There are basements, and then there are basements. They're not all created equal, and finishing one type might boost your home's value more than finishing another. Your location and the prevailing market can also affect any return on investment you might be able to expect for finished basement space.
At the end of the day, a basement is an extra, not a requirement in a home. You’ll need a buyer who’s willing to pay a little more for something other buyers might be perfectly willing to live with an unfinished basement.
The Basement You’re Starting With
HomeLight indicates that there are basically two types of basements. One type of basement is a full basement, sometimes referred to as “usable lower-level space.” Having that is good, but you’ll ideally start out with an English or “walkout” basement. The only way in or out of a full basement is via a staircase leading to a floor above on the main level, whereas a walkout basement provides a door that allows someone to walk directly outside. At least part of it will therefore be above ground. Some basements are a combination of the two.
Walkout basements are typically only available on properties with sloped land. The front of the house might be street level, but then the land tilts downward in the back so that part of the home is elevated on a porch or deck.
Your full basement should have ceilings sufficient to allow a reasonably tall individual to walk around down there without ducking or banging into any ductwork. A minimum of seven feet to the ceiling can be required by ordinance, but eight feet is recommended. Both types of basements can have windows, but you’ll most likely be looking out at lawn level if you have a full basement and natural light will be limited. But that door entrance in a walkout basement can be glass, so it will let in a good bit of light – something buyers tend to look for.
How to Finish a Basement: The First Steps
Depending on the type of space you have, your options for finishing it can be minimal or extensive. Ideally, you’re starting out with exterior wall insulation. Otherwise, installing that is your first step.
Then have the space tested for radon, which is surprisingly prevalent in basement spaces and can cause cancer. You can take steps to get rid of the problem if your basement tests positive, but this will obviously hike the cost of your renovation.
Look for signs of past water or moisture damage that can indicate you might have a potential problem. If so, you’ll want to at least install a dehumidifier or even a sump pump.
Check local building ordinances to determine what you can or can’t do with your space downstairs.
Read More: Does Homeowner's Insurance Cover Damages From Radon?
What Will You Do With the Space?
Next, decide on what kind of living space you want to put down there. You can simply paint and lay down flooring if you want a playroom for your kids, or you might want to add a bar for adult entertainment or a bathroom to turn the area into an in-law suite.
Keep in mind that portioning the space into separate rooms can actually detract from the basement’s value because it can impede incoming natural light. An open floor plan is typically preferred among homebuyers. A bathroom must obviously be closed off, and they're often desired by potential buyers, but you might want to think twice about creating a bedroom in a separate room.
The Finishing Touches
HomeLight recommends not overdoing it. You won’t want to invest the same time, effort and expense as you would on a room that’s above ground, at least if you want a decent return on investment. Think good quality fixtures and flooring rather than top-dollar, particularly with flooring or carpeting, because basements can flood. Even moderate moisture can make hardwood flooring warp. Stone, vinyl or ceramic flooring or non-wool carpeting tends to be more moisture-resistant, and it can be less expensive than other options.
Recessed lighting can be a good investment. And if you do have a walkout basement, go for that glass door.
Does It Add Square Footage?
An important consideration when it comes to any increase in the value of your home is that your basement most likely will not be included in your house’s total square feet the way an upstairs room would. In fact, Fannie Mae guidelines prohibit appraisers from including it, and many mortgages, such as USDA loans, require that appraisals meet Fannie Mae's Uniform Appraisal Datasheet. Only habitable, above-ground rooms can typically contribute to square footage, and square footage can be a primary component of an appraisal.
Read More: What Decreases the Appraisal of a Home the Most?
How Much Will All This Cost?
The cost of finishing a basement will depend heavily on exactly how you finish it. On one hand, it’s cheaper than adding an addition, unless you go with very high-end improvements. HGTV says it could be as much as half of the cost of an above-ground add-on.
HomeLight put the average cost at anywhere from $5,100 to $8,750 back in 2019, but HGTV says it could cost you as much as an average of $61,000 or more from start to finish if you really go all in. HomeAdvisor agrees that that’s the high end, but indicates that the average cost is about $18,400 as of 2021. It depends on the amount of square footage you’re finishing.
Adding a bathroom can cost in the neighborhood of $15,000, adding a kitchen area can cost upward of $45,000 and a radon test alone can run up to $800 or so. A sump pump can run as much as $575, and the cost of adding insulation can be upward of $1,650.
HGTV recommends not spending more than 10 percent of your home’s value, so that $61,303 figure would be representative of a lot of house.
The Effect on Home Value
So how much does a finished basement add value? The most tossed-about number is about 70 percent of what you spend on the renovation – both HomeLight and Zillow agree on this figure. In other words, your home's resale value will increase by about $7,000 if you invest $10,000. It could be $14,000 if you spend $20,000, roughly in the area of HomeAdvisor’s average cost. HGTV comes close to agreeing, putting it at 70.3 percent, and HomeAdvisor put it as high as “up to” 75 percent, but they’re all in roughly the same ballpark.
The exact percentage can depend on how deeply underground your basement is. Deeper will lower the percentage, while a walkout basement would be higher. It can also depend on the current, local real estate market. A top-notch finished basement can make your home stand out in a glutted buyer’s market, and even a partially finished area, such as turning the basement into a laundry room or play area, will add at least a little bit of value.
The bottom line might be whether you intend to put your home on the market immediately, or if you’re going to spend at least a few more years there, enjoying that finished basement. That could make a 30 percent out-of-pocket loss worthwhile.
- HomeLight: A Finished Basement Adds Value to Your Home, Just Not in the Way You Think
- Zillow: Does a Finished Basement Add Home Value?
- HGTV: Finished Basements Add Space and Home Value
- HomeAdvisor: How Much Does It Cost to Finish a Basement?
- USDA Rural Development: Chapter 12 – Property and Appraisal Requirements
- United States Environmental Protection Agency: Find a Radon Test Kit or Measurement and Mitigation Professional
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.