House Hacking: The Financial Overview of the Basement Renovation
I break down the total cost of renovating our basement and how it impacts our cost of living and ability to purchase our next investment
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Throughout the course of our basement renovation project I have been sharing updates and details on our progress (in case you missed it).
Here (Getting Started)
Here (Renovation kick-off)
Also, here (working with contractors)
and…
Here (losing steam)
I shared briefly in my Updates Newsletter recently that we finally FINISHED the job. However, a project this large deserves its own article. So here we are.
The Basement: A Financial Overview
Let me remind you the original intention of buying a house in the first place was to reduce my cost of living and not pay rent. I outline it here: How to Buy a House and Live Mortgage (or rent) Free.
Let’s actually flash back to this article and look at my original assumptions for cost and potential income:
Quick math: I'm estimating that it will cost about $30,000 (plus or minus a few thousand) to finish the basement including all exterior work, interior updates, converting to natural gas, adding an electric meter, installing a bathroom etc. If I rent out the property for $1,200 (plus or minus $100) a month or approx. $14,400 a year. That is almost 50% cash on cash return... aka I would earn the money I spent on renovations back in two years. That is a great investment. Not to mention the rental income will cover over half of my mortgage related costs.
I published this article 1 year ago (October 27, 2020). Now1 year later, let’s see how accurate my assumptions were…
Breaking Down the Cost
Phase 1: Convert to Natural Gas
Time frame: Summer 2020 - November 2020
Approximate Cost: $5,006.30 (with rebate of approximately $1,000)
Summary of Work: Call energy provider to do an initial consultation to determine if we indeed can get natural gas piped to our house. Check yes. Energy Provider comes out Summer of 2020 and digs up our yard and brings the natural gas to our house. Countdown begins and we have approximately 6 months to install a new natural gas boiler and connect to the grid before the energy provider charges us $4,000 for the work they did (within timeline = FREE). We meet our deadline, get the existing oil boiler removed, oil tank sold on marketplace and our family helps us install a brand new boiler and officially connect to Natural Gas by November 2020. This enables us to have a larger space to rent out plus a better kitchen.\
Phase 2: Permits, Architects, Land Survey
Time frame: August 2020 - February 2020
Approximate Cost: $6,297.0
Summary of Work: We started the process of submitting our permits and the fees in August of 2020 expecting it would take a month or two to get approved. We were wrong. It took about 7 months, two surveys, a bunch of revisions with the Architect, printing fees, letters to neighbors in the mail, sitting on planning board meetings and… well waiting. Some people forego getting their accessory dwellings permitted due to the exorbitant cost and time. In the long run this will allow us to sell our house seamlessly and add value.
Phase 3: Interior/Exterior Construction & Lowe’s Bills
Framing Lumber: $1,211
Plumbing: $5,245
Electrical: $8,060
HVAC*: $4,729.00 (plus $800 rebate)
Taping: $1,800
Excavation: $1,200
Fence*: $7,788
Lowe’s Deferred Expenses*: $12,981
Lowe’s Regular Expenses: $4,376.58
Home Depot Regular: $2,7890
TOTAL: $50,172
* = financed
Summary of Work: Most of the expenses above are self-explanatory but I will delve into more detail on the financed expenses and the Lowe’s expenses. We primarily visit Lowe’s for all of our hardware and material needs (quite frankly I think they should personally greet us each time we walk in the door because we visit so frequently and spend so much money there.. but I digress). Our Lowe’s deferred expenses were financed at 0% interest and had varying due dates of 6-18 months out depending on the amount we spent and the promotion at the time. This enabled us to buy a lot of stuff but not actually pay for it all atonce. Our Lowe’s bills consisted of flooring, appliances, sheet rock, insulation, sub-floor, 2x4s, light fixtures, doors, vinyl flooring, kitchen cabinets, plumbing fixtures and more (aka everything we needed to build a basement apartment).
We also were able to finance our HVAC split unit that provides heat and AC to the basement apartment at 0% interest for 25 months. We also utilized a HELOC to cover the cost of the fence. The planning board made the fence mandatory to provide privacy and a noise barrier between our house and our neighbor’s. The total amount we financed was approximately $25,500. We still owe about $14,400 for all of these expenditures with a plan in place to pay everything back interest free and early by March 2022. See credit card disclaimer below.
