construction estimates

If you’re in the process of designing and planning a unit already, your architect should be able to give you far more specific estimates. They will calibrate costs to your design based on the specific alterations, the square and linear footage of work and materials, anticipated labor/material bids from contractors, and installation practices. Professional plans and construction estimates will be necessary for official appraisal of renovation value, loan applications, revised insurance quotes, and potential tax appeals.

For those wishing to develop a quick and dirty estimate, ‘Chi_Construction’ includes two parts:

• 1 Bid range and comparable construction scenarios, in the upper section, are meant to allow you to explore the line-item information through a more orderly and less overwhelming interface. Those drop-down options should allow you to switch back and forth between ranges/scenarios as you select line-items (below).
• 2 The construction line-item prices, in the lower table, are from a series of 2018 bids on basement projects, by Neighborhood Housing Services. The final calculations —of architectural overhead and 10% over-run margins— also include a percentage addition to cover inflation from 2018-2020.

3 As you explore construction costs and select elements that need altered (in the line-items), keep in mind what lies behind the upper options of high, mid, and low bids. Some of those price differences represent profit, but the greater portion represents the skilled labor required for construction, the quality of materials used, and the time that is required to complete a job safely and with care. It can be tempting to use low bids. For basements—where a rushed job could lead to leaks, mold, and the need for additional renovation—you don’t want to skimp on labor, time or materials. Start your estimates in the ‘mid’ range to be realistic and, after running all the calculations, test ‘high’ and ‘low’ options to understand their impact.

4 Based on your upper scenario selection, at the bottom-center you will see the construction costs of either a typical Cottage conversion or a Two-Flat addition, as illustrated in the ‘Common Conversions’ chapter. These scenarios offer a quick reading of the likely level of investment for common buildings and provide an approximate starting point for crafting your own estimate from the list of potential construction items. The list of potential elements and costs is broken down following the same categories introduced in the ‘Code Compliant Units’ chapter. The scenario’s checked line-items are summed within each category and the final composite estimate, at the bottom of the page, is shown in ‘Scenario Costs’ at the top.

5 On the right side of the line-item list are empty check boxes for your estimate: check those items you anticipate needing based on the ‘Code Compliant Units’ and ‘Mitigating Issues’ chapters. When in doubt, reference the scenarios for comparison. For those items you check, prices shown at the far right and are summed by category. As in the scenarios, the final summary of costs is then linked to ‘Your Estimated Costs’ at the top of the page. 6 Just beneath that box is an input where you can add either an independent estimate or test rough numbers as you explore the cost-benefit outcomes. An additional line calculates inflation, architectural overhead (12%), and over-run margins (10%) for the checklist (or your ‘test’ amount). 7 Finally you can toggle to determine which option should be referenced by the other calculators/tables.

Loan terms, payments, & prep

The calculator ‘Loan_Terms’ takes into account the amount borrowed (financed), rate it was lent at (APR), and the length of these loans. This snapshot—of annual debt payments and equity gain—should help you determine whether a conversion makes sense with your resources and investment strategy.

Broadly speaking, if you have good credit and a steady income you should be able to qualify for a fixed-rate home improvement loan. Talk with an accountant confirm the general financial feasibility tabulated here. In general, you’ll need to provide paperwork for a loan, documenting your:

• Existing Assets and Debts, including current equity in your building (the portion paid off) and outstanding mortgage debt.
• Credit Score and Annual Income, so that lenders can get an idea of your overall debt-to-income ratio

For new construction and additions, it is common practice to have an appraiser estimate the likely value of your planned project. As shown in the Appraisal Report at right (for Two to Four-Flat buildings), an appraiser will evaluate your project based on:

• the specific construction characteristics and finishes, with depreciation factors for the age and condition of the structure (middle & bottom)
• an analysis of the capitalization rate of the building, if it were solely used as an income property, and
• a market study of similar properties sold within a 1 mile radius of your building in the last 6 months (not shown), in order to understand your revised property value.

This helps establish the likely return on any money invested and thus the financial risk of the project.

If you have project plans and estimates from your architect and/or general contractor, you should be able to get an initial appraisal based on those specifications, for incorporation with loan applications. Talk with the loan originators at Neighborhood Housing Services to learn more about your renovation financing options. Talk with your accountant about the financial risks (and equity) of your existing assets and potential basement conversion project.

calculator contents

In advance of an appraisal and focused financial guidance, use the ‘Loan Terms’ calculator to estimate payment amounts and your overall annual costs for financing construction. This calculator loads the prior pages’ construction cost estimate.
1 To begin, set the current year, which will feed into new vs. existing mortgage payment calculations.
2 If you’re paying for construction with savings (not financing), set your downpayment to the full amount of construction; this will zero out payments and capture your lack of project debt. Otherwise, if you’re borrowing money, set the loan terms to match your loan (3: years, APR).
4 Toggle payment frequency to match your repayment schedule and this will calculate your required repayments.
5 Repeat the process for any outstanding mortgage on your property. Both the loan payments and mortgage payments (with timing variables and total loan amounts) are incorporated in the ‘Cost-Benefit’ analysis in order to estimate your total annual debt-payments.

