basement apartment investment question

[Temu Chechu]

   My friend owns a duplex near the University of Minnesota that he rents to students.  The duplex is a 3 bedroom second floor unit, and a 2 bedroom main floor unit.  It also has an unfinished basement that currently has 2 washers, 2 dryers and also has the 2 boilers and 2 waters heaters.  I tell him he should put a washer/dryer in each unit,  and turn the basement into a separate one bedroom apartment, maybe 600 square feet of living space  

  I am trying to figure out what the correct formula would be.  If it was going to cost 30k for the renovation but you can assume a constant income of say 1k a month in todays dollars.  How would that compare to investing that same 30k in the stock market?  or how should I think about it?  It's not like he will have to pay any more money for a mortgage because he already owns the property he is just not using the basement as an additional income source.  I know how to use the compound interest calculator to see what happens at 7 percent for the stock market but I'm confused how the rental income works because he could just invest that additional 1k a month into the stock market too?  Let me know.  Thanks

[Eric Johnson]

Baseline for stock market returns are usually.. what 6-7% something in the long-term? If you put 30k into the basement and rent it (I'm assuming you know how to get permits, check with local ordinance to see if it's legal etc.) for $1,000 that's an annual gross revenue of $12,000. 

$1,000 x 12 months = $12,000 gross / year

$12,000 / by cash invested ($30,000) = .4 or 40%. You are making 40% gross return.

To calculate net, just subtract your expenses. Should still be way higher than stock market. And yes, he can then take the cashflow from this and reinvest it into other asset classes or investment vehicles. That's my take and it's a kind of a no-brainer, assuming you can do it.