Finishing basement before rental?

Question

Hi BP, wanted to gather your thoughts on what return you'd require on capital used to finish a basement. We'll be doing the majority of it ourselves, and a conservative estimate is $15k with about 20% margin for 750 sqft. This adds another bed, bath, finished laundry room, and rec area. Potentially a wet bar (included in that number) or without it knock a few grand off for cabinets and countertops.

The home is our current home that we've live-in-flipped over the last couple years and just cash out refi'd with the intentions to 'move on to the next one' in a year. It's a 1200 sqft 2/2 condo with loft very high finish quality that I estimate 1800-2000/mo in rent. Lower quality finishes in the same complex go for 2100+ with basements.

I've seen some posts about if the basement can generate another 100-200/mo (ie 8-16% on capital) it's a no brainer. It'll also add equity, although from prior appraisals they usually add about 15-20k in this area, so not a ton past what we're putting in.

The hangup is if we don't do this now we'll likely never do it once it goes into service. What's BP's thoughts on to finish or not to finish the basement?

Christopher Leon · Answer

I didn't even read your whole post as it was too long for my short attention span, but the first thing I thought was if I finish the basement, I'm just encouraging more people to live or occupy this space which increase wear and tear, and sure you'll get a few bucks more, question then becomes is it worth dealing with the headaches afterward. I like finished basements when retailing, but when it comes to rentals - it just depends on the property, location, profile of tenants you attract, etc. bottom line: depending on your business, it's more than just a financial question. Good luck

Jim Adrian · Answer

@Fred ColcloughI would do a nicer plastic laminate that looks like granite. Stainless steel sink in the wet bar is good. Having not see the space its hard to understand why you want to add other stainless steel appliances. If you are adding a frig (of any size) its another thing to fix when it breaks, so I wouldn't not add it. I would not add a kitchenette which sounds like you may be doing. This could very well be "over building" based on your "follow up" question. These extra items seem to be of convenience not needs. I would definitely look at what the area / neighbors have to be equal to them.

Mark Radford · Answer

Great idea but I'm torn because it's a condo. If you wind up with a 3/3 are you cool with possibly three people living there? If I don't mind roommates, a bedroom and my own private bath may be worth 800+ bucks a month in a desirable part of town. Two people may find it pricey but sell them that each could theoretically have their own private "floor." The extra full bath would be for guests to stink up and extra bedroom is a convenient 1st floor "office." So you can win in either scenario... But you could also have 3 people and their possible internal drama, their vehicles, and guests (also with their vehicles). If the condo folks don't ballyhoo it could be worth it. I personally wouldn't do it though and find another place for that scratch. I wouldn't "over-improve" downstairs if you decide to. Make it tasteful but sturdy. Whoever gets the basement room usually loses the coin toss.

Fred C. · Answer

I appreciate the different angles from everyone, both financial and other.Biggest Pro's - pretty good ROI, bigger pool of renters, build equityCon's - more wear and tear from more people in the home, potentially a higher than ideal time horizon to make back the investmentFollow up question - the home is pretty high finish quality (granite everywhere, SS appliances, etc) would you tend to say the basement should match that, or as it's "less valued square footage" do it on more of a budget?

Jim Adrian · Answer

@Fred ColcloughI would look at your return on investment on money spent. Typically you want to be under 7 years but for a rental you many want to consider 2 - 4 year rate of return. At $200 monthly increase its a little over 6 years to recoop your cost but at $300 monthly increase it now gets reasonable (4 yr). I like your idea but this is a numbers game. Getting to a 3rd bedroom opens up your rental pool greatly.

Dylan McLauchlan · Answer

Depends on the property. After reading about your situation it makes sense to do it.If it costs 15k and you increase cash flow by 150/mo then it works out to 12% ROI, AND if it adds at least 15k to the appraised value of the house you can pull that forced equity out. Being able to pull your renovation money out through some sort of refinance would boost your cash on cash ROI even higherUnless you have a better opportunity to chase why not?