What’s affordable in Chicago

Setting the rent on your basement unit requires research into your local market and consideration of the relationship you wish to cultivate with tenants. You don’t want to have a vacant, overpriced apartment or a unit priced below its earning potential. Ideally, long term tenants who can afford their rent will be more pleasant co-habitants and reduce turn-over, vacancy, and extra legal and maintenance costs. As basement units are typically less desirable than elevated units, it’s particularly important to compare with other basement units in your area and price your unit affordably.

calculator contents

1 To start your income estimates, the ‘Chi_Rental Rates’ calculator begins by referencing HUD’s Fair Market Rental rates, an annual survey of average area rents, which is searchable by zip code and calibrated to unit size. It also pulls in HUD’s Median Family Income (FMI), which Chicago uses as the baseline for affordable units (60% FMI, with ~30% of monthly income as rent).
2 You then select which level —market, affordable, or averaged—makes sense for your basement unit and other rentals 3. This assumes basement units command less rent.
2b 3d Spaces are left so you can add your own rent values based on the local research, HUD estimates, or negotiated rent, with friends, family, or existing tenants you’d like to retain. To be conservative, the model includes 3 months vacancy (for move-out, cleaning, and marketing of units) as basements often experience higher turnover and lower desirability.

3c The lower half of the calculator then tallies these sources to establish building size and annual rental income. It also (not shown) adds miscellaneous income, like laundry change or parking rent, to estimate the final, overall income for your building. This preliminary annual estimate of rental income links to the ‘Cost-Benefit’ analysis.

other rent considerations

To finesse your estimate, you can conduct a (virtual) market survey of comparable units via Zillow, Domu, and Craigslist. If possible review the rents at a minimum of six to eight properties that are within your immediate market area (compare and contrast garden and upper units). Pick buildings and units that are of similar age and have comparable updates. As it allows for the search of active and past listings, Zillow may be the easiest way to see the history of past listings at a building and how long listings have been advertised. If an ad was up for months, the unit is likely overpriced. If a unit appears to have been rented within a month, then it’s probably priced well for the area.

You may want to visit those buildings that most closely resemble the apartments you are offering. Questions to ask:

• Do they have similar amenities, like laundry or outdoor space?
• Are they offering similar appliances/modern bathrooms?
• Are they on a busy boulevard or a quiet tree-lined street?
• Are they close to public transportation or do they offer parking?
• Is heat included or extra, electric (etc.)?

All of these differences will have an impact on the value of your particular apartment in its market.

The rent you should charge should be based on the strengths and weaknesses of your new unit and amenities—compared to similar properties—and finessed to build stable tenant relationships. Resist the temptation to raise rents during your initial estimates of project costs and benefits.

Note: If you are converting multiple basement units in a Five to Six-Flat Building (under the new ADU ordinance) at least one basement unit must be rented as an affordable unit for the first 30 years. Reference the City’s affordability tables to confirm affordable unit caps.

Property assessment decoded

Valuing your Basement Renovation, in advance of appraisal:

• 1 Renovation Value to be Assessed: This model starts with the estimated construction costs for an ADU addition (from ‘Chi_Construction’) and lets you pick high or low (75%, 60%) recuperation of construction as part of the property value.
• 2 Value Appreciation in relation to Neighborhood: This model references DePaul’s Housing Price Index, to estimate the 5yr appreciation average for areas across Chicago and track median sales prices. As the index tracks single family homes, this is a rough proxy based on relative square footage, meant to give an initial sense of whether your renovation is too expensive, i.e. far above the median. Appreciation rates link into the final cost-benefit analysis.

Once you have rough construction plans and costing, an appraiser can accurately estimate the addition of value and area appreciation. (See appraisal discussion in loan section.) The measures above are rough proxies; replace them with the appraiser’s estimate.

3 Assessment Values to calculate taxes and tax increase:

• Fair Market Value: The Cook County Assessor’s Office establishes the Fair Market Value of your unit based on building characteristics and neighborhood. Construction permits will trigger reassessment but you can also appeal for assessment. Look up your current valuation at https://www.cookcountyassessor.com/address-search.
• Equalized Assessment Value: This multiplier is meant to make property takes roughly equal across the state. For 2019, this is 2.9109 * Assessment Value (i.e. 10% of Fair Market Value).