Expense Totals:
Phase 1: $5,006
Phase 2: $6,297
Phase 3: $50,172
Total Cost: $61,476.58
Disclaimer: This does not include the expenses for food or various miscellaneous items. This also does not include utilities, mortgage payments or other holding costs.
Return on Investment:
Monthly Income: $1,550
Yearly Income: $18,600
Construction Expenses: $61,476
Cash on Cash Return (year 1): 30%
Time to Pay Ourselves back: 3 years
Income Projections (post debt payoff):
Basement Income: $1,550
Spare Bedroom Income: $900
Total Income: $2450
Expenses: $2100 (mortgage, taxes, insurance, pmi)
Net Profit: $350
Why this matters:
Renting parts of our house out enables us to live in an expensive area (New York State) for way less. We may not be making money right now (because we have to pay off debt first) but we will have significantly reduced our cost of living come March.
During the time frame that we renovated the basement apartment we were also renting 1 - 2 spare bedrooms in the upstairs of the house. The total monthly income for this time frame was: $24,000 (including utilities). Therefore our out of pocket expenses for the basement were approximately $37,000. Not to mention the free money through 0% financing and credit cards, approximately $25,500. Although we did manage to pay down some of the 0% financing during the project and since we currently owe about $14,000, I’m estimating our actual out of pocket expenses were about $23,000 (not too shabby).
However, the total cost of $61K is still TWICE my initial projection of $30K from October of 2020. Why was I off so much? I never factored in the cost of permits/architects, the fence, or quite frankly a global pandemic that would cause the price of lumber and other materials to sky rocket. I was also able to rent the basement out for $350 more than I anticipated thanks to that same pandemic and all around high demand for housing in our town.
Let’s do some math…
Scenario 1: Let’s assume we live in a perfect world and we have already paid off our debts, we are renting out one bedroom and the basement. Let’s also not include utilities because that complicates things.
Income: $2,450
Expenses: $2,100
Total Savings: $350In this scenario we are making $350 a month to live in our house. This is our current living arrangement and our goal is to maintain this until March until we have paid most of our debts. Not to mention we aren’t spending $2,100 a month towards our mortgage expenses. Hence, we are saving $2,100 a month in expenses and making an additional $350 a month after expenses. In total we can put $2,450 a month or $29,400 a year towards our next investment. If you count savings towards our Cash on Cash Return that is almost 50% return on our investment.
Scenario 2: What about if we just rent out the basement and no one is living upstairs?
Income: $1,550
Expenses: $2,100
Total Cost: $550In this scenario it costs us $550 a month to live in our house. Split by two people that is about $275 per person per month. In New York the average cost of living is 10.5% above the national average. I think we are doing pretty good. Oh yeah, did I mention we are splitting utilities & wifi with our roommates/tenants. Extra savings there too. In this scenario we are saving approximately $1,550 a month. Across the entire year this is about $18,600.
Do you belive in the power of House Hacking yet?
I know I do, but I am biased. Let me know in the comments what you think and whether you would give House Hacking a try?
Remember house hacking doesn’t necessarily mean you need to renovate a basement and turn it in to an apartment. You could buy a small multi and live in one unit and rent the other out. In our area it was difficult to find something that fit this mold. Hence why we went down the path we did. It definitely has been a bumpy but I am grateful for the lessons I’ve learned along the way and ultimately the savings that I am able to generate.
Keep in mind: “If you live like no one else now, later you can live and give like no one else!” - Dave Ramsey
Until next time,
Amanda
Disclaimer: I am not a financial advisor and am not giving advice. I am sharing my story for entertainment purposes. Please consult a financial advisor, CPA or lawyer before proceeding with any actions. Please also take caution in using credit cards. I do not recommend the use of credit cards to complete a renovation. They have high interest payments and can really put people into a lot of debt. I only feel comfortable knowing that I can afford to pay these bills based on the payment plan I have put into place.