Basement Rental (Income, Legal, Recommendations, etc.)

[Jashan Mundi]

I'm curious about knowing the market for finishing and renting a basement to tenants.
I've targeted the Detroit, Buffalo, and Niagara falls markets for single and/or multi-family houses, but I'm interested to hear from any investor outside of these markets.

Here in Canada, it's quite common to rent the main floor and basement so an investor gets that double source of rental income. I'm not sure if the situation is any different over in the States.

1) What kind of rent can I expect with a finished basement?
2) Are there any legal restrictions and/or procedures that I should know about before finishing the basement?

[Kenneth Garrett]

@Jashan Mundi

First you need to check the building and zoning requirements to make sure it can be done.  Some jurisdictions prohibit bedrooms in basements.  You need to pull a building permit.  You are required to have an emergency escape window in each bedroom.  Need to comply with ceiling height, usually 7 feet but it can vary.  You can’t just create another unit without the proper approvals.  I would hate to spend the money and find out it’s not allowed.

[Noah Gregory]

Agreed with @Kenneth Garrett make sure all space you plan to rent conforms with local laws. That being said you need to have a plan. Is this going to be a true split level such that both floors have full kitchen, laundry, entrances, etc. I currently rent in a basement like this and have all these separate from top level. It's also fine to have both floors share these but expect less rent as this is a more common house rental situation as opposed to two separate apartments. 

[Timothy Smith]

In Buffalo, you see very few finished basements as water table is high. Unless you are getting further out into the suburbs, the old fieldstone foundations are designed to seep and I believe would be prohibitively expensive to finish. But, maybe people here have done it. I just can't see it as a worthwhile pursuit, legal or not. 

[Matthew Irish-Jones]

@Jashan Mundi  you need to get finished basements approved by the local building dept.  They are not easy to get approved.  You will need an egress window added as well.  Depending on what type of foundation you have and the surrounding area that can be a big cost.  You also may need to get the property rezoned.  You can't add units without zoning approval.  When you add all of the above together you usually realize why not that many investors are doing this. 

[Jashan Mundi]

Originally posted by @Matthew Irish-Jones:

@Jashan Mundi  you need to get finished basements approved by the local building dept.  They are not easy to get approved.  You will need an egress window added as well.  Depending on what type of foundation you have and the surrounding area that can be a big cost.  You also may need to get the property rezoned.  You can't add units without zoning approval.  When you add all of the above together you usually realize why not that many investors are doing this. 

Would the better option to buy a duplex/triplex that can be rented for that multiple streams of rental income?
I didn't know that basement rentals weren't very common over in the States.

[Jashan Mundi]

Originally posted by @Timothy Smith:

In Buffalo, you see very few finished basements as water table is high. Unless you are getting further out into the suburbs, the old fieldstone foundations are designed to seep and I believe would be prohibitively expensive to finish. But, maybe people here have done it. I just can't see it as a worthwhile pursuit, legal or not. 

Appreciate the insights. Do you have any experience/knowledge with owning a property that can generate more than one source of rental income in the Buffalo market? What is the range of rent that I can expect from renting out a unit in multi-families?

I'm looking at multi-family houses like duplexs and triplexes if basement rentals aren't so common.

[Jashan Mundi]

Originally posted by @Noah Gregory:

Agreed with @Kenneth Garrett make sure all space you plan to rent conforms with local laws. That being said you need to have a plan. Is this going to be a true split level such that both floors have full kitchen, laundry, entrances, etc. I currently rent in a basement like this and have all these separate from top level. It's also fine to have both floors share these but expect less rent as this is a more common house rental situation as opposed to two separate apartments. 

I would definitely include a seperate full kitchen, laundry, entrances, etc. for the basement tenant.

If you don't mind me asking, in which market are you renting the basement? Is it common in your state for basement rentals?

[Noah Gregory]

@Jashan Mundi in outside Denver Colorado. And IF someone plans on doing the 2 split apartment type deal, yes it's very common for each space to be furnished with kitchen, laundry, entrance, etc. I would say more often you see duplex or room-by-room rental of a house, but this setup is decently common here. 

[Jashan Mundi]

@Noah Gregory great! I appreciate the help and much needed information.

[Timothy Smith]

@Jashan Mundi I see you are up on the outskirts of Toronto, where the basement apartment/efficiency is very common, so your question makes a lot more sense to me now. And for the reasons @Matthew Irish-Jones pointed out, it would be expensive, red tape, and honestly you wouldn't see a better return than finding a traditional duplex or triplex. Even turning attic space into apartments is hit-or-miss, and requires sprinkler systems and/or egress -- really not worth it until prices for those things drop. I have two houses that I've considered trying to convert the 3rd floor but it's just not feasible. However, those spaces would certainly be of value to a potential owner-occupied as people convert their attics to living space all the time -- often it's just not legal! But the city isn't knocking on the doors of owner-occupied to inspect. I use my own attic as living space but it doesn't count towards the square footage.

Regarding your question on finding rents and cash flow, my best advice is to search the various neighborhood rental listings on Zillow. 2- and 3-bedrooms in the immediate Buffalo area and suburbs range $800-1500 for something that is not considered "luxury". There is a tremendous drop-off in quality of units under $800 -- not a place that I spend any of my attention, but some do quite well in that market. Just as one example, I have a duplex with two 1200-sq ft units, 3-bedrooms each, new 4-piece kitchens, tiled bath, LVP/tile flooring throughout, and they rent for $1100 and $1200. I could have gotten more, but I wanted to have more choices in tenants and it was also mid-winter.

[Matthew Irish-Jones]

@Jashan Mundi yes that is the most common strategy. Finding and buying a cash flow positive 2-4 unit.

[Jashan Mundi]

@Matthew Irish-Jones @Timothy Smith @Noah Gregory @Kenneth Garrett thank you all for the help!!!

[James Carlson]

@Jashan Mundi

Like some others have said, check your zoning laws and allowable uses. Like @Noah Gregory said about Denver, we see those setups all the time and search them out for our clients wanting to house hack with a little more privacy. But in Denver (and in Colorado Springs where we see this basement setup as well), if the property is zoned single-unit (SU in Denver or R-1 in Colorado Springs), the law only allows you to rent out the basement separately when the owner is living there. Once they move out and stop house hacking that place, then technically the law only allows you to rent the whole space. 

We also try to find traditional style SFHs that are on lots zoned for two units. They're often in residential areas but a block off commercial areas or sometimes they're corner lots. This gives you a much better shot at doing the basement apartment and renting both legally. 

Good luck!