Exemptions:

• 4 Homeowners (EAV-10k): Homeowners or owner-occupiers can deduct $10,000 from their Equalized Assessment Value.
• 5 Senior Credit (EAV-8k): Seniors qualify to deduct $8,000 from their Equalized Assessment Value (auto-renews) and can apply to permanently freeze their taxes.
• 6 Disability (EAV-2k): Persons with disabilities can apply to reduce their Equalized Assessment Value by $2,000.
• 7 Returning Veteran (EAV-5k): Returning Veterans can apply to reduce their Equalized Assessment Value by $5,000.
• 8 Home Improvement (4yr tax-freeze for >75k of improvement): This is triggered by construction permit applications and allows the deduction of the first $75,000 of improvements, with qualifiers. If checked, these rebates are applied to ‘Cost-Benefit’.
• See additional exemptions

9 tax rates

Cook Co. Tax Rate (6.786% for 2019): The Cook Co. rate for Chicago residents is calculated based on the city’s annual Corporate, Parks, Schools, Water District, and Forest Preserve budgets (plus other funds).

• The tax rate for 2019 was 6.786%, which is multiplied by your Equalized Assessed Value minus any Exemptions. The final outcome is your tax bill, as split into two annual payments. This annual tax value is linked into the ‘Cost-Benefit’ analysis, with increases tied to the consumer price index. Learn more about tax bills at the Cook Co. Treasurer’s pages. Over the last decade, the rate has fluctuated between 4-7% and may increase, given the city’s need for retirement funds. These tables assume a fixed rate for ease of calculation.
• Simplified Tax Rate: This composite rate is calculated without exemptions, for estimating tax on annual appreciation.

Water, sewer, garbage, power

In terms of additional costs for a multi-unit building, you should anticipate new charges to cover the common area electricity, additional water usage from shared laundry facilities, and, if heating from a steam system, increased gas bills for the finished basement. As the property owner, you will receive combined bills (shown at near right) from the City for each metered water line, which include sewage charges and garbage collection fees (for four-flats or less). As a multi-unit owner you are no longer eligible for sewer-rate reductions or cancellation. Your tenants’ gas and electric accounts should be entirely separate and billed directly in their name.

It is your decision as to whether and how to pass water, sewer, and garbage costs along to tenants, in pro-rated rent or variable monthly payments. Likewise, shared heating costs are commonly incorporated into overall rent calculations. If you have a larger building (Five or Six-Flat) and must rent one of your basement conversions as an affordable unit, you are required to calibrate combined rent and utility costs so that they fall beneath the city’s affordable thresholds.

calculator contents

The ‘Chi_Utilities’ calculator estimates annual, building-wide utility costs, to incorporate into your overhead calculations:

• 1 At the top you have the choice to estimate monthly costs based on a) averaged monthly volumes (water, electric, gas) for Cook Co. from the Energy Info Administration or 2 b) you can add your own meter readings, from a typical month for one unit. If using your past bills/meter readings, try to input an averaged value as heating and air-conditioning costs vary widely, given the Chicago climate. 3 For both average and custom values check to indicate whether using electric or gas for heating, as utilities charge lower rates for higher anticipated volumes. The rates shown for both options are taken from 2020 rates for City of Chicago, ComEd, and People’s Gas and are available at the bottom of the table.
• 4 The center section uses the selected monthly usage numbers (average or custom inputs) to calculate monthly and annual costs for one unit (the owner-occupied unit) and likely shared costs per unit. Laundry is typically 17% of a household’s water usage; common lighting is set to 12.5%; heating is assumed to be nearly 66% of gas usage. Your actual usage may vary but this provides a rough starting value to multiply by the total number of units in the building.
• 5 The bottom section offers four scenarios representing different levels of utility coverage by the landlord to be incorporated in the cost-benefit analysis. The most extensive and expensive is to absorb all city utility costs, shared heating, and common laundry/electric. The most minimal strategy is to pass city utility fees along to tenants and keep heating, gas, and electric all separate, covering only laundry and common lighting. Pick the scenario that most closely matches your anticipated separation of meters and building systems.

