In the world of real estate, savvy investors are turning to a creative approach to enhance rental income and elevate property values – the addition of extra bedrooms. Juan Huizar, President of Sage Real Estate Group, shares insights into this strategy, emphasizing its potential benefits and offering practical considerations. He says, "No one pays extra for a formal dining room, but people do pay extra for bedrooms."
Before starting the journey of transforming extra space into an additional bedroom, property owners are urged to assess the feasibility of their units. Huizar highlights the importance of aligning with market demands and complying with local laws and regulations. "In California, for example, bedrooms must measure at least 80 square feet and have at least one door, window, electrical outlet and closet," he states.
He suggests that many formal dining rooms already meet these requirements, making them suitable candidates for conversion. "The landlord wins because they can charge more, and the tenant wins because there are more bedrooms for family or roommates," he adds.
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Investors are further encouraged to consider the costs associated with adding a bedroom and weigh them against the potential return on investment (ROI). "When you’re buying a building, you’re buying an income stream. If we’re smart managers of that asset, we can increase that income stream, which increases the value of the property," Huizar says.
Domenick Ferrera, Executive Director of Commercial Real Estate Digital at JPMorgan Chase, shares his success story of converting a two-bedroom unit into a four-bedroom unit, significantly doubling the monthly rent, by adding 500 square feet for $100,000.
He not only doubled the monthly rent from $2,000 to $4,200 but also increased the property's value significantly. Moreover, with an annual additional income of $25,000, he anticipates a remarkable 25% return on investment within five years, exemplifying the lucrative potential of strategic property upgrades.
"I was able to take out the money I put in to pay for the addition and use it to repay all of the credit card loans I took out as well as repay myself," Ferrera states.
However, transforming extra space into a functional bedroom is not a DIY project, according to experts. Huizar and Ferrera stress the importance of consulting architects and hiring professional contractors to ensure the project is executed correctly. "I read a couple of basic books and watched YouTube videos to get a high-level estimate of how much this would cost. Then I asked three contractors to give me quotes to make sure I was getting a good price," Ferrera remarks.
Patrick O’Sullivan, owner of getMULTIfamily, advises property owners to be prepared for potential reassessment by tax assessors post-project completion. Securing proper permits and following legal procedures is emphasized to avoid issues during property sales and potential fines. Furthermore, income tax implications should also be considered, as increased revenue may result in higher income tax bills.
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"If your local laws permit an additional room in your unit and you believe you’ll be able to make back your investment and then some, then it’s a wise decision," says Isaiah Henry, CEO of Seabreeze, a property management company that manages more than 100,000 properties on the West Coast.
