Basement Renovation: High Return On Investment

Basement renovation can quickly make a house more valuable. An investor I know built a bedroom in a basement for less than $1,500, and probably got $8,000 more for the house as a result. That is just one example of what you can do with basement space.

Unfinished basements are perhaps the most under-valued space in real estate. A little renovation, and you can quickly and efficiently raise the value of a house. Keep your eyes open for fixer uppers with large unfinished basements that can be made into livable space.

Basements are not common in all areas of the country, however, and they take many forms, such as the "Michigan Basement." This is essentially a hole in the dirt below the house. You want "full" basements, meaning they have the same square footage as the floor above.

You also need basements that are dry. Watch for water stains from previous seepage or flooding. If you are not certain you can resolve any moisture issues at a reasonable cost, don't buy the home. Also, see if basement space really does sell cheap where you are. Like anything else in real estate, basements can be valued differently in different areas.

A Basement Renovation Example

Let's say you are in an area where 1600 square-foot, 3-bedroom homes sell for around $150,000. You note that 2-bedroom homes of around 900 square feet sell for around $100,000, or about $110,000 with a full basement. That's just $10,000 dollars more for an extra 900 square feet of unfinished space.

You find a dirty 2-bedroom home which was a rental, make an offer of $96,000 and eventually get it for $99,000. A contractor tells you that he can panel the walls, create a bedroom on one side, install a ceiling, electrical outlets, carpet and two windows, and be finished in about three weeks. Other renovation options include a sliding glass door on the side where the property dips low.

A family room in the basement is what you decide on, with a slider opening to a patio, and one small bedroom. You get it all done for $21,000. Now you have a three bedroom home with 1,800 square feet of finished space - more than most houses in the area. Three months from the day you bought it, you sell it for $157,000.

How much can you make with a basement renovation like this? Lets assume that in this example there is $2,000 of other work on the house:

Purchase price: $99,000

Buying costs (closing fee, loan fee, etc.): $1,400
Total renovation costs (basement and other): $23,000
Holding costs (interest, insurance, electric, etc): $1,700
Real estate brokers commission (6%): $9,400

Total Expenses: $37,300

With the purchase price, the basement renovation and all the other expenses, you have $136,300 into the property. That means that with a sale at $157,000, you net $20,700. This assumes you pay to have the work done. Do it yourself, and you could make more profit (but then you have a job instead of an investment).

Note: See the page Basement Renovation Ideas for more on what can be done with a basement.

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