Can a rental unit add value to your property?

Can a rental unit add value to your property?

When Norma Rafferty’s father passed away, it made sense for her and her husband, Bob, to have a modest apartment addition for her mother built onto their home. A few calls showed neighborhood zoning and homeowner regulations allowed it if various permits were granted. They hired an architect to design an addition to fit well with the existing house.

Then they got bids from three contractors (after checking with the Better Business Bureau) and hired a firm recommended by friends at their church. The addition blended seamlessly with their house using the same style windows, siding, paint, and roofing.

Mom’s space was legally an “accessory apartment,” because although it connected to the house through the living room, she also had a separate outdoor entrance, a bathroom, and a modest kitchen with a cooktop, microwave, small fridge, and an oven large enough to bake her famous chocolate chip cookies. The floor plan also included a separate bedroom with a good-sized closet and a living area with enough room to entertain friends.

The long-range plan was that once Mom no longer needed the apartment, Norma and Bob would use it as a rental it to augment their retirement income. In the end, however, they opted to convert the space to a luxurious master bedroom suite for themselves complete with a sauna and a large hot tub.

Does an extra unit increase value?

Options for adding rental spaces vary from creating a full apartment to converting a walk-out basement or space over a garage into a modest studio with a separate entrance, a bathroom with a small shower, and a kitchen sink with a microwave and mini-fridge.

“When people are considering whether to add a unit, either for a relative or as long-term rental income, they ask me if it would add value to their property,” says REALTOR® Sara Greenfield, Principal Broker for Charlottesville Fine Homes and Properties. “I have seen homes transformed and the owners get to use rental income to offset the expense of upgrading and adding to the property.

“When you add a full bath and complete kitchen it definitely adds value to a home,” Greenfield continues, “but it’s not inexpensive. It generally entails finishing or adding space which often requires additional heating and air-conditioning. Plumbing and electrical work are another expense when creating a kitchen, a bathroom, and perhaps space for a washer and dryer.”

Does a rental unit help or hinder the sale of a property?

“I believe a separate living area helps sell a property,” says Jay Kalagher, a REALTOR® with Long & Foster in Charlottesville. “I find people who are house shopping don’t generally ask for properties with a rental, but when they see one with an extra property—whether new or a resale—they think it’s a good idea. They find uses for it and see a benefit to it because a rental unit can make great financial sense,”

Kalagher points out that this concept was very much a part of the planning for the new Belvedere subdivision in Albemarle County near Charlottesville. “Many of the Belvedere homes,” he explains, “are built with a garage. A ‘carriage house’ can be created above the garage which can be used as extra living space for the family or as a rental property.”

He says in Belvedere’s first phase of 116 dwellings about 90 have this carriage house capability. “About 60 or 70 of them were completed specifically as rentals,” he says.

Some things to consider

Before adding a rental unit, there are things to consider carefully. Will there be a loss of privacy or unwelcome noise from people living so close? Do you have adequate parking space? Can you handle the responsibility when the unit’s toilet backs up at midnight, or the fridge fails the day before Thanksgiving? Will it be difficult to find tenants?  Will your neighbors object?

And most important, what are local regulations, restrictions, and requirements?

What are the legalities for a separate unit?

If you are persuaded you want to do this, the next step is to check with your local zoning board, your neighborhood homeowner association and, for good will, your immediate neighbors. Whether it’s new construction or a conversion, you’ll need an architect or contractor who is qualified to draw up and submit plans to your local planning department to obtain a building permit and inspection schedule.

Craig Fabio, assistant zoning administrator for the City of Charlottesville, notes that these units are termed “accessory apartments,” whether interior as part of the existing dwelling or exterior in a separate building. “Especially since 2009,” he says, “we’ve seen people go that road to maintain their homes which may have lost value. They may have also lost jobs and this extra income can make a lot of difference in being able to keep their home.”

Charlottesville itself has a number of zoning districts. Fabio says the majority of the districts permit accessory apartments, although they may have differing restrictions on factors such as how many unrelated persons may share the space. “It’s a by-right use,” he says, “but you have to go through permitting, have a separate entrance, and meet building codes for exits and habitable space.”

