Walk the blocks of University Heights between Park Boulevard and Texas Street and look past the front porches. A lot of these lots have a second house in the back. Sometimes it's a little stucco cottage, sometimes a converted garage, and sometimes a newer ADU with its own gate off the alley.
Investors love these. So do buyers who want help with the mortgage. The listing flyer usually makes it look easy: "Back unit rents for $2,800!"
Here's how I actually run it.
Say you buy a two-on-a-lot property for around $1.5 million, which is roughly where a lot of them have traded this year. With 20 percent down and a rate near 6.5 percent, principal and interest on a $1.2 million loan comes to about $7,600 a month. Add property tax at roughly 1.2 percent (about $1,500 a month) plus insurance, and you're near $9,300 before anything breaks.
Now the cottage. I don't plug in $2,800. I plug in what comparable one-bedrooms nearby have actually leased for, which lately has been closer to $2,400 to $2,600. Then I take out a month for turnover and set aside around 8 percent for repairs. After that, the back unit is bringing in something like $2,100 a month in real money. Your housing cost is about $7,200, not the $6,500 the flyer implied.
That's still a strong position in this neighborhood. It's just a different decision.
I've been building businesses for 25 years, and the habit that has saved me the most money is refusing to believe a projection until I've redone it with my own numbers. Gross rent on a flyer is a sales tool. Net rent is the number you live with.
The bigger trap is the permit. Plenty of these back cottages went up decades ago, or were added later, without a sign-off from the city. You can live happily with an unpermitted unit, but an appraiser may give it little or no value, and a lender may not count its rent toward your income. That can change how much you're able to borrow by a real amount. Before you write an offer, pull the permit history. It's a public record, and it takes an afternoon.
If the cottage is legal, you have a real income property. If it isn't, you have a nice studio for visiting family, and the price should reflect that.
Which one are you actually buying?