New investor - Basement for short-term renting

Member since 2023 · 26 posts · 14 votes

Hi everyone,

After reading a good number of experienced investors' posts from different forums, my wife and I have decided to finish our basement for short-term renting. Having said that, we would like to ask for your advise on the following questions;

Question 1. What are the pros and cons of short-term renting on a primary residence?

Question 2. Can we use our home equity for a project like this?

Question 3. What tax implications might arise from this kind of investment especially on a primary residence?

Thank you so much for your help, and advise in advance.

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Noah Laker

Real Estate Broker · Sacramento, CA · Member since 2021 · 516 posts · 408 votes

Hey Jamiru, I'm a real estate broker and manage over 100 STR properties.

Pros of renting your primary: You can get around many restrictions depending on your area, and you can maintain control over the property and keep an eye on it.

Cons are obvious, you'll have different guests all the time and you never know if they're gonna disturb you. Be sure to vet your guests for good review history.

Certainly you can talk to a lender about a HELOC or similar loan program if you're short on cash to complete the job. Make sure to run comps on Airbnb / VRBO and make sure the economics make sense.

As far as tax consequences, talk to a CPA. Always maintain records.

Good luck and hope this helps!

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Noah Laker
Real Estate Broker · Sacramento, CA · Member since 2021 · 516 posts · 408 votes
2y
Hey Jamiru, I'm a real estate broker and manage over 100 STR properties.
Pros of renting your primary: You can get around many restrictions depending on your area, and you can maintain control over the property and keep an eye on it.
Cons are obvious, you'll have different guests all the time and you never know if they're gonna disturb you. Be sure to vet your guests for good review history.
Certainly you can talk to a lender about a HELOC or similar loan program if you're short on cash to complete the job. Make sure to run comps on Airbnb / VRBO and make sure the economics make sense.
As far as tax consequences, talk to a CPA. Always maintain records.
Good luck and hope this helps!
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Jamiru Mutebi
OP
Member since 2023 · 26 posts · 14 votes
2y
Hi @Noah Laker,
Thank you so much for the information.
0 Reply
Joey BanasihanPro Member
Investor · Boise, ID · Member since 2019 · 233 posts · 188 votes
2y
Hey @Jamiru Mutebi!
That is great to have made the decision to essentially house hack using your basement, my wife and I have done the same and it was great. Based on my experiences I will do my best to answer your questions:
1. Pros: STR is high risk, high reward; so if you are willing to put in the money, research, design aesthetic, competitive amenties, etc. then there is a possibility of high reward*** "***" But, you need to do your research using a tool like AirDNA before starting; this software will tell you all of the data pending on the size your rental (bedrooms/bathrooms), amentities, projected income, daily rates, competition, etc. Cons: STR is a competitive arena and you will need to be willing to invest into the experience, space, and amentites. Also its a hospitality business, not a rental business; so you will either need to hire folks at 25% fees or be able/willing to accomodate all questions, needs, and concerns quickly to create a great experience and received credible reviews. Ton of work. Plus, AirBnB tend to side with guests over hosts most of the time.
2. HELOC: As long as you qualify, you can use a heloc for anything you would like; so this would totally fall into that haha. We did the same thing and utilized the HELOC to pay for everything and now the rental is paying it back (slowly).
3. TAXES: Please talk to a local CPA, as I am not a tax professional* From my experience where I live and our current situation, we were able to depreciate renovation costs, insurance costs, and other things with our CPA.
4. MID-TERM RENTAL: I would consider looking into doing a MTR rental to start off, either through AirBnB or Furnish Finder. Traveling professionals utilizing places to stay for 3 - 6 months, but looking for a furnished rental which means you can charge more. Besides utilizing software to help create leases, collect rent, and screen folks, these travelers are typically higher quality tenants, very passive, and could be a way to ease in. Just a thought!
Hope that helps, please reach out if you want to talk more about this!

