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The Movement of Backyard Offices: What Investors Need to Know

Jul 09, 2020 by Brad Cartier

Working from home (WFH) and outdoor spaces have each become a surprising new trend in real estate. The ongoing pandemic and remote-work policies have only served to exacerbate this major shift in how we live and work. Real estate investors must optimize their properties for WFH, but they should also consider how to better utilize outdoor space -- specifically with backyard offices.

In the end, the desire for home office space is only growing, and you only have so many indoor bedrooms and space to play with. So why not take advantage of your outdoor space as well? Here's an overview of the tiny home movement as it relates to outdoor office units, the pros and cons of these small studio offices, and whether real estate investors should try to get in on the action.

Costs are low for backyard office development

Considering you already have operating expenses for the existing property on the land, additional living spaces outdoors add very little to ongoing expenses. Perhaps some electricity or water if there's a bathroom, but other than that, backyard offices add minimal additional operating costs. Further, given you already own the land, total costs include materials and labor only, which drives up your return on investment (ROI).

Here are some reasons backyard offices are a cost-efficient investment.

  1. Build costs: Because backyard offices use such a small footprint, they are often highly economical to build or even purchase turn-key.
  2. Landscaping: Because you or your tenants are already cutting grass and landscaping, there are very little additional costs associated with putting in a backyard office.
  3. Land costs: You already own the land, so if you're installing any number of backyard office spaces, then your costs are strictly related to labor and materials.
  4. Building permits: In most cases, you will need some sort of building permit, although it may be cheaper if you choose to renovate an existing structure on the property. It's best practice to check with your local municipality and legal team first to better understand the requirements and costs.

The total cost to build a backyard office

So how much does it cost to build a brand new backyard studio office? It depends entirely on square footage and finishes. It also depends on if you do the work yourself, hire a contractor, or purchase a pre-made studio shed or office from a company that specializes in tiny home development.

Generally speaking, you're looking at $3,000 or more for construction materials. If you're hiring contractors to do the work, you can expect your total all-in costs to approximately double. For instance, if you want to build a small wooden office where all materials are going to cost $4,000, you then need to hire a carpenter, handyman, electrician, and maybe a plumber if you're putting a bathroom in. Your total costs for the build in this case will likely be closer to $8,000.

If you're purchasing a prefab outdoor office from a company, then the prices can vary anywhere from $10,000 all the way to above $100,000 depending on size and finishes. A standard sized backyard studio office at around 150 square feet could cost around $30,000. You also need to consider if the prices are inclusive of delivery and installation. Further, some backyard offices require a cement footing or some sort of foundational structure. All of this has additional costs.

How can backyard offices play a role in rental property investing?

As we move towards a greater emphasis on working from home, optimizing your real estate investments for outdoor and office space will be critical. Backyard offices fill this need perfectly. So how can you add to the net operating income (NOI) of your properties using backyard offices?

Consider if you were able to do a small self-contained 150-square-foot studio office for $30,000 all-in. If done correctly, you may be able to get an additional $400/month rent for that office, and there are very few additional operating expenses to consider. Therefore, your cap rate on the backyard office project in this scenario would be an astonishing 16%. And that's just one backyard office!

Or, perhaps you can build the backyard office yourself, and you have the room for two in the backyard. Each unit costs you $10,000 to build, and you're able to get $300 a month from current tenants for the rental of one, and you can rent out the other for $400 a month to someone who lives nearby and wants the extra office space. In this scenario, your additional gross income is $8,400 annually, but you add an additional $50 a month in utility expenses. Therefore, your total additional NOI is $7,800 at a total cost of $20,000. This gives your backyard offices a cap rate of 39%. Not too shabby!

Styles and types of backyard offices

Backyard offices can come in many different styles and sizes. Here are some of the more common ways real estate investors are implementing backyard office space. The basic idea is that the design involves a desk and lots of natural light.

  • Repurposed studio shed: Using an existing shed or cabin and converting the inside space into a small office area. This often requires putting in windows, flooring, and a small deck or staircase in the front. Similarly, you can repurpose a larger detached garage in a similar fashion, but this often costs more due to the larger square footage.
  • Prefab options: A simple Google search will yield significant results on companies that build prefabricated small and tiny offices that can be shipped to your properties and installed. These are typically more expensive, but if you don't have the time to manage the build yourself, a prefab garden office is a great option.
  • DIY backyard studio office or cabin: This is the most economical way to build a modern backyard office shed but requires the most work from you. By building it yourself, you get the materials yourself and don't require additional contractors.
  • Hybrid backyard office development: In this scenario, you buy a brand new shed or workshop from an existing carpentry or hardware shop. You will, however, ask the builder to make certain adjustments to fit the garden-office model, such as adding desk space, changing the layout, and using a different style door and windows.
  • Shipping container: A shipping container can be purchased and turned into a backyard retreat with a modern outdoor office.

Depending on the interior design and finishes, a backyard office can also double as a guest house or guest room.

The bottom line

Backyard offices are an excellent value-add for your existing rental properties. With the ability to keep costs low, a modern backyard office shed optimizes not only your outdoor space and income but embraces a growing work-from-home trend that will only get stronger in the future.

Take a moment to think about your current outdoor spaces. Do they have the room for a possible backyard office? Are there other properties in your area that offer this feature? What types of rents do you think you could get? Would you buy a prefab backyard office, hire a contractor, or do the work yourself? All of these questions can lead to your next real estate project and ultimately boost your cash flow.

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