January 12, 2020
One of the best-kept real estate secrets is to convert a single-family home into a multi-dwelling duplex or triplex. This is an especially wise move here in the San Francisco Bay Area where we have a housing shortage due to the sheer number of younger people in the tech industry.
A remodel to a multi-unit home is also an ideal solution for empty nesters who prefer not to relocate from their family home, as well as for first time home owners or for investors who want a quicker return on their real estate investment.
While it's an enticing idea, creating a multi-unit home is not as easy as putting a wall in the middle of your house and calling it a day. First, you must check to see if you live in a zone that allows the transformation of single-family homes into one that can accommodate multiple units. Every state, every city, and sometimes every neighborhood has policies regarding the question. However, you can easily get all the necessary permits by talking to your local realtor. Then you'll need to check with a tax specialist to explain all the IRS rules involved in this real estate consideration.
Next you will need to find the right architect to ensure your layout is livable for you, your family, and for your tenants. Typically, there are two different designs you can choose from. The first, and most common, involves turning a single-family house into two or three separate units that share common walls. The second type consists of two or more living spaces on different levels, ground floor, first level and so on. Most people opt for the first solution since it requires less renovation and is much easier to pull off. However, if you decide on the common wall design, you can expect great results but bigger expenses. This involves a lot of planning, tearing down and building back up, with pipes being the biggest problem.
Throughout this project, you’re going to need an experienced team of contractors. Make sure to seek multiple bids and consider all your options. Then, when the building is complete, you'll need to invite a building inspector to conduct a full inspection of your property and point out any potential issues that should be taken care of by the builder. Once all is up to code, a building inspector will give you a certificate and occupancy permit.
Once the unit(s) are complete, you will need to solicit and interview tenants, or hire a property management company. As a baseline, you can expect to pay a typical residential property management firm between 8 – 12% of the monthly rental value of the property, plus expenses. If you remain in your home, you will need to anticipate engagement from tenants, either for repairs, or to mitigate other issues. While some home owners are happy to engage with tenants, be sure you have protocols in place to respect your - and their - expectations and personal boundaries.
Once your tenants are settled and boundaries properly established, I think you will find that creating a duplex or triplex from a larger home is the best way to downsize and achieve a good return on your investment.
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