Help with ROI calculation on basement ADU

[Gerald Joyce]

My wife and I just got done rehabbing a brick two flat in Ravenswood Gardens. All new electric, plumbing, HVAC, etc. We didn't touch the basement. The basement has a 7'6" ceiling and dedicated doors for both ingress and egress. The GC said it's a good candidate for an ADU and that she can put a 3 bedroom, 1 bath unit in there for $120k the has flood control, dedicated utilities, etc. I would estimate that we would have to carry the construction loan for 6 months before we could rent it for $1600 - $1800 a month. What is the formula that you guys would use to calculate ROI and whether the investment was worth it? Any ballpark idea what percentage our property taxes would go up if we went from 2 to 3 units and how does that get plugged into the calculation? Anything else that should be added and calculated in? We have worked with this GC in the past and she is generally very good at giving a number and sticking to it. My wife and I currently live in one of the existing apartments. If we moved out and didn't do the ADU, the building would cash flow about $500 a month (more, if rates come down and we refinance). If we stay, our tenant pays more than half of our mortgage and we live in a much nicer apartment than we could probably rent. I would like to know if the investment in an ADU makes sense. I spoke to a builder friend in the neighborhood who has done a ton of two flat conversions and McMansions in the St. Bens/Roscoe Village/Lincoln Square area and after 5 seconds of thinking, he thought it was a good idea. That's off the top of his head though. I was wondering what you guys thought.

[Jake Baker]

@Gerald Joyce

I just did this on my property in Jacksonville. SFR with a massive detached garage in a great area for airbnb.

You know the current value of the home without the conversion.

Calculate the value of the home with the conversion. (have your agent comp this)

You know your rehab costs for the conversion. 

How much will you equity increase compared to your rehab and holding expenses. 

[Henry Lazerow]

If they aren't digging down the basemen $120k is too high. Shop around it can likely be done around $80k. I would say a basement ADU should add $150k range of equity in Ravenswood so definitely worth it + the cashflow. Sounds like a cool project!

[Gerald Joyce]

They will take the floor out down to the footing, rework all the drains in the building, install drain tile on the inside of the foundation that drains to a sump. Overhead sewer and ejector pit also. 

I am not interested in the equity of the building so much as we plan to hold it for a very long time. In terms of ROI, I was really thinking about rent vs. cost calculation and if it's worth it. What is the general calculation/guidelines on should I do X upgrade to get Y rent (taking into account an increase in property taxes)? Also, any very ballparks idea of how much property taxes might go up for something like this?

[Henry Lazerow]

I would look at it x invested vs x equity gained but you could look at the cost of capital vs cashflow. I still would say get more quotes as I had a client do similar project on a likely bigger basement (oversized bronzeville building) for around $80k.

[Jonathan Klemm]

Hey @Gerald Joyce - I am a sucker for utilizing as much space in my own Chicago buildings as I can....even if the numbers don't pencil out perfectly on the cash flow because like your Ravenwood building my buildings are in Bucktown and I know the long-term appreciation will far out way the short term cash flow...

The question is, with your current situation can you bridge that short coming?

The question about taxes is a really good one....I'd love to hear if anyone else @Brie Schmidt or @Mark Ainley knows anyone who has done an ADU and how that affected the taxes.