Author Topic: Improving a basement to rent it out  (Read 1210 times)

AMandM

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Improving a basement to rent it out
« on: April 17, 2018, 02:02:44 PM »
Our basement has the potential to be converted to a separate apartment, and we are trying to figure out how much it would be worth spending to do so. Is there some version of the 1% rule that applies to property that's already owned?  Since we already have the space, there isn't a purchase cost. Do I use the 1% rule but replace the purchase price with some fraction of the value of the total house? (Current value or the purchase price we paid?) 

Or should I use some completely different analysis?  Just calculate the expected ROI on the cost of renovating?

Thanks!

leighb

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Re: Improving a basement to rent it out
« Reply #1 on: April 22, 2018, 09:59:03 AM »
I would run your numbers based on the cost of improving the basement. Seems like that's the easiest comparison to purchase price.

I would also look into how property taxes are worked out in your area. I know where I live this might trigger a reassessment of the property. I've heard tail of folks adding a mother-in-law suit and having their taxes increase by $7000 because the entire property gets reassessed. 

Dicey

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Re: Improving a basement to rent it out
« Reply #2 on: April 22, 2018, 10:25:12 PM »
Batsignalling @waltworks. There are plenty of folks who can teach you the math, but Walt is one person I know of who has actually done this.

AMandM

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Re: Improving a basement to rent it out
« Reply #3 on: April 24, 2018, 07:34:40 PM »
I would run your numbers based on the cost of improving the basement. Seems like that's the easiest comparison to purchase price.

That was my first thought, but it allows a pretty big investment, bigger than seems reasonable.  $1000/month is a conservative estimate of what we could charge.  Allowing 10% for vacancy and 10% for R&M, and $100 annual permit fee, leaves a cash flow of $9500. Even if we were to put in the ludicrous sum of $95,000 it would give a ROI of 10%! That's too good to be true.

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I would also look into how property taxes are worked out in your area. I know where I live this might trigger a reassessment of the property. I've heard tail of folks adding a mother-in-law suit and having their taxes increase by $7000 because the entire property gets reassessed.
Yikes, reassessment had not occurred to me as a possibility since as long as we live in it while renting the basement the property will still be considered a SFH by the city. Thank you! I will definitely check with the city before I go any farther!

AMandM

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Re: Improving a basement to rent it out
« Reply #4 on: April 24, 2018, 07:39:24 PM »
Batsignalling @waltworks. There are plenty of folks who can teach you the math, but Walt is one person I know of who has actually done this.

Just found his thread about it. Thanks--it looks like just what I need!

YttriumNitrate

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Re: Improving a basement to rent it out
« Reply #5 on: April 25, 2018, 08:13:27 AM »
I fixed up and rented out my basement, and then eventually moved and rented out the whole house. The math on a basement renovation is tough because there are many things not easily quantifiable/predictable. For example, how much is the basement space worth to you in its current form? How is it worth to you not to have people living below you? Unless you meter the basement separately, how extra will you be spending on utilities?


Now that the house is fully rented out, the calculations are much easier. For example, in June I will be spending $5,000 to put in an egress window into one of the basement rooms to make it a legal bedroom. There was a corresponding $100 a month increase in rent, so that $5,000 improvement has a 18-20% rate of return (24% minus increased wear and tear from extra person).

waltworks

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Re: Improving a basement to rent it out
« Reply #6 on: April 25, 2018, 11:09:16 AM »
Hey, sorry I missed this thread earlier. If my original thread didn't help, I basically ran the usual numbers using the cost to renovate/finish the basement ($70k give or take) and then used the "25% rule" rather than 50% (the exterior of the structure is no different and won't require extra maintenance, property taxes only increase a few hundred bucks a year, and management is dead easy, plus there is almost zero chance of vacancy where we live since housing is in such crazy demand).

I think for our situation, 25% overhead is being pretty conservative and we'll actually do better, more like 10% just for occasional fixes/appliance breakdowns. We put a lot of effort into doing durable finishes/floor/etc. I could be wrong.

So at a rental price of $1300/mo (probably a little under market) I figure we're making roughly $12k/year or something like a 17% annual return (we paid cash for the finish work so there's no loan/mortgage involved).

Now, we had an enormous basement we didn't need or use. If you are giving up something by finishing the basement and locking it off, that's a different set of concerns. Likewise if you don't *like* people living under you, that would change things. But those aren't really quantifiable, so nobody but you can decide on that.

Good luck! And let us know what you decide!

-W

Dicey

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Re: Improving a basement to rent it out
« Reply #7 on: April 25, 2018, 12:41:24 PM »
Thanks, Walt. I know you'd be a great resource.

AMandM

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Re: Improving a basement to rent it out
« Reply #8 on: April 29, 2018, 07:21:14 AM »
I read Walt's whole thread--extremely helpful, thank you!!

Then I had another very helpful conversation with the landlord licencing person at city hall. It turns out that the county permitting process is even more onerous than I had thought. Almost anything more complicated than laying flooring requires a county permit, and most permit applications require drawings and have to be submitted by a licensed contractor! So we can hardly do any DIY work, which means it will be more expensive than we had imagined.

We also discussed the unquantifiables you mentioned, Walt.  We are in fact using some of the space now in ways that we could if necessary give up but we'd much rather not. In discussing the possibility of doing a smaller conversion, it became clear that my urban duplex childhood and his suburban quarter-acre lot one have produced very different attitudes to multifamily housing, shared laundry, etc.

So the upshot is that we have decided not to do anything right now. We'll wait till all the kids are out on their own, when we won't want the space anymore, and then we'll do the whole basement in a way that is totally separate from our living space.

Thanks again for the guidance!

hucktard

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Re: Improving a basement to rent it out
« Reply #9 on: April 30, 2018, 03:23:25 PM »
I finished my basement and rented it out for a few years. It paid for itself within a couple of years and will pay for itself another couple of times whenever I sell the house. I have no regrets. However, I did all the work myself, so the out of pocket cost was very low. It is definitely one of the best investments I have made. It should be pretty straightforward to figure out your ROI if you know how much its gonna cost and how much rent you can get. I wouldn't do it unless the ROI is greater than like 15% a year, because it takes work and impacts your life.