, Nashville TN and Phoenix could well benefit from increases in rent prices on conversions within single-family properties.

Thanks to CNBC.

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