Is that worth investing money?

Question

Hi, I am new to Bigger Pockets and would love to hear your opinion.

I am a house owner in a great area of Washington DC.

I bought my row house with now my ex-husband in 2008. The house grew in value because of a prime DC location. Last fall  I bought out my ex out of the house with a new much higher mortgage including cash for renovation on the basement.

I needed basement rental income to pay for the new mortgage. After that I also planned on renting the main house and buy a new place for flipping or a duplex where I could rent out the other place.

What am I struggling with is investing into my house worth all that hassle and am I putting myself into a financial disaster?

I knew that I had to underpin the basement to create a Single Dwelling Unit because of the height restrictions. I am an architect and with a help of a friend who stamped my drawings we submitted for permit. Permit comments increased cost of my construction from around $85,000 to $120,000 (because of the structural requirements). In the process of all that my contractor demo’d the basement and started doing some other things, so I already invested some chunk of money.

With the new price increase I will need to find another $40-50.000 for the renovation. Looking at my house as a long-term investment, should I put myself in all that hassle or should I bite on already spent money and sell the house and invest into something new?

I am wondering what experienced people would do, as I want to start on the journey with rental properties and maybe some flipping.

Really appreciate anyone’s input.

Magdalena

Jessica Evans · Answer

Is it comfortable for you financially to do the basement renovations? Specifically, are you putting yourself in risky financial situations by taking on additional debt? If yes, then I'd say that it probably isn't worth it. My general philosophy is that if you have to stretch to the point where it's uncomfortable financially, then you're risking more than just a profit or return, and in that case you would probably be better off selling and making a different investment. Renovations can go wrong and the costs and timeline can increase significantly. On the other hand, if it's just a matter of the cost being more than you would like to spend, but not problematic, then I think that's a different scenario.

If you finished the basement but did not make it a separate rental unit, do you know how that would impact the long term rental potential? Capitol Hill is an area where there is significant demand for whole house rentals, particularly larger spaces (there are more apartments than homes for rent). My thought is finishing the basement but not creating a separate unit would likely be a fraction of the cost and maybe see a better return.

This is a pretty complex scenario to analyze, you may want to seek the advice of an experienced real estate agent in your area who might be able to give you better estimates on rental projections and resale potential.

Jack Seiden · Answer

Basement digouts are rarely worth it imo.

Jeremy Gifford · Answer

Sorry posted before I wrote anything. You may be able to get by with mini splits in the basement for some cost savings. This fall will begin the next election cycle spin up which always brings more people into the city. I think your rent estimates may be on the lower side depending on your location. DC gets more expensive by the day.

Magdalena Elliott · Answer

Hi John - the basement hasn't been improved yet beside the demolition of that was there before. Because I was planning on adding a separate entrance to the basement (SDU) my contactor also demo'd the stairs (from the main house to the basements) and in the place of stairs we created a laundry room, because the W/D needed to be added to the main house as well.

I also spent lots of money on the structural engineer's plans (I have architectural plans that I have done as well - these went  already through permit comments and are ready to be submitted for permit).

What made all of that  more expensive than I anticipated is the type of the house footing. It would need be underpin in 4'-0" increments and that adds on labor and the way how that needs to be done (more labor intense)

What I dont know now is if I should undo my steps - put a new stairs to the basement, do some cosmetic uplift  ( also waste all the money that I put into creating a new laundry room) and:

1. sell the house and invest that money somewhere else?

2. rent just the upper house (with unfinished basement)

3. or create two units with putting myself into a though very financial situation and hoping that this will pay off in a future.

What would experience people do if they are just starting the journey into investing in real estate?

House location - Capitol Hill in Washington DC- Amazing location by waking distance to the Capitol Building, restaurants, groceries. Lots of people would want to rent out here.

House's price on Zillow is $885.000

My new mortgage that I got this passed fall (after buying off my ex husband ) is $552,000 and that included $89,000 for renovation of the basement.

My new reality is that I need:

$120,000 for the contractor

+/-$10,000 adding AC to the house (my neighbor can do that for me )

+/-$10,000 for the  basement finishes

For renting basement as  LTR I could charge $1,800/mo for (1bed + DEN beautifully finished). Or do a STL with possibility of getting much more for that.

And I would also want to rent the rest of the house for +/-$3,300/mo

Currently my monthly mortgage payment is $3700 and that's a stretch for me.

I know that it's a long time till I will see the money, but what approach is worth perusing?

And would it make sense to refinance the house after the renovation and do a BRRRR.

If not, what would you do? I would love to get  input from someone from this great community.

Magdalena

John Teachout · Answer

Did the basement work add any value to the property or was it primarily paperwork?

Jason Piccolo · Answer

I would avoid dumping anymore money into the basement if you could.

Patricia Steiner · Answer

You're asking all the right questions and it seems to me that you know the answer.  Trust your instincts.

Just because you can, doesn't mean you should.

Dave A. · Answer

That sounds like a lot of money and a lot of work that may be better invested elsewhere. You may want to consider selling your current property and finding a new property that already has a permitted basement apartment. Or instead buy a duplex where you can live in one half.If you prefer to stay put, I would be looking for other properties in your neighborhood with finished basement apartments that have sold recently to use as comps. Chances are that it will take years, perhaps decades, before your property will appreciate enough to recoup that $120k investment in your basement. If you currently have extra bedrooms, you may want to consider listing those bedrooms as short-term rentals on AirBnB or mid-term rentals to travelling nurses on Furnishedfinder.com. You may find that those strategies put more in your pocket every month than the basement apartment would, without the expense of construction and permitting. Good luck!

Is that worth investing money?

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