The mother-in-law unit

Image result for mother in law unit

                                        Image provided by: http://www.servicelane.com/photos/view/5358-Mother-in-law-unit

 

While the debate roils regarding the impacts on housing affordability that mother-in-law rental unit additions might provide, I have seen very little consideration for the practicality of actually stimulating the supply of such units. There appears to be an innate assumption that single family property owners unanimously undertake property use considerations through the highly complex and financially minded lens used by most sophisticated developers. From a zoning and housing affordability perspective adding a triplex to every city block in a city with rampant housing demand sounds great. However, for many a single family land owner adding a mother-in-law unit sounds like a daunting task.

Example Scenario:

Imagine that you are a software developer that works for XYZ.com and (lucky you) were able to buy a residential property early in the recent housing cycle. You have a friend that figured out that your property is zoned for adding a mother-in-law unit. Making some additional cash while making use of unused space on your property sounds great. What do you do next?

Considerations:

How do you finance this project?

You have no experience in financing multifamily unit additions and you don’t have enough cash to either build a single family unit on your parcel or build out a fully functional living space in your basement. You easily have enough collateral + income to finance this project but you have no idea how to make this happen. Will a second loan take a junior position to the home mortgage lender? Will this violate the terms of the home purchase mortgage? Do lenders offer a program that blends residential home lending with multifamily mother-in-law considerations?

Once built: How do you manage a rental unit?

You have absolutely no background in property management. How will I go about leasing this space? What will my lease agreement say? Who will maintain financial reporting for tax purposes? Do I need to establish a reserve account? Security deposit? If there is a flood who do I call? The burden of starting a mini property management company for your mother-in-law unit is overwhelming!

What impact will this have on property value?

You bought this house because it was a great deal and no matter what you tell your friends… this is a significant financial investment. Is there demand in the single family market for mother-in-law unit additions? Will this ultimately make a home sale more difficult due to the financing considerations described above?

Although many scenarios leading up to the addition of mother-in-law units may provide unique solutions to the problems presented in scenario above, the crux of the mother-in-law unit solution is that most single family home owners have absolutely no background in multifamily real estate. The ingredients are there: property owners with the space, the zoning, and an appreciation for additional cash on a monthly basis. Unfortunately, the ability to actually execute on adding such a unit (without completely winging it) is often not feasible.

A Proposed Solution:

A private market solution is needed to make the addition of mother-in-law units a value creation opportunity that is relatively easy and accessible for single family landowners. The hybrid residential multifamily asset, with the proper private market solution could and should have unique financing, management, and value considerations.

A mother-in-law property management solution

If there was a property management company that specialized in managing mother-in-law rental units much of the data and expertise needed to support unique financing, operational, and valuation solutions could be generated. Such a company could provide market analysis, project cash flows, establish reserves and even guarantee a portion of cash flows towards loan payments on behalf of property owners.

How do you finance this project?

            The proposed property management solution could generate a pro forma using data generated from its management activities. It could also provide consulting and development management services on behalf of single family owners, providing access to a professional network of contractors and vendors required to manage risk. By centralizing financial performance data and ensuring best practice property management services, lenders might actually be interested in considering loans unique to mother-in-law properties.

Once built: How do you manage a rental unit?

            You don’t. You let the proposed property management company manage the unit. They take care of leasing, maintenance, legal considerations, banking, and financial reporting. They could provide a swath of rental strategies that best fits the needs of home owners regarding length of lease, access to common amenities (such as a garden or backyard), and or the use of parking spaces.

What impact will this have on property value?

This is a difficult question to answer. The value created by ensuring best in class financial management services for this hybrid asset class is hard to estimate. It would make the addition of mother-in-law units a painless process for landowners while providing assurance of legal and financial regulatory conformance. This could lead to unique home purchase loans that incorporate mother-in-law cash flows into the borrower’s credit considerations.  It would provide home owners and potential home buyers a measured analysis of the financial impacts that mother-in-law units create. It would create a market for single family home owners looking to purchase properties with additional cash flows with little to no burden to the buyer.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s