The majority of my clients who add a second suite to their property fall in one of the following two categories.
1. An investor who intends to hold a property long term to gain from appreciation and mortgage pay down, while benefiting from the higher than normal cash flow associated with a 2-unit property.
2. A homeowner who wants to get a "mortgage helper" by renting out the unit. Sometimes this income can be a determining factor on whether they can even afford their home.
A smaller percentage of folks actually buy a single family home, add in a second suite, and sell it right after. In other words, they flip it. Generally speaking I don't recommend flipping a 2-unit home because I think that holding it long term is a better strategy.
But then again, I generally don't recommend flipping period. That doesn't mean it won't work for some investors.
In many cases, the immediate income associated with flipping may be more suited towards an active investor in a rapid growth mindset, rather than a passive income mindset.
And if you're the type of person that is very good at controlling renovations costs and create a very streamlined approach, then flipping might be the right strategy for you.
Doing a second suite flip can make a lot of sense, because the potential buyer may really value the addition of a fully functional self contained suite that can bring in extra income, or be a comfortable apartment for a close family member or friend.
This can in turn result in a much higher demand and greater value.
If your intentions is to add a second suite to sell, here are a few tips to increase your chances of success.
1. Control the Costs
We know that house flipping is fraught with pitfalls and unexpected expenses, and it's not as easy as HGTV makes it out to be.
In addition to the cost of the renos, there are agent fees, land transfer taxes, and legal fees in a transaction that can really eat up all the potential profit. Controlling costs is critical.
This means hiring individual trades, and getting lower cost materials may be the strategy. You may forego retail for building materials, but rather use other less expensive options (eg. used items on Kijiji, auctions, ReStore, warehouse type stores, etc). If you're able to have multiple projects on the go, you can benefit from scaling and getting better pricing.
Additionally if you can manage the project yourself, you can potentially save 20-30% of the total project cost (which is the typical margin associated with a good general contractor)
2. Focus on “Value Enhancers”
Although we know the value of a legal second suite, this may not be the case with many appraisers. They may be comparing your fully legal beautifully renovated suite to the house down the street that contains the scary and illegal unit.
This is why it's still important to focus on the cosmetic stuff, such as a really nice bathroom and kitchen, with great curb appeal, so that you will get the higher value when the appraiser comes by.
Adding more bedrooms can also help with the valuation.
3. Buy A Property With "Good Bones"
As a former home inspector and a building science grad, I used to roll my eyes whenever a Realtor would use the phrase "good bones" to describe a house.
I've since chilled out, and accepted it as way to indicate that a house has structural integrity, with mechanical, electrical and plumbing systems in good working order. In conjunction with the 2 points above, you should try to find houses where the homeowner has spared no expenses on these important items.
These items are expensive for them, and take precedent over updating the kitchen, bathroom, and front yard. These leaves you plenty of opportunity to increase the homes value with the "value enhancers" described in item #2 above.
I generally find that first generation homeowners (who have lived in the house since they were built) are good candidates for these types of properties.
4. Get A High Quality, High Paying Tenant
Getting a high quality tenant who pays market or above market rents for the second suite can really enhance the appeal of the property to someone who needs the additional income to cover the mortgage and other expenses.
In fact, this is something a lender may require the home buyer to prove in the form of lease agreements, and may take 100% of the rental income into consideration when underwriting the mortgage.
You, as a sophisticated investor, can really increase the home’s perceived value if you can "build in" a great income generator.
5. Sell To Other Investors
With the current market, you should be able to locate a property that will generate $400 to $600 in monthly cash flow (after all expenses and borrowing costs for initial investments and renovation costs associated with adding in a second suite). This may take some time, and require the expertise of an experienced Realtor.
After going through the sweat equity of buying the property and working with the contractor during renovations, you can sell the property to another investor who simply wants a turnkey investment, and is quite happy with $100 to $200 in cash flow, or even to break even. This can result in a handsome profit when selling.
6. Legalize it
This last point is a no brainer. Make sure you do it legally, because many investors and homeowners don't want to take the risk of renting a suite that is illegal, for fear to being shut down by the city, or possibly face a fine. Doing it property will ensure that liability is reduced for all parties involved.
In many cases, you may have an existing illegal suite that is relatively easy to convert to a legal unit through a few simple building code revisions and minor renovations. This is something that should definitely be considered.
Run The Numbers
So here were my list of things you should consider if you're doing a flip where you are adding in a second suite. It's not for everyone, but I have come across a few investors where this has worked for them. If you decide to use this strategy, make certain to run all your numbers carefully.
Also keep in mind that this strategy may not be successful on your first at bat, but may take a couple of tries after you have honed in on all the details, and taken lessons from the inevitable mistakes.