Life and Money With Helaine by Helaine Olen

Homeowner Toys With Turning Large Lot Into Retirement Cash

Dear Helaine: My house is in a booming neighborhood in an "it" city. I only have a $50,000 mortgage. The property would appraise for about $300,000. It's a large lot, with a house and detached garage in so-so condition. It needs some work.

I would like to buttress my retirement savings, and I have two ideas of what I can do. I could subdivide it, and then sell the lot for a pretty penny. I would lose my garage and most of my yard, but I would have a chunk of change in the bank, which I could invest in my retirement.

Or I could tear down the detached garage and build a new one with a granny flat apartment to rent above it. I could then do a traditional rental or Airbnb. (I'm leaning toward the traditional rental.) A friend of mine recently did something similar and, based on her experience, I speculate this would cost me about $125,000. Based on what rents are where I live, I believe I could rent the apartment for enough to cover the increased mortgage payment and other costs. What do you think? -- Home for Good

Dear Home for Good: The personal finance community likes to promote earning money as a landlord as "passive income," but it's frequently anything but. Tenants can call in the middle of the night, short-term guests can be wonderfully charming or a difficult handful. Either way, the person living in your property will be a most definite presence in your life. Expenses are often somewhat more than you expect -- you are now maintaining two properties, not one. You've doubled the number of sinks and roofs that can spring leaks.

That's not to say selling the land is an ideal situation either. It will cost you money in the long run -- homes lacking a detached garage or decent yard space do sell for less than those with them. You will, moreover, be living next to a construction site, and you'll ultimately have a neighbor you have no control in choosing living very close to your home. A difficult tenant is a relatively temporary problem, but you'll live next door to a problematic neighbor for a much longer period of time.

If you still want to go ahead after weighing all these pros and cons, I suggest sitting down separately with both a real estate attorney and an accountant. You want to know the laws regulating both short- and long-term rentals in your neck of the woods, and then you'll also want to run the numbers with someone knowledgeable, objective and neutral. You need to know whether you have a financial cushion for contingencies ranging from the inability to rent the property out at the price you need to paying for unexpected repairs. If we want something, it's easy to underestimate the potential expenses and make the numbers work in our head. It's harder to fool a professional.

(To ask Helaine a question, email her at askhelaine@gmail.com.)

(EDITORS: For editorial questions, please contact Sue Roush at sroush@amuniversal.com)