My wife & I just bought a home for $175,000 with 10% down. We pay $1,020 per month on our mortgage, which includes property taxes and insurance. The home has a very large, finished basement with a kitchenette, separate entrance around back, but no bathroom (yet).

We're kicking around the idea of adding a mother-in-law studio suite in the basement and renting it out to a long-term rental or possibly Air BnB to "fill the gaps" in renters as necessary. The renovation would add a bathroom, upgrade the kitchenette to a full kitchen, and add a few demising walls to create the space.

I've researched similar rentals around our area (metro Atlanta, Georgia), and found that we could likely rent this space out for $750 per month. And based on home renovation projects I've seen, let's ballpark this renovation to cost $20,000 (depending on the quality of the buildout, I know this could easily be more).


After building up roughly $20,000 in equity in the home, would I be able to borrow against that to finance a basement renovation for the purpose of earning rental income? If so, what's the best way to estimate how much my monthly mortgage payment would increase as a result of borrowing that money? I want to make sure I could at least break even on a month-to-month basis.

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    Make sure the zoning allows this plan. Also make sure the home owners association allows this type of use. Jan 22, 2019 at 16:49

4 Answers 4


There are two common financing products that leverage home equity, HELOC (home equity line of credit) and home equity loans. Typically, with either you can borrow no more than 85% of the equity and must have at least 15-20% equity to qualify (along with decent credit score, no recent late payments, and sufficient income). The payback amount for either will depend on the interest rate and payback period/term, most are shorter than 15 years and current rates are ~6%. You'll get a better interest rate with more equity, so expect to pay more than prevailing rate if borrowing near the maximum you qualify for. There are numerous calculators that will give you an idea of what to expect, here's one from US Bank (not recommending them, just found their calculator quickly.)

Before you go down this path, you'll want to check with city/county to ensure there are no zoning or code issues that would prevent this, as well as your HOA if applicable to ensure no restrictions there.

I'd also recommend doing some additional research on HELOC vs Home Equity Loan, and lots of research on being a landlord in general and specifically in your area. Being a landlord can be very lucrative, but is not without its risks and challenges.

  • "you can borrow no more than 85% of the equity" I think this answer would be improved by clarifying that it is 85% total between the primary mortgage and the HELOC/HEL.
    – stannius
    Jan 23, 2019 at 16:26
  • @stannius I'm not sure I follow, home equity is the portion of the home value above the mortgage balance (really balance of all house-backed debts, but in OP case only one mortgage), so saying you can typically only borrow 85% of equity already accounts for the mortgage balance.
    – Hart CO
    Jan 23, 2019 at 16:35
  • I agree, and you and I know that, but I think OP and many others who are less well versed in this topic would benefit from it being explicitly spelled out. It's just a suggestion.
    – stannius
    Jan 23, 2019 at 16:45

This might not be a good idea, but you didn't ask that.

If so, what's the best way to estimate how much my monthly mortgage payment would increase as a result of borrowing that money?

You listed your payment with taxes and insurance - so it is too difficult to guess what your loan term and current interest rate are.

You can assume that your insurance rates will go up since you will no longer be a single family dwelling. Your agent can tell you how much extra you will be paying.

After a tax reassessment is done, your home value will go up so your taxes will go up - hard to say how much. The renovations you are doing (adding a full bathroom) could trigger this to happen after the work is inspected - varies by location... I'm not familiar with Atlanta.

If you refinance your loan, and you want to avoid paying PMI, then you'll need 20% equity remaining in the home ($35k) plus the $20k you need for the renovation.

If you go for a HELOC or other 2nd mortgage product, PMI won't be a concern, but often the cap is 85% of equity so you'd need 23,500 in equity to get $20k out.

since you asked why might it not be a good idea?

A renter or Air BnB person can make quite a mess of your place. A family member owned a rental and the renter had a girlfriend who called the police and said she was being held hostage. The SWAT team crashed in all three doors at once. The door crash and other damage amounted to half the value of the house. This was paid by insurance, but it took a loooong time to resolve because, well, its kind'a a weird thing to happen. And it did happen - I saw the house.

If someone stops paying rent, it takes 91+ days (3+ months) to get them out and more time to fix it up (evicted people tend to leave a mess). Even if they pay, if they trash the place, you're out rent while you fix it back up.

I said that because your question seems to imply that you expect things to go well.. you get the rent every month, your place isn't trashed, not much time between renters. Most people assume this, but not everyone experiences it. If it goes as you expect, it works out like you expect... very profitable!

You might not like being a landlord - just in general, even if none of the above happens.

I have friends and family that are landlords, mostly they like it and think it is financially a good thing to keep doing.

But if you're going to try it, do what they tell me they do... have a few thousand set aside for when things go wrong - don't max out your credit and be house poor.

