Single-family residential homes are a great entry point for new real estate investors looking to start a rental real estate portfolio. But as that portfolio grows, it's fairly common for investors to outgrow single-income assets looking for further diversification and multiple streams of income under one roof. One way to achieve this is via a single-family property to multifamily conversion. But before you start building walls and adding an extra front door, there are important considerations to take into account to determine if a multifamily conversion will be worth it in the long run.
What is a multifamily conversion?
A multifamily conversion, for the purposes of this article, will refer to the conversion of a single- family residential home into a multifamily residential property, which is a property that has two or more units. A multifamily conversion is not a property that was originally developed and built for intended multifamily use, like a duplex, triplex, or fourplex. Instead, a single-family residence is subdivided into two or more housing units, which can be done on separate floors if multistory, splitting one floor into separate dwellings, or converting large detached garages or basements into a secondary unit.
Multifamily conversions are fairly common in older, historic homes that have 2,000 square feet or more under one roof and are typically in a multi-floor dwelling. Typically, the units are approximately the same size but are situation dependent and may include shared common entryways, such as a stairwell or courtyard with private entrances to each individual residence. To be classified as a multifamily conversion or multifamily property, each new unit would need to meet certain requirements:
- Its own exterior door (potentially two depending on local regulations).
- At least one bedroom.
- A full kitchen.
- A full bathroom (with sink, toilet, and shower or bathtub).
- Separate heating/cooling systems.
- Its own utilities (usually).
What is the cost of a multifamily conversion?
It may seem like a fairly cost-effective approach since you aren't adding an actual addition in most cases, but a multifamily conversion -- particularly one that's done well and up to current codes -- can be costly. According to Home Advisors (NYSE: ANGI), the average cost of adding another bathroom into an existing structure can cost anywhere from $3,000 to $25,000. Adding a kitchen can cost another $6,000 - $50,000 depending on the size and quality of the job. Tack on adding new or extra ductwork for the furnace or cooling unit, which costs around $6,500, plus rezoning, permitting costs, and additional utility meters, and this "cost-effective" conversion could quickly run you $25,000 - $50,000 or more per additional unit.
Almost more important than the cost of converting a single-family home into a multifamily home is determining if you're legally allowed to do so. Before crunching numbers, you must first check with local zoning and building regulations. Many cities strictly regulate any sort of changes in use so that the character of the neighborhood is not altered and the population density does not tax the existing system (think parking, using neighborhood amenities, and transporting sewage).
Is a multifamily conversion worth it?
While the cost can be steep up front, the payoff may be worth it. Not only does a multifamily conversion add additional income streams while maintaining the same expenses, but in most instances the property's value will increase because of the increased rental potential. Carefully crunch your numbers and have a firm understanding of the conversion costs as it relates to potential income to see if the end result is worth the effort and up-front money.
If the single-family home you're considering converting is already in need of a heavy remodel, it could be an ideal time to convert. If you're interested in a particular area or city, call the zoning office and ask them which neighborhoods are already zoned for this type of conversion. Do not assume you will be able to change the zoning unless a process is already established for doing so. If a multifamily conversion is worth it in the long run, it ultimately comes down to assessing the specific details of the property at hand.