Recoup Money on a Basement Apartment Investment in Utah
Hello everyone, Caleb with Dansie Design Build. I wanted to talk to you about the payback timeframe on a basement apartment and how long it takes to recoup the money you’re investing into your basement to make it into an apartment.
Average Time it Takes to Pay Back a Basement Apartment
Typically, we see about five to seven years for a completely unfinished basement with no basement walkout, kitchen, bathroom, or finished space, turning that into a complete unit where you can rent it out and start generating monthly income.
Basement Finishing Cost Calculator
I made a calculator and will have this on the blog post on our website, so you can download a copy of the Excel spreadsheet and use it for calculating costs. To access the calculator Excel sheet, click HERE to enter rough project numbers. Anything that’s in the green cells can be edited. So if you’re watching the video, I’ll share my screen so we can review the numbers. So essentially, we’re going to need a few numbers.
Example for the Total Costs of Basement Improvements
The first one is the total cost of the improvements. In this example, our total costs are $108,000, which is a rough number for a hypothetical basement on our basement finishing cost calculator. If you need some help getting some information, this will get you pointed in the right direction regarding what this type of work costs in the Salt Lake County and Utah County areas of Utah.
You will fill the calculator out; I have a video on how to use the calculator. But the second number you will need to enter is the square footage. In this example, I used 1,000 square feet. You then can select custom finishes, such as a luxury kitchenette of 10 feet of custom hardwood cabinets, a basic bathroom, and a full basement walkout entrance. You will then get an estimated total for each of those custom items and the estimated grand total.
How Much is the Average Rent for a Basement Apartment in Utah?
Next, let’s move on to the apartment information. Right now, basement apartments are rented for about $1,500/month. You can use rentler.com to see what apartments are renting for in the area, such as Salt Lake and Utah County in Utah. I set up a search for a two-bedroom, one-bath basement apartment in Herriman, Draper, and Sandy. Most search results ranged in price between $1,300 – $1,700, so $1,500 is on average. If we figure that the apartment will be rented for 11 months out of the year. If there’s turnover, such as someone wants to move after a year, that gives you a little leeway for finding a tenant. It’s safe to consider you’re only going to get 11 months out of every year.
National Average Annual Rent Increase
Then the annual rent increase would be 3%, for this example, but you can change it to a 5, 10, or 20% increase; however, realistically, 3% is average.
On apartmentlist.com, they’ve researched the national rent increases every year. The annual increase for 2018 was a 3.3% increase in rent, and 2019 was a 2.3% increase. 2020 was on track for the first three months of the year, and then the pandemic started, ending with a -1.6% increase. 2021 made up for that with a 17.5% increase, and then 2022 is on track for an 11% increase. So I would figure about 3% because historically, that’s been pretty accurate. So once you have these numbers figured out, it will automatically generate the rent increases for every year. So the second year is going to be $45 more.
How Much is Paid Back Yearly for the Basement Apartment Rental?
Let’s view the payback schedule and subtract the renters’ payments. You’ll notice that there is an empty cell in December, and that’s the one month out of the twelve that I’m factoring in that nobody is going to be living there or you’re not making rent, but that’s just a factor of safety for turnover. So that is factored into the numbers. So when starting with the $108,000 cost of total improvements, on day one, the first day you collect $1,500, the remaining balance is $1,500 less, continuing down the first year.
So we’re starting into year two, into year three, and then into year four, and in this particular example, we’re jumping into years five, six, and seven. Six years is when you would pay off this example. Then, when in the first month of year seven, that’s when the first chunk of money would turn positive because the basement apartment has completely paid itself off. So that first year, you’d be getting nearly $20,000 paid back; it’s at $19,600, and then every year after that, it just increases a little bit as the rent increases. So after six years and at the beginning of the seventh, it’s completely paid off.
Variable Costs for Basement Apartment Finishing
So you won’t need to pay for a basement finish if you have a finished basement; you can plug in zero for those costs. So if your basement is finished and already has a bathroom, you won’t have those costs either. However, you may need a kitchen or kitchenette. This number is variable based on countertops, cabinets, size, and plumbing location. You may also need a basement walkout entry, which is an extra cost. So there are a lot of variables.
If you need a kitchen and walkout entrance, that would be about half the investment, so it should pay itself off in about half the time. So, when the numbers turn negative, you’ll see that it starts in year three, at two years and ten months, essentially when that would get paid off and start generating a positive cash flow indefinitely.
How to Access Your Copy of the Basement Finishing Cost Calculator
If you’re watching the video, I wanted to show you how you can download a copy of the basement finishing cost calculator. To get a copy for yourself, copy it from Google Drive, plug your numbers in, and figure out your timeframe for getting your basement apartment generating that passive income.
I hope this has been helpful for you today. If you need help building your basement apartment and getting things planned out as far as design, engineering, permitting with the city, drawing plans, getting construction underway, and then completing the entire process, we can help you with that. You can call us at (801) 341-9690 or submit a request for a consultation. Thank you for your time. It’s been great chatting with you. Have a great rest of your day!