| Turn your basement into a rental |
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Approximately 99.9 percent of the
basements Bishop sees don't offer proper kitchens -- that means
appliances like stoves, refrigerators and dishwashers with adequate
counter space to store can openers and microwaves. You need cabinetry
as well. Homeowners rarely select custom-made oak with fancy inlays,
but even serviceable storage will run several hundred dollars.
Ditto the showers, toilet and sinks
in the bathroom. Overall, Bishop tells his clients to budget a third
more beyond the basic construction to bring a basement up to rental
standards. So if you'd pay $20,000 to make this space useful for
your family, budget about $30,000 to develop rental space.
If you want to upgrade, consider
pumping a bit more cash into your insulation, Marshall recommends.
"Sound transmission is a big issue with renters. Neither of
you wants to hear what the other one is doing," she says.
Even thicker fabric treatment
on the windows can pay off here. She urges inexpensive esthetics
like simple crown moldings, upgraded door frames and recessed or
track lighting around the perimeter as well.
"If you can offer something slightly better
than the apartments down the street, you can command a one- or two-year
lease," she says. "And you'll likely attract a higher
caliber of renter."
The basement remains the most
affordable area to fiddle with, Bishop says. Attic conversions run
afoul of myriad building codes and access issues, home additions
cost approximately $125 per square foot to blend with the existing
structure, while unfinished basements cost around $50 a square foot
to make livable.
Getting your money's worth
Count on including Uncle Sam every April 15 in your new venture.
Basement rental has its share of tax myths, starting with the concept
of depreciation, says Neil Becourtney, CPA, a tax partner with J.H.
Cohn LLP in Roseland, N.J.
Yes, you can write off the
money you sink into improvements, but over a total of 27.5 years.
It works out to approximately 3.6 percent of those receipts each
year.
To figure annual write-offs,
Americans must first carve out the land portion of their total cost
because land is not depreciable. Next, determine what percentage
of overall space the basement constitutes. If it's 20 percent, that's
the amount you can take of your operating expenses like mortgage,
utilities, homeowners insurance premiums, security, garbage removal
and cable or satellite service. Some homeowners establish separate
electric, water, phone and cable lines into the basement to avoid
fights over usage -- and to cut down on this massive IRS paperwork.
It gets still trickier as
you encounter repairs and renovations down the road. Capital-improvement
items to your home, such as a second bathroom in the basement, aren't
immediately deductible. Repairs such as new carpeting, paint or
a roof patch are tax write-offs in that calendar year.
"But you won't find a clear-cut definition
of these terms in the revenue code," Becourtney says.
Don't forget, you must list
those monthly rental checks as passive income on these tax forms.
Typically the income and deductions offset each other in Becourtney's
experience. But the reality is that if you sink $30,000 into a space
that rakes in $500 a month, it will take you five years to break
even. If your basement needs only $10,000 in cosmetic touches, you'll
enjoy a much faster return on investment. So play out the numbers
before you take out a classified ad in the local newspaper.
On the other hand, Bishop
sees no downsides to taking this plunge, even if the rental angle
crashes and burns in the future.
"A self-contained finished
basement is a wonderful selling feature. How many parents with college-age
and older kids living at home wouldn't jump on it? A full kitchen
in the basement makes it easier to entertain. There are no negatives
to this investment," he says.
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