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Does a Guest House Add Property Value in Today’s Market?

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guest house living room

If you’re looking for a way to add value to your home, a guest house can be a wise investment.

For those wondering, “how much does a guest house increase property value?”, the answer may vary depending on a few important factors.

Read on to learn how and why a guest house adds property value and what you should do if you’re considering adding one to your home.

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Start by calculating your return on investment

If you’re going to invest money into a guest house, it’s crucial that you get a decent profit, or return as a result. The term ROI (return on investment) determines just how successful your investment is by comparing it to the upfront cost and operating costs to the profit you receive.

You can determine your guest house value by subtracting your annual overhead costs from the annual rental income (if you’re planning to rent it out). Then, add your equity build and divide everything by your total building cost. The rental income you receive is your cash flow, which can make a guest house an ongoing lucrative venture.

In order to get a great ROI, try to keep your initial investment low in comparison to the income you plan to receive. Build your guest house in the most cost-efficient way possible without sacrificing quality. 

Tips for efficient building

While the answer to the question of how much does a guest house increase property value can vary, the more efficient the property is, the better the return. When considering how to build your new guest house, try to keep it small yet comfortable.

A good average size for an investment guest home is between 600 and 1000 square feet. The more square footage, the more your upfront costs will be, as will the costs to maintain the house, pay for energy consumption, and more.

Try to build your guest home using durable and low-cost materials for the finishes. A luxury vinyl tile or engineered hardwood can be a great way to keep your costs down while still offering a beautiful look. Extra insulation and energy-efficient appliances will keep overhead costs down.

If you’re planning to use your guest house as a vacation rental, make sure you fill it with on-trend, stylish decor. Unique artwork, planters with succulents, and soft throw pillows will attract guests and give the house a warm, inviting aesthetic when you advertise.

How much does a guest house increase property value when renting it out?

Once your guest house is built, you can rent it to either short or long-term tenants. In terms of stability, a long-term tenant is best since they’ll be renting from you for at least a year or longer.

Since your guest house is right there next to or behind your home, it’s much easier to keep up with maintenance. Compare a few rental listings in your neighborhood and look at the current prices based on the size and features of the rentals around you to determine your monthly rental price.

Before you rent your guest house, make sure you’re abiding by local laws and draft a lease that fits the laws in your state. Consider adding a separate power meter so you can accurately charge your tenants separately for utilities.

Remember to keep your upfront costs low so that your monthly rent will recoup the cost quickly. A modest, nice guest house with a decent budget will provide you with enough returns to pay for the building in about two years or so.

The value of your guest house will vary in terms of rental income depending on your market. For example, a low-cost guest home in Seattle may recoup more money from rent than one built for the same cost in a rural or remote area.

Short-term vacation rentals

With the number of vacation apps and services always expanding, you can get some decent returns on your guest house by renting it short-term. Many Airbnb hosts net a decent profit every month, with at least half earning more than $500 per month in certain markets.

This number typically refers to hosts who only rent out a single room in their home. Those who rent complete properties like a guest house will likely net much more.

Before you decide to go this route, think about what your listing price should be in terms of how much you should charge per night. Then, determine how many nights per month you think the guest home will be occupied.

The key to success in this type of business is to be located in a busy market with a lot of activities and amenities. An Airbnb in Orlando, Florida will likely garner more money than one in rural Idaho, for example. Living in a tourist area will certainly give you a better advantage for a higher ROI.

Try the hybrid house approach

If you really want to get a higher return on your investment, consider living in the guest house and renting out your main home. In many instances, this simple change can help cover your entire mortgage each month and then some.

Homeowners who are willing to sacrifice living in a smaller space can see some pretty big returns over time. Renting out your main property at a higher rate can offer you the chance to live completely mortgage-free. Sometimes, you may even make a profit that can help you put money toward other things like a high-yield savings account or your child’s college fund.

Before you try this approach, it’s really important to crunch the numbers. Look at how much your total monthly costs are currently and decide if renting your main home will cover them, and then some.

Another way to “hack your home” is to rent the guest house to friends or family members. You’ll all save money by living somewhat together, and if you charge rent, you will still be able to recoup the cost of the guest home within a few years.

This option is especially helpful to those with elderly family members. It’s much cheaper than assisted living and you’ll be able to check on your loved one every day without ever having to leave your property. The average cost of assisted living can cost as much as $4,000 per month, so it’s easy to see how this option can save everyone money in the long run.

Selling your home: potential for profit

A guest house can add significant property value when it’s time to sell your home. Simply by having a guest house attached to your home, you’re adding a decent amount to the home’s total square footage.

If your guest house is detached, it will be considered a “line-item adjustment.” This has the potential to add anywhere from $10,000 to as much as $30,000 to your total asking price when you’re ready to sell.

Buyers looking for a separate place for their elderly parents or college-age children will love the concept of having a guest house. This is also an appealing option for younger buyers who want to host lots of friends and out of town visitors but still value their privacy.

If there are other homes near you with guest houses, the appraiser will have an easier time determining the value. Find out whether your home’s value will be determined per the additional square footage or if it will be added to the total asking price as a separate line-item adjustment.

Overall, a guest house is a profitable way to increase your property value as time goes on. The key is to find a reputable contractor that can build the home using durable materials at a low cost to help increase your ROI.

Boost your home’s value with a guest house

As you think about how much does a guest house increase property value, consider these options to help you determine the best way to get the most return on your investment. Whether you rent the house out long or short-term or use it to pay your mortgage, it’s a smart way to get cash flow as long as you build it smartly.

Always get several estimates before you commit to building a guest house, and make sure you’re following the current laws within your state and local jurisdiction. The key is to pay as little as possible upfront and take steps to make the most returns as quickly as possible.

If you need advice about selling your home or you’d like a valuation, please visit our website and contact us today to find out how we can help.

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