Is a basement apartment worth adding?

We have the opportunity add a basement apartment in our home. Does it make any sense?

basement apartment

Should we add a basement apartment in our house?

Longtime readers might recall that we kicked off a pretty significant basement remodel last year. We knew it was an inevitable future project, but we hadn’t wanted to start while we had such a little kid running around.

When my wife decided to change jobs, she ended up with some time off before starting the new job. An opportunity to have someone watch Pretired Baby while I smashed drywall was something that couldn’t be wasted. So I headed downstairs and grabbed my hammer.

As always, we underestimated how much time the project would take, mostly this time because we didn’t really figure in the time I’d have to keep things quiet for naptime. And because the scope kept expanding.

As we got deeper into the project, an idea that we’d talked about many times began to look increasingly realistic. The idea: add a basement apartment.

I talked quite awhile back about how we bought too much house when we moved here. We had specific things we were looking for and the size of the house wasn’t much of a consideration at the time. Although we love our house, I have to admit buying it was a significant mistake. A cheaper, more appropriately sized home would have been a smarter move. In fact, the extra amount we spent on this house is right about the same amount I currently need to declare myself officially pretired. Obviously if we were to downsize at some point (something that could still happen someday), I could declare myself financially free and be done with it. If we stay here, I will likely need to go back and bank a few more years of salary to put myself over the top.

Or is there another option? Could I downsize in-place? Let’s examine the situation.

  • Total house square footage: 2,500, split evenly upstairs and downstairs.
  • Upstairs layout: three bedrooms, one bathroom, dining room, kitchen. Bathroom is tiny.
  • Downstairs layout: One bathroom, which will be nicer than the upstairs bathroom when done, two bedrooms (One is tiny — only technically a bedroom, but would work for a kid. The other is currently planned as an office and has a fireplace in the room and no closet yet.)  There is an awkward entry area that would likely be a junk-collecting area and there is a large open room that would work nicely as a kitchen, but is currently planned as an exercise room. The laundry is also downstairs.
  • Our mortgage situation: Regular readers already know all about this, but the short story is I’ve paid off my portion of the mortgage to prepare for staying home with Pretired Baby. My wife now owes about $90,000 on her half, with about seven years until the loan matures. Her payment is around $1,500. Zillow puts the current value at $650,000. Appreciation was 11 percent and 14 percent the last two years, so if the market stays hot, we gain about $50,000 or so a year in value.
  • Other bills: Our core bills are around $1,600/month, so $800 each. We’ll call it $1,000 each to include some occasional splurges.
  • Potential rental income: We could easily get $800 for the space, potentially up to $1,000. While we’re daydreaming, it’s conceivable we could double that or even triple it if we went the VRBO route instead, although that would probably only be the high season, so likely we’d average back to the $1,000/month, especially once the extra tax and other expenses are considered.

That’s the big picture. So should we add a basement apartment or just finish up the space and enjoy it? I’m really not sure which way to go.

Yes, we should build a basement apartment:

  • More money is more money. Why wouldn’t we go get more since we’re already in mid-remodel anyway?
  • We’re not really using the space currently and things seem fine. We do have some things stored downstairs but that’d be a minor issue.
  • The extra money could essentially cover a nice chunk of our bills. If we brought in $1,000/month, we’d only need $500 each going forward. Appealing! And $1,000/month is about what my fourplex produced with a lot of hassle. This would be an easier way to get the same cashflow.

No, a basement apartment is a terrible idea:

  • Do we really want someone else living in our house? What if they’re nuts? We have a young child in the house. Is it safe?
  • There is extra work, so more scope creep. I’d have to run an additional drainline under the concrete floor. I’d also have to add laundry upstairs and while I sort of have a space for it, it’s awkward and would actually cause some storage issues.
  • Back to landlord hassles. I’ve really been enjoying not being a landlord the last few months. It’d really suck to go back.
  • We’d have to be considerate neighbors and keep the noise down. With a toddler running around and crying a few times every hour, that may not be possible. One of the best things about living in a house is that you can make lots of noise without annoying your neighbors.
  • Is $12,000 a year really worth it? We’re appreciating at four times that amount right now. I don’t mean to act like that’s pocket change, but in the grand scheme of things that amount of money doesn’t seem to compare favorably to the negatives.

As far as the extra works goes, the thing that scares me the most is adding laundry upstairs. Everything is possible, but the hassle and expense of that is off-putting. The biggest negative overall is just giving up part of our house — having a stranger around all the time. Maybe we’d get lucky and manage to rent to a busy airplane pilot who is gone all the time, but odds of that are slim. For $1,000/month, it just doesn’t seem worth it. If we were reliably bringing in $3,000/month or more, it’d be irresistibly doable.

