Basement unit in need of rehab: How much to upgrade?

Question

Question for the group:

We have a 3BR, 1Ba single family home in an excellent location (28801, between Merrimon and Charlotte streets near downtown for the Ashevillians) with a 2BR/1BA basement apartment that has a separate entrance. Home is from the 1920s and upstairs has a lot of original character. We had a horrendous mold outbreak in the downstairs unit and had to gut it.  We are now faced with the following options fro renovation:

1) Basic rebuild with minor upgrades to layout (better lighting, better bath, a bit more open), materials for 89K. Would still be a 2BR/1BA. Rent estimate: $1600/mo

2) Expand the unit by 280 sq feet and make it a 3BR/1BA apartment with an open kitchen/living/dining space for 140K.  Median price per square foot in this area is $360 (although this is a lower level unit so assume premium for these square feet would be lower?). Rent would be ~$2000-2200.

Note: upstairs currently rents for $2600. Current estimated value of this home is ~$750K.

We may have an option to take a loan for the 140000 at 5.75% via a cash out refi on another unit.

What would you do? Would you worry about undermining the value of the single family home by creating a 3BR apartment in the lower level? Where would you target your amenities?

Parking is an issue but we could turn the backyard (which isn't used) into a parking area.

Michael Hernandez · Answer

Hi LynnSince you already had to gut the lower unit, this is a chance to think about long term value. Expanding to a three bedroom will likely attract a stronger tenant base and bring in higher rent, which makes the extra investment easier to justify over time. In a location like yours, walkable to downtown, bigger units with open layouts tend to stay in demand. Converting unused backyard space to parking also solves a key issue and makes the property more appealing. What is in it for you is not just the bump in monthly rent but also a boost in overall property value, since a larger, more functional lower unit makes the home more versatile to buyers down the road. The main thing to watch is making sure the finishes match what renters expect for the rent level, so you get the most out of the added space.

Marc Winter · Answer

Since the building is 100+ years old, there are probably items that were grandfathered in, so building an addition might trigger forced compliance with the current code.  That could blow up your projected budget.  Check with your local zoning/permit office.I'd stick with the existing footprint and do a complete renovation of the apartment, with the interior upgrades you mentioned.

Make sure the exterior of that basement unit is weather-tight, especially after the mold you had.

It sounds like a nice project--good luck!