Increase Rental Cash flow or Pay of student loans?

[androo]

put this in your mind vice:

I'm 30, $87k/year income from job and $36k/year in rental/airbnb income. Live-in landlord style house with 2 buddies. Drive a 1998 ford minivan with a dented side panel. I have $50k in the bank saved up.

Thinking of remodeling the house's basement into a separate unit. Would increase rental cash flow by $1000/mo. But it's going to cost me $30-$40k to finish.

I also have $31k in student loans. owe $280k on the house. no cc debt.

sheeit. should I pursue this basement remodel or pay off the student loan first?

[englyn]

Either's better than 50k just sitting in the bank.
What's the interest rate on your student loan? How confident are you in the rental and remodel estimates? Will the remodel increase the house's value by at least as much as the remodel cost, or will it make it hard to sell because it's an unusual layout with the separate unit?

[Dicey]

In addition to englyn's questions, I'd ask the following: What is your interest rate on the 280K loan? What is your % of equity? Is taking out a second to build the new unit an option? Better still, is taking out a second big enough to pay off your student debt and do the remodel a possibility? Mortgage debt, used wisely, helps you leverage into a better financial situation. Student debt, not so much.
Brilliant question, btw.

[trammatic]

It wouldn't be the MMMF if you weren't asked, how much of that basement reno could you do yourself? If you could cut the cost down to 10k or so, then it becomes a no-brainer.

[SunshineGirl]

Without knowing interest rates, other investments, etc., I would be inclined to pay off the student loan, because it seems you'd be able to build back your savings pretty quickly (you'd still be left with 20K, out of the 30K you need) , and because it reduces your monthly expenses.

I would also do a little thinking on how much you are pouring into one particular property vs. purchasing another. The additional income you think you could generate is great! - but unless you live in a city where basement apartments are common, most people would place a higher value on living at or above ground, so maybe your money should go toward a different property. Even though your return on your investment is lower, your assets are better diversified. Then again, if this will be a unit used for AirBnB, then it might be easier to manage if it's the same unit.

It's all about opportunity cost.

Could you tell us more about your AirBNB, etc. business/income and how it's been going for you? It sounds like a cool idea. 

[Rebecca Stapler]

I would pay off the SLs while remodeling the downstairs myself. I don't know how to remodel a basement, so that process would take a while, learning how to do it, but if I were a landlord, it would be information I would use in the long-terms. In the months when I need to invest in supplies for the basement, I would hold off on the SL repayment to buy the supplies.

[Hamster]

If you'd really make an extra $1000 per month, or $12,000 per year after expenseson a $40k investment, then that is over 10% 30% return, not including your time/labor. Any sense of how reliable those estimates are? Did you already account for expenses, vacancy, etc?

If you want to put in the time and your numbers are accurate, I can't imagine you'll beat that level of return easily anywhere, certainly not in paying down your student loans early. What rate are you paying, btw?

P.s. I love that you mention the older minivan with the dented side panel. Serious mustachian cred points, there.

[MakingSenseofCents]

I would pay off the student loans and then do as much to the basement as I could myself. Maybe save up some more cash as well?

[androo]

Diane C- I just refinanced the house to 4.3% fixed 30 year. Cashed out to pay off the 2nd, which was a city sponsored down payment assist loan - not designed for income properties.... Curious what you mean by using mortgage debt wisely. Can you elaborate?

Hamster - i like how you think, a 12% return plus appreciated property value. Vacancy rate in Portland is 2-3%. Need to confirm costs with a contractor, but a few years ago it was estimated at 30k.

Sunshine girl - Airbnb is awesome.  No real problems have developed in the 1 year i've been hosting. $22k annual income off a small guest house/garage conversion. Airbnb issues a 1099, so advise you to keep track of tax implications. Not all cities allow this sort of business but Portland encourages density.

Englyn - The student loans vary 4-5%. The bulk is a private loan subject to interest rate hikes. Ouch. Regarding the basement unit, I don't think the layout would affect re-sale. Imagine a sidewalk up leading up to a front door, and then that sidewalk branching off to the side of a house where you'd find a separate exterior basement stairwell for access. Subject to planning/zoning review but I think stairs are allowed in property setbacks.

[msilenus]

If you make half of what you're expecting, and it costs twice as much to do the work, then you're still left with a 7.5% ROI, which would be far from a disaster.  If you're anywhere close to right, then this isn't even close.

[AlmostIndependent]

Go for the extra rental. If the numbers are even close to what you say its a no brainer.

[willn]

Get rid of the debt. Student loan debt with 50K in the bank?  Blech.

Use the (presumably small) increase in monthly cash flow from not paying your loan and save it into a basement remodeling fund.  And 30-40K sounds like a lot to finish a rental basement.  You pay off the loan, have 10K left over, on your income you should save another 10K in like 3 months, finish the basement then for 20K. 

Now you've done both in less than 6  months.  No brainer indeed.