He also points out that because different jurisdictions can have very different zoning and regulations in place, it’s essential to check the permitting requirements and process before beginning any construction or remodeling.

He says the city doesn’t really know how many accessory units there may be. “That’s just talking about the legal ones,” he says.  “We’re under the impression there are more that don’t have required permits,” he says. “They may have been around for forty years. When we find them, we review them to be sure they are a safe place for people to live.”

What might be the tax implications?

Keep impeccable financial records. If a family member will be using the space, you can still add the building expenses to your home’s basis. Check with your tax advisor in case the person could be claimed as a dependent.

If you will be renting out the space, it’s doubly important to keep an accurate record of your expenses which will often substantially offset the rental income on your tax return. Check IRS publication 527. You may be surprised at what you can claim. Construction and maintenance costs, and repairs to the rental premises are all expenses that can be deducted on Schedule E of your tax return.

Other expenses must be divided between the rental part and the part you use—rather as if they were two separate properties. You can deduct part of certain expenses on a percentage basis including a portion of expenses such as utilities, home mortgage interest, insurance premiums, and real estate property taxes on Schedule E.

Although setting up the bookkeeping can be complicated at first, after the first year it will be easier and offset by that steady rental income or the peace of mind knowing a family member is cared for close at hand,

Creating the second unit

Remember, things usually cost more than expected, so draw up a basic budget of how much you can realistically afford. Calculate expenses such as architectural plans, plumbing, electrical work, a heat pump or other way to heat and cool, fixtures, cabinetry, appliances, carpeting, painting, even paving. A small laundry area with washer and dryer is a definite plus when seeking good renters.

Obtain bids from several contractors and check their references carefully. Talk with persons who have used them about the quality of the work, the accuracy of the estimate and bid, how disruptive were the workers on the job, and whether they finished on time.

If you are at all handy, you can probably do much of the finishing work yourself. You may not be able to install a toilet or wire the ceiling for lights, but perhaps you can install kitchen and bathroom cabinets and flooring. It’s likely you can do the interior painting, install privacy blinds, and hook up appliances. Consider neutral colors in paint, tile, carpets, and floors.

Can you have a separate electrical meter installed? If not, you’ll need to calculate the portion of your electric bill used by your tenants. In any event, you’ll want to install the most energy-efficient appliances and lighting you can find.

Finding tenants

REALTOR® Kalagher says there is a clearly established rental market in this area. “People post properties on Craig’s List and they are rented pretty quickly,” he says. “In fact, some Charlottesville lenders will factor in an anticipated rent from an established accessory unit when evaluating potential mortgages.”

Prospective tenants include UVa students and visiting faculty, young people, older persons who are downsizing, and others. Some property owners prefer to engage a rental management company to handle the legalities and midnight emergencies. Many local real estate firms have rental management departments. Fees can vary.

Becoming a landlord brings a new set of challenges starting with arriving at an appropriate monthly rent that attracts tenants without leaving money on the table. This will depend on whether your offering is furnished, prices in your neighborhood, and your costs like taxes, insurance, utilities, mortgage payments, plus potential maintenance and repair.

Check out tenant candidates very carefully. Check their employment and credit reports, have a responsible co-signer for students, and contact former landlords. Your rental agreement should include your duties as a landlord, and the tenants’ responsibilities. Include terms about security deposit, late fees, and especially terms by which the lease may be broken by either party. If unrelated parties are renting, have each individual sign the lease.

It’s important to plan carefully before creating a rental property, but the financial rewards can be substantial.

NOTE: The Virginia Short Term Lodging Association (VSTLA) represents individuals in our region who offer short-term rentals of completely furnished rooms, guest houses, or entire homes. For example, the website Airbnb which brokers properties between homeowner and renter, recently showed 384 listings for Charlottesville, 124 in Lovingston, and hundreds more in other nearby zip codes. StayCharlottesville.com is another service offering a variety of short-term accommodations from apartments to cottages to estates in the region. This article, however, is addressing properties with separate units for family members or for long-term rental, rather than short term accommodations.

By Marilyn Pribus

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Marilyn Pribus and her husband live in Albemarle County near Charlottesville.