Should I finish the basement in a Duplex to increase STR Cashflow?

Question

I found a duplex that is a 1/1 on each side. The basements on both sides are unfinished. I can finish both basements and turn both sides into a 2/2, and that would increase the STR cashflow by $700 per side. But in order to do this, I'd need to take on an additional $70K in debt to finance the basement rehab effort. The additional debt for the basement rehab is about $300/month, and it would increase overall STR cashflow by $1400/month.

is this a good idea in your opinion? This is my first time investing. Should I just purchase the property, run it for a year, gain some experience and then finish the basements later on? Do investors usually finish their basements in order to increase cashflow?

is this a good idea in your opinion?  This is my first time investing.  Should I just purchase the property, run it for a year, gain some experience and then finish the basements later on?  Do investors usually finish their basements in order to increase cashflow?

Gino Barbaro · Answer

@Joshua Christensen

Investing in real estate is about investing in a business. You are ultimately purchasing a future stream of revenue.

You have to take into consideration ROE, Return on effort. IS it worth investing not only 70k, but the brain damage and the time it takes to achieve the desired return.

Sam Applegate · Answer

@Marc ShinOverall, I agree with Gino’s point about Return on Effort. However, in my opinion,  since you are a new investor, completing a successful transaction and allowing yourself to gain experience by getting a win under your belt is more valuable than the Return on Effort itself.

Joshua Christensen · Answer

@Marc Shin - This is a good question.

To both @Evan Polaski and @Gino Barbaro's points, it ultimately comes down to numbers and feasibility.  Does it make sense?

Investing in real estate is about creating a return on your investment.  What's your long term goal and why did you get into REI?  Answer that and then measure this decision against your goals.  Does this plan help you reach your goals faster or easier?

Answer those questions and make a decision.

Evan Polaski · Answer

@Marc Shin, I echo Gino's thoughts.

First the financial: assessing any improvements will come down to how those improvements affect both your cashflow and your overall value of the asset.  It is rare that investing money in a property would DECREASE the value, but will this investment increase the value of your property?

Additionally, this clearly improves your cashflow.  So let's say there is no value increase, but you pocket an extra $1,100/mo in income.  That is $13,200/yr, which is nearly a 20% annualized return on investment.  I would do that all day long, personally.  And in reality, your property will likely be worth more money with the finished basement, so your return on investment will likely be higher, i.e. you spend the $70k, your property is now worth $50k more, so your $13,200/yr really earning at 66%, per year (13.2k/20k).  And even better, you invest $70k, get $13.2k more in income and the property is worth $100k more than it is worth today...

Second item, and really more important: Can you finish the basement?  If you plan on renting as a second bedroom, you need egress and closet.  If egress is already available, great, but often times this means digging an egress "well", structurally reinforcing the foundation where the larger window will be going, etc.  If you are on old sewer, or septic, you may not be able to add another bedroom due to capacity.  The ceiling height might not be high enough.  Water intrusion may be an issue.    In reality, besides maybe public sewer capacity, nothing I list isn't able to be overcome, but it could get very costly.

You will want to talk to with a GC and potentially the building department directly to understand any issues that may keep you from executing on this plan.

Gino Barbaro · Answer

@Marc Shin

Great question. What do you think it would do to the overall value? If it increases by more than 70k, then it's a consideration

You need to make sure that you can turn it into another bedroom that has windows for means of egress. This is an engineer/architect/ building dept question

Once the rehab is complete would you be able to refi the debt all in one loan?

Should I finish the basement in a Duplex to increase STR Cashflow?

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