The Commonwealth Blog

Monday, April 15, 2019

Should You Invest in a Guesthouse?

Building a cottage in your backyard could be a fun and fruitful project, but you’ll want to think twice about investing large sums of money into an additional property. While convenient for family, friends, and renting to tenants, guesthouses require a lot of planning and maintenance to become worthwhile investments. If managed properly, your new guesthouse will make tenants happy and be a source of extra money.

Planning Properly

Begin by investigating local building codes and real estate laws. Hiding an unpermitted building behind your home will cause more harm than good if insurance companies consider your property risky or illegal. Even if your guesthouse properly meets construction standards, ADU (accessory dwelling unit) laws may prohibit building in your neighborhood. Many counties have relaxed regulations, so check local laws to ensure your guesthouse can be built in the first place.

Consider Financials

Mortgage programs determine if you can own a property with multiple residencies (and how you can use each property). Research conventional, Federal Housing Administration, and U.S. Department of Veterans Affairs loans for a better understanding of their impact on housing regulations. Consider, too, that a lender may calculate your rental income to determine how much money you’re allowed to borrow from financial institutions.

Local housing markets also impact earnings. Research the demand in your area, and look up guesthouses in your neighborhood that are similar in size and style to estimate the value of your planned project.

Lastly, you’ll want to think about managing utilities to increase your cash flow. Certain companies can set up utilities for guesthouses separately, requiring tenants to handle their own gas and energy usage. If this isn’t an option with your provider, determine your own energy usage beforehand to accurately charge renters for their own usage once they move in.

Welcoming Guests

A guesthouse is a great source of extra cash as a rental property (if managed properly), but there can be other perks, like welcoming friends and family into your home. If you’re prepared to host friends or strangers for a night or longer, you’ll likely enjoy the experience. If you’re not prepared to live in a communal environment, owning a guesthouse can quickly become a stressful ordeal. Consider how much you value privacy before welcoming others onto your property.  

Keeping Things in Tip-Top Shape

Owning a guesthouse also means maintain the property to keep tenants happy. If you’re not willing to make repairs and tend to the landscape, investing in a guesthouse may not be the best idea. Contrarily, if maintaining a clean and beautiful space excites you, renting out your little home can be very profitable.

Increase Your Property Value

Investing in a guesthouse increases your property value. After you’re through with all the research and building, you can rest assured knowing you’ll see a larger return on your investments if you ever decide to sell the place—perhaps one of the best reasons for adding a cute little cottage to the back of your home. 

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