  • "91+ days" depends heavily on state and local laws.
    – stannius
    Jan 23, 2019 at 16:27
  • 1
    @stannius True. In my area it is 91+ days, and that seemed a good generalization. Georgia law is different, and it looks like the average eviction is 4 weeks if they go quietly or 6 weeks if they fight it. However there are a lot of things in play - in Georgia if you are dealing with a tenant-at will, then you might have to give 60 days notice before filing your dispossessory. Note that I am not a lawyer (IANAL) and if I were it wouldn't be in Georgia ;–) This site is from a firm that appears to practice in OP's area: kimandbagwell.com/evictions Jan 23, 2019 at 18:07
  • +1. Great resource, @J.ChrisCompton!
    – Will
    Jan 23, 2019 at 19:06

I recently did this at my house. I had a detached garage that didn't have any utilities - just an empty box. My house appraised for $300,000 at the end of 2017 and I owed $220,000 when I decided to break ground on the project.

The first thing I will say is that it ended up costing me almost double what I had estimated. I was aiming for $30,000 and it cost me over $60,000. I had $20,000 in savings and I planed to finance the kitchen/appliances with consumer credit cards.

I live in a nice area of Utah near the Cottonwood Canyons. My house is very small, but I'm right at the mouth of the canyon. I decided to add extra amenities to make it feel like more of a "resort quality" stay for short stay rentals. That certainly added to the cost, but a lot more than I bargained for! I did most of the labor myself and hired out an electrician and plumber, along with a handyman for big jobs. If I would have used a general contractor, I'm sure I would have paid close to $100,000.

As far as the financing goes, I made a lot of mistakes. I think the other answers are better advice from the banking perspective, but as a consumer, here's my opinion of the options:

1- Work on your credit score before you start. I had a couple of items on my report that I didn't know about (mostly medical, but even the damn county library!). I didn't plan on borrowing a lot of money, so I didn't bother to sort it out. By the time I needed to, it was too late!

2- Shop around for a good mortgage. I ended up going with a cash-out refinance out of necessity for survival! I kept trying to optimistic about completion date (was aiming to finish in November to take advantage of Christmas vacation renters). Anything that could go wrong, did go wrong! Regardless of late nights and long weekends, it's hard to coordinate everything with contractors and mistakes pop up all the time when you're new to construction. I didn't finish till January 1st.

3- Do your research on zoning/title status. In my case, the "accessory dwelling" didn't add much value. As far as the zoning/tax record, none of the space counts as a kitchen, bathroom or bedroom! I'm sure they factored in the space for ascetic and selling appeal, but nothing towards my square footage which they use as the primary metric for comps they pull for appraisal. Luckily, the values in the area have kept climbing and had their highest YOY increase on record last year (13%!). My house appraised for $340,000. I estimate the general area value increase for the construction period of 18 months accounts for most of the $40k increase. (I did utility lines first, then paused for the winter)

4- Don't take signature loans/max credit cards! It's SO hard to keep track of when payments are due when you're juggling hardware store cards, kitchen, tile warehouse, appliances, etc. I used all consumer credit card loans which was big mistake! You can only borrow above 80% of your home's appraisal value, but they add your consumer debt BEFORE they look at how much you can finance! The cash-out refi allowed me to pay off the loans, but not before I had late fees and finance charges.

For the "Is this a good idea part"? I think that depends... I'm a single parent with partial custody of 4 kids. It's been great to work on this project with my kids, so that weighs in emotionally. I've only had bookings so far, and it's been awesome! My first guests drove all the way from Quebec! They are great skiers and we had a wonderful time together!

For the dollars and cents part of the answer, everything is looking GREAT! I've had almost back-to-back bookings with AirBnB! I'm making nearly 3 times what I would make renting to a full-time tenant. There are a lot of extra costs, so probably closer to netting 2 times. I'm basing that off of a rent report I did in my area that suggested I could rent a 1 bed/ 1 bath condo for $1,000 / mo to get less than 5% vacancy. January I made nearly $2,000 but only had it rented for half the month (no one booked the first week, and I was still tying up lose ends). February is booked most of the month and already over $2,000. I have bookings into march.

I know that every area is different, but I mention my personal experience to highlight what I feel is a key point - with real estate it's all about location!

Checkout Rentler.com for a rent report! It was only $20! Worth every penny in helping me make the right choice! They also have great landlord tools if you decide to do a full time rental. Otherwise, AirBnB is working good so far!


The average rate for a home equity loan is 8.76% and that is high-yield financing which is high-risk financing for the business enterprise.

The average rate for a home equity line of credit is 5.56% but that is a variable rate. The variable rate could be hedged with a sell-side 2-year Treasury Note future.

The basement might be developed by buying an up-flush toilet and hiring some laborers by the hour. But I suppose that plumbing must be signed by a licensed plumber.

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