But maybe I’m wrong. Small amounts of money do add up over time and this would greatly lower our overhead on a percentage basis. By effectively lowering my overhead to around $500/month, my existing pretirement fund would enough to cover all my bills, essentially rendering me essentially financially free without working another day of my life. (Naturally we probably wouldn’t want someone living in our house the rest of our lives, but presumably, we’d eventually sell and downsize so the rental phase would act as a bridge until the market ripened to where it became time to sell and move, at which time I’d have additional pretirement funds available.)

So on one hand, more work, more short-term expense and a major hit to our comfortable, private lives. On the other hand, I wouldn’t need to think about working ever again. Ever again. That sounds pretty sweet, too.

What do you think? We should add a basement apartment? What would you do? 

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37 Thoughts on “Is a basement apartment worth adding?

  1. Jon S. on April 28, 2014 at 6:48 am said:

    My “vote” would be no….based solely on personal preference. If you can stomach a quasi-roommate, the $ certainly would come in handy.

    • Pretired Nick on April 28, 2014 at 7:10 am said:

      Yeah, the good part is we’d live very separately — separate entrance, etc., but it’d still be pretty close quarters. I have to admit I’m leaning toward No.

  2. I’d do it Nick. It’s great you’re in a city that allows basement apartments. For me it’s all about the cash flow. Rent money TODAY is here and real…….capital appreciation tends to swing widely. Screen tenants well and get that basement rent-able buddy :o)
    Income Surfer recently posted…The Hallmarks of a Value InvestmentMy Profile

    • Pretired Nick on April 28, 2014 at 12:23 pm said:

      Oh, I should check to see if it’s allowed? Heh! I think it’d technically fall under rules for renting out a room in one’s house — and there really aren’t any rules on that. Worth looking into, though. Might be considered separate enough to be considered an apartment so that’s definitely a consideration because rules about bedroom size, etc. could kill the whole idea.

      • Believe it or not some municipalities, like several in New York and New Jersey, prohibit basement apartments on the grounds of fire safety……unless they also include the first floor. It’s unlikely you’ll have a problem, but worth a look. I look forward to seeing the completed renovation
        Income Surfer recently posted…The Hallmarks of a Value InvestmentMy Profile

        • Pretired Nick on April 29, 2014 at 5:15 am said:

          I’ll definitely look into it if we decide to go that route. The entrance is at the ground floor and the bedrooms both have big windows on the ground floor so there aren’t any major fire issues, fortunately.

          • Yea I agree with Income Surfer…you should make sure first. But it seems that since it’s a ground floor versus a basement, it should be fine. There’s more than one exit right? If you don’t need the extra space in the basement for storage or you don’t plan on using it as a family room or something like that I think it would be nice to get some cash flow out of it. It’s a separate entrance so it’s not like you guys would be sharing any common areas.
            Andrew@LivingRichCheaply recently posted…Small Baby, Small Apartment, Small BudgetMy Profile

            • Pretired Nick on April 29, 2014 at 12:16 pm said:

              It would be nice, but even though there is a separate entrance and we won’t really need to interact with them much, it’d still kind of suck. We will definitely use it if we don’t rent it and I kind of can’t wait to settle in down there. But maybe I could put it off for some sweet, sweet cashflow.

  3. I would lean toward saying no based on the baby and laundry factors. Also, if you sell the home you may have to undo some of the renovations to turn it back into a single family home.

    What about a third option? You didn’t mention how much the reno will raise your home value. Why not complete the reno to maximize value as a single family home, sell it, buy a smaller home and put the profit into your investment account?
    Chattanooga Cheapster recently posted…Cheapster Challenge – Hypermiling UpdateMy Profile

    • Pretired Nick on April 28, 2014 at 12:26 pm said:

      Yeah, doing this work would actually bring down the value. We’d certainly want to remove the basement apartment before selling. That wouldn’t be too difficult, but is certainly more than nothing. The third option is basically our default plan. We are, however, looking at least three years down the road for that, mostly to recover the cost of work we’ve already done here. And, it’d be nice to actually enjoy a house I rehabbed for once in my life.

  4. Great analytical framework for looking at the issue. I’m not sure the decision is any easier though!

    The good part of having the basement apartment is you can always stop renting it if it’s too burdensome, with the option to resume renting it out if you need the cash. And it might come in handy even if not rented. An in-laws suite, the occasional VRBO/Airbnb rental, or a nice guest suite if the RootofGood family ever makes it to the west coast.

