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Basement Conversions - An Investment Strategy
Basement conversions can be a way to quickly make a home more valuable. Just be sure to do the math before you try this. You should also plan for a few surprises.
Why should you convert basements into living space? Because unfinished basements are the most under-valued space out there. Finish them, and you can quickly and efficiently raise the value of a home. You can even make an investment strategy of buying homes with large unfinished basements, in order to resell them for a profit.
Basements are not common in all areas of the country. They also take many forms, such as the "Michigan Basement," which is essentially a hole in the dirt that the house sits over. The basements you want for this strategy are known as "full" basements, meaning they have the same square footage as the floor above them.
You also want basements that are absolutely dry. Look for damp corners or water stains from previous seepage. Unless you know for sure that you can resolve any moisture issues - and at a reasonable cost - don't buy the house. You also want to check to see if basement space really does sell cheap in your area. Basements, like anything else in real estate, can be valued differently in different parts of the country.
A Basement Conversion Example
Suppose you find a neighborhood where the 1500 square-foot, 3-bedroom homes have been selling for around $135,000, and the 1000 square-foot , 2-bedroom homes without basements are selling for around $90,000.You also notice that 2-bedroom homes with full basements sell for about $100,000 - just $10,000 dollars more for that extra 1000 square feet of unfinished space.
You talk to a contractor. If done simply he can panel the walls, put in two walls for a bedroom on one side, install ceiling tiles, electrical outlets, carpet and two special windows - all for $16,000. He can do it in about two weeks time. The windows make the space legally habitable by allowing an exit in case of a fire.
Other alternatives include a sliding glass door and patio if the land dips low on one side. You might make two bedrooms as well. Put at one end of a basement, two bedrooms require just two new walls. Painting the basement wall without paneling them is possible too, if the cement blocks have a decent appearance. Light colors will brighten up the space.
You wait for the right opportunity, a 2-bedroom home which because it was a rental is dirty. You make an offer of $86,000 and eventually get it for $89,000. You decide on a family room in the basement, with a slider opening to a patio, and one small bedroom as well. This costs you $22,000. With closing costs and one month's holding costs, you now have $114,000 into the property.
You also have a three bedroom home with 2000 square feet of finished space - more square footage than most of the 3-bedrooms in the neighborhood. It takes two months to sell, but you get $139,000 for it. Holding costs added another $1,750 in expenses, a 5% commission cost you $6,950, and other closing costs were around $1300. That means you had a total of $124,000 into the project, giving you a profit of $15,000.
That isn't a large profit, but on the other hand, you are paying people to do all the work. If you find that this strategy can be replicated, you could have several projects going at once.
Another possibility? You could also look for homes with basements to convert in order to get more rent from a property. There are families that need four bedrooms, and a 2-bedroom home could be made to accommodate them. You might not be able to get cash flow by buying a renting out an existing four-bedroom home, but in this way you could have positive cash flow.
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