[email protected]
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Jamiru Mutebi
OP
Member since 2023 · 26 posts · 14 votes
2y
Hi @Joey Banasihan!
Great advise, thank you so much for the information. About MTR, that's something my wife brought up in our plans, I'm glad you mentioned too.
Thanks again!
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Bonnie LowPro Member
Lender · Asheville, NC · Member since 2016 · 1k+ posts · 1k+ votes
2y
I second what @Joey Banasihan suggested about MTRs. We did exactly that. We turned what could've been an LTR into an MTR so we could get our feet wet with regards to systems and processes before going all in on a luxury cabin to use as a short term rental. And I am so glad we did! It was nice to be able to get all of that set up and working with a very few umber of turnovers before essentially having to replicate it but on a much faster cadence with our STR. We got our website set up, PMS in place, developed our lease agreement and background check process, figured out how to collect payments and handle deposits and refunds, developed a system for managing turnovers of the unit and developed automated guest responses to simplify and streamline communications. It's been a successful MTR unit so we haven't pivoted it to STR (and I didn't want to have to get a permit for it) but the experience definitely helped us feel confident self managing our North Carolina STR from California.
[email protected]
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Jamiru Mutebi
OP
Member since 2023 · 26 posts · 14 votes
2y
Thank you @Bonnie Low!
1 Reply
Ryan ThomsonBusiness Member
Real Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
2y
@Jamiru Mutebi
Converting a basement space is a great idea. I just converted a 1500 sqft basement into 3beds/2baths in Colorado Springs. It should cover a huge portion of my mortgage!
1. Pros are extra income. Cons are a little less privacy, noise potential, and being more aware that someone is below you.
2. yes!
3. Tax implications. Talk to your accountant! You can no depreciate the %of the basement and reduce the taxable rental income by that amount. You can also deduct any expenses associated with running and setting up the airbnb.
Your accountant may allow you to deduct the expenses in year one or you may have to capitalize the expenses and deduct it on a depreciation schedule. The income is great and if you do it right a lot of it will be tax free.
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Jamiru Mutebi
OP
Member since 2023 · 26 posts · 14 votes
2y
Thank you so much for sharing this valuable information @Ryan Thomson.
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Ryan ThomsonBusiness Member
Real Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
2y
@Jamiru Mutebi you are welcome!
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Benjamin Carver
Real Estate Agent · Raleigh, NC · Member since 2019 · 303 posts · 288 votes
2y
Hey there! Doing this myself.
1. short term means usually higher profit. Of course if you have an HOA that might cause problems. If it's a condo or townhome you might really have issues. And str naturally has higher volatility but AIRDNA can help a lot with planning that out in your city. Get to know the STR laws there and see if there are other STR in your neighborhood or nearby. And if house hacking you don't need a PM and can clean it fast and free if you want for even higher profit. STR guests typically treat the space nicer and don't nest like normal tenants do.
2. Shouldn't have a problem with this.
3. CPA question.
1 Reply
Colleen F.Pro Member
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
2y
@Jamiru Mutebi One con is liability just make sure you have the right insurance to cover this and consider egress requirements when you build as they can add alot to anticipated costs depending on your setup. For taxes you would be depreciating the rented portion so if you sell that could come into play. You have to ask the tax people though for any other implications.
1 Reply
John Mocker
Insurance Agent · Norwalk, CT · Member since 2016 · 2k+ posts · 1k+ votes
2y
Jamiru,
As Colleen mentioned, there are insurance implications. Be sure to discuss with your agent what changes need to be made to your current policy to properly insure this new use at the home. It is likely the policy will have to have an endorsement added to extend the liability coverage. You also need to have the rebuilding costs (Building Replacement cost) updated to include the changes to the basement. I would suggest adding an Umbrella policy if you do not have one already. That policy is generally sold in $1,000,000 increments. I would price several levels and purchase the most coverage the makes sense.
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