    It would definitely increase the value of the house just due to the bump in finished square footage and possibilities.
    Justin @ Root of Good recently posted…When It Pays To Be CheapMy Profile

    • Pretired Nick on April 28, 2014 at 12:29 pm said:

      Finishing the basement will definitely increase our value, but I think the apartment will actually bring the value down (not true for everyone, but in terms of what people are looking for in this neighborhood, I think it’s true.)
      You nailed one of our thoughts as well. Just renting it occasionally to VRBO customers and then using it for family as needed. We even thought about not putting in the extra laundry upstairs upstairs and just sneaking down to do laundry when no one was renting it. Not sure that would bring in enough money to even bother with, though.

      • I guess you must live in a higher class neighborhood than me! 😉

        I figured it would be a nice selling point – call it an “in-law suite” instead of an apartment in the MLS listing. Perfect for owners with an older parent or a boomerang 20-something kid they want to live with, but not share all the spaces with. Of course stairs down to the basement might be a big impediment to those looking to house an elder down there.
        Justin @ Root of Good recently posted…When It Pays To Be CheapMy Profile

        • Pretired Nick on April 29, 2014 at 5:16 am said:

          I suppose it is a little fancypants here. A house up the street (nicer than ours) just sold for over $1 million. It’s a prized neighborhood. We were lucky to even find a place here and in fact we’ve been getting letters from someone saying they want to buy our house.

  5. We made our downstairs into an apartment and we share a “common” laundry space down there in the entryway. Its not too pretty, but if you can share a laundry space, that would help you eliminate that task. Also, make sure it is someone you know and/or like. I wouldn’t personally rent to a complete stranger with kids in the house.

    • Pretired Nick on April 28, 2014 at 12:32 pm said:

      I wish the laundry was in an area where we could do that. The way the house is laid out, we’d have to go through their private area to get to the laundry. I’m kind of with you on having strangers around my kid. I hate to be paranoid, but I don’t want to be naive either.

  6. I think the key figure is the amount of additional money you’d have to put into the basement apartment, compared to your alternative remodel. That delta could be significant, and would determine your break-even point.

    I personally rent out a room in our place and, while it’s only $5k a year plus 1/3 of all utilities, we’re used to the easy money. Some of the best money we get, as it’s so close to passive.

    Yeah, it’s a bit of an adjustment to get a renter and share your house, but hedonic adaptation works in reverse, too. Emotions and impressions always regress to the mean.
    Done by Forty recently posted…Preaching to the ChoirMy Profile

    • Pretired Nick on April 28, 2014 at 12:36 pm said:

      We’d easily break even in a year, which is not bad at all. Probably 6-8 months. It’s funny, when I bought my first house, I bought that particular one specifically because it would work well to put a renter down there. Turns out I never did bring myself to give up my space and I lived in that big house by myself for years. Maybe I’m not a good sharer!

  7. My thought was “this is not the house for you” With or without renter.

    I agree with the idea to fix and sell.

    Get to the house you can live 10-15 years in.

    • Pretired Nick on April 28, 2014 at 12:37 pm said:

      Yeah, that’s what we’re thinking right now. Just need to wait a few years to let the value run up a bit more.

      • I get caught up in that rhetoric too…but then remind myself that by the time my house increases in value, so to will the next house I’m looking to purchase ( most likely ).

        • Pretired Nick on April 29, 2014 at 5:13 am said:

          Your point is usually correct but we really do appreciate faster in this neighborhood than the rest of the city and there is some potential of moving to a different city — farther from the employment center so it would be a LOT cheaper. So we should easily outpace the growth of a house elsewhere.

  8. Kevin S. on April 28, 2014 at 7:27 pm said:

    PN, a very compelling argument indeed. The money is tempting to be sure. But as a fellow father of a little one, I can say without a doubt that I am glad there is only one family living in our single family home. The extra noise and chaos that roommates bring would certainly not be welcome at naptime and bedtime. Then there’s the occasional nighttime baby crisis that is typically short lived but not conducive to other’s sweet repose.

    Having roommates and little ones in a confined space can be a recipe for epic failures of lifestyle expectations. And it goes both ways. My vote would go in the no category. I would probably be hesitant to rent a downstairs room from a family with a baby, mostly because I have a 5 yr old and 20 month old and know what that household can be like. Its crazy fun, but only because they are my family =).

    PS – I’m new to the blog and have enjoyed reading the conversations. Thank you for the thoughtful posts.

    • Pretired Nick on April 29, 2014 at 5:19 am said:

      Yeah, it’s a tough one. I hadn’t even thought about noise from the renter when we’re trying to keep things quiet for the baby. I’ve been mostly worried about him running around and making lots of racket. The decision really is about money vs. lifestyle. Lifestyle might be winning.

      Thanks for the kind words! Glad you’re along for the ride!

