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May 10, 2007
Is Rental Conversion Worth It?
We're about to buy a brownstone. Small side, but still much more room than we're used to. It's always been a one family. As we crunch the budget we realize most of the perks of discretionary income will go away. We've briefly touched on the possibility of renting the first floor (nicest floor/but most feasible), at least for awhile-- but with insurance jump, c of o change, adding in kitchen and backyard stairs to upper floor, separating doors-- seems like the costs will go near 30K just for set up-- our current landlord says it's very difficult to make money on rentals in today's climate. Interested to hear other takes---
Comments
Not sure what your landlord is talking about, the rental market right now is red hot. If the one family is a reach i wouldn't buy it and i would continue to search for either a cheaper one family or a two family you can afford. I personally wouldn't want to get involved in a conversion like that. It could potentially end up taking a long time and it could cost more than 30k. (possibly).
Posted by: AnnaBee at May 10, 2007 2:45 PM
Think of it this way, if you spend $36,000 on the conversion and then rent the place for $1,000 a month for three years. It has paid for itself. After three years, it's all bonus.
Posted by: Anonymous at May 10, 2007 2:49 PM
Don't forget to factor in the extra tax you will need to pay on the rental income.
Posted by: Anonymous at May 10, 2007 2:57 PM
Right it is all of those things as well. What percentage does a landlord figure to write off of his rental income as expenses.
Posted by: haddock at May 10, 2007 3:14 PM
Check with an accountant. However, my understanding is you can set off against your rental income all your applciable expenses proportional to the rental portion of the house -- e.g., in a four story house with one story rental, roughly 20-25% (you need a land value in there) of your owner's insurance, mortgage, property taxes, heat, plus you can set off the costs of renovating (incl. c/o etc.) according to something like a 27-year amortizaton schedule. An accountant can tell you the exact rules and help you figure out how much of you rental income will be set off by costs. So don't assume you pay taxes on the whole income.
Posted by: Anonymous at May 10, 2007 3:41 PM
But then you also might incur increased property tax with the CoO change. And if you deduct mortgage interest from federal taxes that ammount allowed might be affected as well.
Posted by: Anonymous at May 10, 2007 5:16 PM
Don't do it. 1-fam is valued higher so you might get some short term cash but when you go to sell you will pay for it with a decreased valuation - compared to what you would get if it was still a 1-fam.
If it's the only way you can afford the place then do what you need to do but otherwise I wouldn't do it. If you really need the cash, think about finding another way to rent some space to someone without going through a conversion. Maybe there is a photographer, writer, etc. or someone like this that could use some space but doesn't need a kitchen.
Posted by: Anonymous at May 10, 2007 6:47 PM
In my experience, the appraised value of a house as a one family vs. that of a house with rental income depends upon the appraiser and the location of the house. My house is a one family,with professional space, although it is taxed as a 3-family (don't ask!). When going for a refinance, the first appraiser low-balled the appraisal, citing the house to be "only a one-family." The second appraiser placed the value of my home at 250K over that of the first appraiser. Apparently, he was extremely liberal in analyzing the house's gas and water lines (the kitchen had been moved to another floor but the old lines remained intact), along with the tax assessment, to declare my home as a 3-family for appraisal purposes.
BTW, I'm told that one-family homes appraise higher in the suburbs but that, in NYC, houses with rental income potential will comp higher than one-family homes.
Posted by: Anonymous at May 10, 2007 10:52 PM
Rent.
The price to rent spread is insane right now -- I pay roughly 40% of the cost of purchasing a similar condo as rent, and my landlord handles repairs and the standard PITA items.
Rents in bed-stuy are very low because there is plenty of supply, and because most people are on section 8. I can't imagine why you'd want to do a huge reno and then have to be a landlord and potentially have dreadful (nonpaying) tenants.
A house is a discretionary purchase.
If you can't afford it don't try
Posted by: Anonymous at May 11, 2007 9:34 AM
All the points above are well taken and good things to consider. Oddly, however, no one has suggested that OP check out the rental market. We don't even know OP's n'hood. OP should figure out the likely income based on comps in the area and crunch the numbers, with tax implications and everything. Then balance all the stuff everyone said above. Big difference b/w $1200/mo and $1800/mo. Cruise the Craigslist listings in your area for similar size and configuration and you'll get an idea.
Posted by: Anonymous at May 11, 2007 10:07 AM
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