Strategy 27 of 107
Build or convert an accessory unit and rent it
What it is
Check local zoning for accessory dwelling units (a basement, garage or backyard unit).
Steps
- Check local zoning for accessory dwelling units (a basement, garage or backyard unit).
- Price the build and its financing honestly; the rent must cover that cost before any is extra.
- Send the net rent (after the unit's own costs and loan) to principal.
Repeat: Monthly rent.
Measure: Net monthly rent after the unit's costs.
Try it in the calculator Enter its amount in "Monthly non-income amount to principal". Add a payoff goal of 5 years to see what is still needed.
Risks
- Building costs, vacancy and tenant problems.
- Permits, insurance changes and higher property tax.
- Rental income is taxable.
Who it fits
Married couples, Business owners, Grandmas and grandpas (62 and over), Higher earners, Average household
Needs
A spare room, unit or space to rent
How predictable
Depends on people or program rules (tenants, family, IRS records, lenders)
A worked example (hypothetical, not guaranteed)
Picture a hypothetical household (married couples). They owe $300,000 at 6.5% with 30 years left. The required payment is $1,896 a month, and that payment, which comes from income, never changes in this example.
They follow the steps: check local zoning for accessory dwelling units (a basement, garage or backyard unit).
Suppose it brings $600 a month on principal from this strategy, not from the paycheck. The loan would be paid off in 16 years 3 months instead of 30 years, saving about $196,219 in interest. To finish in five years, they would still need about $3,374 a month more from other strategies. That is why the five-year sequences stack several at once.
The amount above is chosen only to show the arithmetic. It is not an estimate of what this strategy will produce for anyone. Put real numbers from the fact finder into the calculator.
Sources and more information
- Fannie Mae: Accessory dwelling unit income singlefamily.fanniemae.com
- Fannie Mae Selling Guide: Rental income from the subject property selling-guide.fanniemae.com
Where to get help
- CFPB: Find a HUD-approved housing counselor (free or low cost) consumerfinance.gov
Related strategies
- 26. First-time buyers: a Mortgage Credit Certificate
- 29. Rent the home by the day for photo shoots, filming and small events
- 30. Rent out the driveway, garage, shed or attic for parking and storage
- 31. Put the land to work: hunting lease, timber sale, billboard or cell-site lease
- 35. Home sharing through a nonprofit matching program
- 36. Landowners: a genuine conservation easement on land you keep