  9. It’s very difficult to make a choice in this situation. Extra money is extra money and it would be difficult to say no to them. But your own sanity, your time and well being are also extremely valuable, so it’s difficult to balance things. You didn’t enjoy being a landlord so that would probably not change right now. You’d be living close to the renters, and maybe they’ll be noisy when Baby Pretired needs to take a nap… There are many Pros and Cons and it is, in the end, up for you to decide which can be easier to be dealt with.
    C. the Romanian recently posted…How to Bring More Search Engine Visitors to Your Blog EasilyMy Profile

    • Pretired Nick on April 29, 2014 at 5:22 am said:

      I think being a landlord in this situation, while still annoying, would be easier than having a fourplex. I’d at least be more careful on who the renter will be. But, yeah, still…

  10. I would probably forego. You have already been a landlord and did not enjoy it. Plus, having a kid around, makes it harder. Will it be hard for you to enter the workforce again once your baby is in school?
    SavvyFinancialLatina recently posted…Kitchen Update PlanMy Profile

    • Pretired Nick on April 29, 2014 at 12:18 pm said:

      Oh, it’ll be hard. VERY. HARD. I wouldn’t mind the interactions with coworkers (most of them anyway) again and I wouldn’t mind the intellectual challenge of the work. But when I imagine sitting in a conference room again listening to some idiot drone on and on I just about get PTSD.

  11. We bought a multi unit a couple years back and had a similar dilemna, in the end we decided to fix up the basement and add the extra monthly rental income. We already had the common room laundry, storage space, and a tenant in Unit 1, so for us extra income to pay off the mortgage was a no brainer. Having someone live in your home that pays you rent does make decisions a little closer to home(no pun intended), but if you get the right person it’s a nice bonus rent check. Thanks for the post.
    Even Steven recently posted…Buying Stock to Pay off Debt-Mistakes I’ve Made or I’m a GeniusMy Profile

  12. I’d do it. Even if the land-lording doesn’t work out, you have added value to your home, especially if you do the work yourself.

    One thing I’d definitely do is soundproof it very, very well. There are measures you can take to make things pretty quiet between that floor and the one you’d be living in. For example, blow in cellulose (much better than fiberglass insulation) makes an awesome sound barrier and is dirt cheap. I did this in the floor of my new 2nd floor office and I can hear nothing from below. I assure you, our 4 year old is extremely loud.
    Mr. 1500 recently posted…Warren Buffett WisdomMy Profile

  13. Be sure to check with your city codes about having a renter. You must also make sure there is an egress window or door. If it is just a roommate, it should be OK.

    You do not want to get into a situation where the renters refuses to pay rent, takes you to Court, and the Judge rules the apartment illegal and makes you refund all of the rent paid so far.

    It could happen…
    No Nonsense Landlord recently posted…Rental Property Improvements that make a DifferenceMy Profile

    • Pretired Nick on May 1, 2014 at 12:13 pm said:

      Thanks for the advice! We’ll definitely make sure we’re all legal before we head down that path. But fortunately egress isn’t an issue for us because it’s basically at ground floor so there’s a door and a large window in each bedroom.

  14. The extra landlord hassles would be annoying, but there would be no travel time to fix any issues. Although having someone right in your house might be annoying at times, it definitely has some pluses. Any issues you could address fairly rapidly because it just would be convenient. I think the trick to success here is finding the right tenant. So long as it was someone who was considerate of your kid and not overly demanding, it sounds like this is a great option for you.

  15. I’d check the rule if you want to go the vacation rental route. In Portland, you’d need to register with the city and something else… Not really sure.
    I like the vacation rental idea. You don’t have to rent it out if you don’t want to. Friends and family can stay there when they come to visit.
    That’s what I’m thinking about for our next place… We’ll see.
    Good job with the remodeling.
    Joe recently posted…2014 Goals and Financial Update – MayMy Profile

  16. I say go for it. We did it at my mom’s house – it was actually my apartment for a while – and she has been able to get money from it since. And even if you don’t rent it out, it can’t hurt to have a finished basement.

    I don’t think you will have to remove the basement before you sell. Don’t quote me on this but I believe if you don’t have a stove in the basement you could say is just an extra living space. That’s how we have it at my mother’s house and the inspectors said it was fine. So you could just remove the stove before you sell if you have one.
    MillionDollarNinja recently posted…Spent: Looking For Change (Documentary)My Profile

  17. It is quite a difficult decision to make really. Both have a lot of pros and cons. A lot of weight is upon who will end up living in the basement apartment after it has been completed. It is trying to find the correct candidate and you may be surprised and find someone who fits in just fine. It is added money too. It is still added value to your home at the end of the day and if you do plan to move and sell, it will benefit you.
    Kayleb Holden recently posted…Comment on Contact Us by Will a basement conversion add value to my property?My Profile

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