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The Renovation Plan

As I mentioned in my about me section, I got a second roommate in my townhouse after things worked out well with my first roommate.  But before I got another roommate to move in, I had to do some renovations to my townhouse.  So the plan was for me to move in the basement and my current roommate would take my place in the master bedroom.  My current roommate would still continue to pay me the same amount for rent despite having a third person moving in because he was moving in to a larger room.  But before this move could happen, I would have to finish the basement to make it livable.  When I first bought the place, the basement was partially finished, it had dry wall up, and vinyl floor tiling, but lacked a ceiling and sufficient overhead lighting.  I planned to do most of the work myself and hire sub-contractors where I needed help.

How I Paid for the Renovation Plan

I didn’t have a lot of cash on hand because I was paying for graduate school at the time.  I estimated the material to cost around $3,100.  This estimation included, carpet, overhead lighting, ceiling material, and furniture.  To finance this whole operation, I had some money from my tax return and  I also applied for a credit card with an introductory rate of 0% for 12 months in April of 2007.  I figured I could get the third roommate to pay me $600 bucks in rent and I could use this money to pay back the credit card before the introductory rate expired.  The minimum monthly payment while I was carrying a balance was something like $50 bucks, which is something I could easily afford.

I figured the payback period for this project was about 5 months, which was determined by taking the cost to finish the basement, $3,100 and dividing it by the rental income $600.  Theoretically I could pay back the credit card before the 0% rate expired.  Was there risk involved?  Sure, I knew I had to race against time to finish my basement and find someone to move in.  I gave myself a time frame of 3 months to finish the basement starting from starting April 2007.  So, according to my plan, I should finish by July and have a renter move in and start paying back my credit card balance.

Did it work out to plan?

First off, the basement took longer than planned to finish.  The basement was completed sometime during September of 2007 — about 5 months later than I originally planned.  Why did it take so much longer?  Well, I was doing most of the work myself so the only time I had to work on the basement was after work and on the weekends.  In addition, I was doing the dry wall myself I really wanted the walls to look nice and presentable when I resold the townhouse.  So, I took my time to ensure my cutouts around electrical outlets and switches were clean.  I was constantly spackling, sanding seams to achieve that seamless look.

Was it worth it in the end?

Despite taking longer than planned to finish my basement, I was fortunate to find a reliable roommate to move in almost immediately after the basement was done.  At this point, I was feeling relieved rather than stressing out about paying back my credit card.  After six months from the time my second roommate moved in, I collected $3,600(6 months x $600) in rental income which was more than enough to pay back my credit card before the introductory 0% rate expired.  Any rental income collected after this was profits before paying any taxes.

I would recommend only doing renovations if you can make your money back fairly quickly.  In my case, I was paying for the material with a credit card with a 0% introductory rate, so making my money back quickly was an important factor.  As I mentioned early, I planned on hiring help where I needed it.  The only thing I hired help was for carpet installation and some electrical work, which came to a total of $1,000 bucks.  Although, I should have included this cost into my pay back period, however, I did not because it was cash on hand and not additional debt on my credit card.  Even if I included the $1,000 of subcontracting to the credit card balance, I still made a profit well within a year of renting out my second room.  The biggest uncertainty in the renovation was how much time it would take for me to find another roommate.  This was something I would never know until I actually refinished the basement and searched for a roommate.  Luckily, as I stated before I found a roommate almost immediately.

The question that remains for me now is how much did the renovation help my resell value of my townhouse?  This is something that is difficult to determine because there are so many variables from one townhouse unit to another when looking at previous sales of townhouse units.  I can say for sure that renovating the basement, worst case scenario, would at least make my townhouse unit easier to sell if not increasing the nominal value at all.

Other Things to Consider

If you are taking on a bigger renovation such as converting a garage into a bedroom that requires a much larger initial investment, you must ask yourself the following questions: Will the renovations hurt or help my resell value?  How can a renovation hurt my resell value?  Let say you want to convert a garage into a bedroom, that may deter would be buyers that want a garage.  Other questions you may ask yourself:  Will the room be rented out long term to make a profit?  Is there a cheaper way of doing this? — Even considering selling your current house and perhaps buying a two family house if it is cheaper than doing a full on renovation to take in renters. You must think about all possibilities before taking on any renovations and by constantly asking yourself questions it will help you determine the best possible solution.  Obviously, a smaller renovation to take on renters is almost always worth it especially if you can do most of the work yourself and hire help when you need it.

{ 2 comments }
  • Sarah March 8, 2015, 9:31 pm

    Hi Mike, I am so glad I found your website. I am trying to figure out if A) I should put a bathroom in my finished basement and then rent it out or B) rent it out the way it is. I would prefer “A” because then I can exclude it from the rest of my house and charge a little more but of course I will have to install a bathroom which may cost say $8000.00 I plan to stay in this house for at least 3-4 years and the added income would greatly help. I plan to charge $1000.00 a month. What do you think?

    Reply
    • Mike March 9, 2015, 11:39 am

      @Sarah, How many bathrooms do you have total? Does your basement have a kitchen? If not, I would just keep it the way it is and rent it out without having to spend the $8,000. Make a little money first and then see if it’s worthwhile investing more into. I invested money because I had to turn the basement into livable space to rent it out. If your basement is good to go without the bathroom, just rent it out.

      Reply

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