Wouldn’t it be nice to throw up a relatively inexpensive backyard cottage, a little privacy fence and then collect rent on it? For some homeowners, it’s just the type of supplemental income that could subsidize a mortgage or help fill-up a savings account.
But, like death and taxes, nothing as simple as we wish.
With the Austin City Council poised to debate easing the restrictions on accessory dwellings this Spring, now may be the time to start doing the math on how it could work out on your property.
Let’s start with a couple caveats. The cost of building an accessory dwelling of up to 850 square feet has a huge price range, depending on how spartan or luxurious you go. And, corresponding permit fees and land preparation could have a big impact on the overall cost.
Next, let’s look at how the law works now, and how it could change. Current codes allow secondary homes of up to 850 square feet on lots that are 7,000 square feet or more. A few neighborhoods have exceptions to that, allowing such dwellings on lots larger than 5,750 square feet.
Such backyard rental units, or granny flats or in-law homes are relatively common in the Hyde Park and Brentwood neighborhoods in Austin.
But it’s the other regulatory hurdles that have advocates for affordable housing in Austin looking for change. Perhaps the most significant is the requirement that backyard apartments and homes have a 9-foot-wide driveway.
Under a proposal being debated now, that driveway requirement would be zapped, allowing for on-street parking.
For many, more cars on the street and more short-term renters in the neighborhood are cause for concern. On the other side, it could provide cheaper housing for Austin’s booming population while giving homeowners an option for supplemental income that could help pay for ever-rising property taxes.
Permits, Building and Rental Income
While simple tiny homes that ride on trailers can cost as little as $10,000, most backyard dwellings that can be rented out end up costing much more. In most cases, prices top $60,000 for relatively small and simple units and range beyond $200,000 for custom-designed cottages.
Likewise, garage conversions and remodeling can quickly add up when you incorporate plumbing, electric, air and other required utilities.
For our purposes, let’s assume you can build a reasonably nice place for $150,000, including design, permits, land preparation, inspections, appliances and other associated costs.
Depending on your location, that unit could rent for $600 to $1,500 in Austin. We’ll settle near the middle — $900 — with the understanding that rental rates will increase significantly over time.
Assuming you put 20 percent down on the $150,000 project and take out a 30-year loan at 3.92 percent interest, your mortgage, insurance and taxes would run roughly $775 per month. That means that you could start making money on the first month your renter moves in, allowing you more disposable income or the opportunity to pay your loan off early.
Assuming you profit roughly $125 a month — or $1,500 per year — you could generate about $30,000 of additional income in 20 years just based on current rent levels. As rents increase over time, the profit margin will increase. Of course, a considerable chunk of that would likely need to flow to an account dedicated to property maintenance and other costs.
During your ownership period the figures will change as the value of your property rises along with rental rates. But a fixed mortgage remains static and provides a tax shelter via mortgage deductions on your taxes.
So is it a good deal? Sure, it could be. But it hinges largely on the delicate balance of construction costs and rental prices. At present, Austin shows no signs of slowing down, with its population growth among the top in the nation each year.
Outside of the pure construction costs and rental income calculation, homeowners also have to consider other pros and cons.
But many homeowners associations prohibit renting a property out and some properties may also be subject to deed restrictions that limit the property’s use. And renting can be a headache. Background checks, property maintenance, bounced rent checks and evictions could take much of the fun out of the dream.