Cons of Finishing a Basement for Property Investors
7 Negatives of Finishing a Basement
As a property investor, when you are considering finishing the basement of an investment property, you must look at both the positives and negatives. While finishing a basement has the potential to increase the value of a property, it also has its pitfalls. Costly renovations, higher bills, and zoning issues could turn a potential profit into a liability. Here are seven cons of finishing a basement as a property investor.
To finish a basement as a property investor, you will have to take out permits with the town. On the permits, you will need to write the estimated cost of the improvements you are making. Once the permits are approved and all of the work has been satisfactorily completed, the town will likely reassess the taxes on your property. They will raise your taxes based on the value of the improvements that have been made to the property.
Depending on how much the taxes go up, it could make it more difficult to sell the property. The increased taxes could put the home out of the price range for some potential buyers because the monthly mortgage payment would be that much higher.
When finishing a basement, you not only risk your property taxes increasing, you may also see an increase in your homeowners insurance. You will want to make sure this additional area that you have spent so much time and money finishing has the appropriate insurance coverage in case of any issues.
The finished basement will increase the replacement cost of your home. Therefore, to insure this additional space, you will have to pay more for your insurance. While this isn’t a huge increase, like is the case with the property taxes, you can still expect an increase somewhere in the range of $100 a year.
Increased Utility Bills
A finished basement requires electricity and heat. You will therefore have higher utility bills to contend with after completing the renovation. If you are flipping the property, these bills will be a short-lived expense that you will get rid of when you sell the property. If you are intending to hold onto the property, these bills will be an extended expense that you must account for each month.
Flooding Issues May Not Be Covered By Insurance
Insurance companies can be tricky with their coverage for flooding caused from exterior sources. Many insurance companies will not cover damage caused by outside water sources. You will likely have to prove some sort of defect in the homes structure for them to pay out this type of claim. Therefore, finishing a basement can be a risky endeavor if you are concerned about exterior water seepage. Most insurance plans will cover water damage that comes from pipes inside the home.
Finishing a basement is expensive. There are permit fees, increased taxes, insurance and utility bills, cost of materials and contractors’ costs. Even if your sole purpose in finishing the basement is to increase the home’s value for a quick flip, you must still come up with the initial money to perform the renovations.
If you are taking out a loan to come up with this money, you will also have to pay the interest on the loan, which is an added expense.
Some People Don’t Like Below Grade Living
Regardless of how nicely you complete the basement renovation, there will be certain people who just do not like basements. They will not pay extra for a finished basement and do not see the practicality of a bedroom or bathroom in the basement as it will never get used. You need to take this into consideration when considering the practicality of a basement bedroom or bathroom.
Zoning May Prohibit Rental Unit
If your purpose in finishing the basement is to convert the basement into a rental unit, you may be faced with the harsh reality of a zoning issue. Even though you already own the property, the town may prohibit you from converting a one family home into a two family, a two family into a three family and so on.
You need to have this information before you purchase the property if it is your reason for purchasing the property and before beginning any type of renovation so you do not spend any unnecessary money on contractor quotes or gathering materials.