Broadly speaking, these calculations, over the long-term, are likely to slightly under-estimate the full annual cost of utilities. Gas and electric rates can be volatile as they are tied into energy costs and respond to climatic swings. In addition, the City of Chicago’s rates are tied into the cost of capital improvements. This calculator, which feeds into the ‘Cost-Benefit’ analysis, anticipates annual increases at the rate of inflation, which is low and steady compared to the factors above. See the City’s rates and billing page and your gas and electric provider to finesse these numbers with prior rates and personal usage.

covering rental risks & administration

If you’re not a Two-Flat owner, the costs and task of management can feel nebulous. A quick way to get a sense of your responsibilities is to review Chicago’s Residential Landlord and Tenant Ordinance. As a small building (< six units), it’s not legally binding for your unit, but it offers a template for typical management tasks, including:

• placing security deposits into interest-earning saving accounts
• setting reasonable late payment fees (and legal caps of fees)
• setting rights of access and maintenance standards
• resolving tenant-landlord disputes and means of recourse

It’s advisable that you both read the ordinance summary and pass it along to tenants, so everyone is on the same page.

estimating administrative tasks

To flesh out a full plan and robust budget for managing your building, you should reference the Community Investment Corporation’s Property Management Manual. Their extensive guide covers marketing apartments, setting up tenant selection procedures, enforcement and eviction processes, and speaks to the relative cost-efficiencies of managing larger vs. smaller buildings.

Having spent time and money, creating a new unit and finding tenants, it is also essential to have the proper insurance to protect your basement investment. A landlord policy offers two broad types of coverage. It protects a) the physical structures on the property in case of a loss/damage and includes b) liability coverage, should a tenant/visitor slip and fall.

As you update to a landlord policy, it should have:

• Dwelling Coverage for the physical rental property: It is the cost to replace the existing structure.
• Other Structures for any other buildings like garages or sheds.
• Personal Property for your personal items: furniture, home goods, and computers. (Tenants will need renters insurance.)
• Loss of Use for any rental income you could lose. Set this to equal your annual gross rents.
• Medical Payments for any medical bills you may be responsible for.
• Liability Coverage for injury or lawsuits brought against the property (min. $500,000 coverage).

calculator contents

1 In terms of budget estimation, the ‘Chi_Admin Insurance’ table translates the bare minimum of tasks into low estimates, assuming you will manage the building yourself . What you see in the sheet, like the costs of marketing units on Zillow, or legal fees for a real estate lawyer, are meant as a best-case scenario facing evictions and rental turn-around. Consider, for instance, the ‘public’ face of showing units: do you need unit photos, cleaning, painting, or a paid broker to help show the apartment? That’s just part of the management cycle. Double-check and update costs as needed.

Landlord’s insurance is more expensive than homeowners and you can anticipate paying about 20% more a year for a landlord policy. For approximate numbers, input 2 your existing policy and 3 type . For quick estimate purposes, this calculates a landlord’s policy - with 4 personal property separated from building and liability costs - as 120% of homeowners rates, with rough increases for finished basement units.

For an accurate estimate, get an updated quote from your current insurer. Net costs from management and insurance feed into the ‘Cost-Benefit’ analysis.

Costs, cycles, and reserves

If you’ve gotten this far in the manual, you’ve probably realized there is no such thing as a maintenance-free building. The purpose of maintenance is to keep the property safe, clean, and in good working condition. Regular repairs and annual assessments should halt decay and deterioration before it takes root - in common spaces, structural systems, mechanical systems, appliances and the building grounds.

As an owner-occupant, you may decide to do some of these services yourself, like lawn care or gutter cleaning. Even if you contribute labor, it is important to plan and schedule your maintenance in advance, to cover the cost of materials and synchronize seasonal tasks, like changing heater filters or checking radiator valves.

calculator contents

Conceptually, the main maintenance table includes:

• 1 Routine maintenance contracts & materials: Often accomplished by outside labor, these tasks correct problems that result from continuing wear on the property and equipment, accidents or abuse. This includes non-emergency repairs to the building, the equipment and the grounds such as performing snow removal, lawn care, sweeping, cleaning windows, and hallway vacuuming. Update by line-item.
• 2 Preventive Seasonal/Annual repairs & materials: This includes regularly scheduled upkeep on all areas of the property and equipment, esp. for heat/cooling. It allows trade experts to catch problems early and prevents expensive replacements to the building systems and structure. Update by line-item.

Your costs, for routine contracts and annual service, will likely vary from the generic rates above, which are derived from Community Investment Corporation’s manuals. As a small multi-unit building you are unlikely to have much bargaining power when hiring for lawn care or cleaning, and thus may pay more. For a more accurate estimate of routine maintenance costs, update the current line-items based on trade-experts connections and existing contracts. See Community Investment Corporation’s Property Management Manual and Training for more on developing a maintenance plan.

• 3 The final, reserve table outlines recommended savings for emergency repairs and capital building projects. While not as extensive as the routine list, you can anticipate that these funds will be used to cover long-term up-keep, like inevitable roof repair and furnace replacement. These funds should also be used to handle tenants’ (or your own) urgent or emergency maintenance requests, like replacing broken fridges or immediately fixing broken water pipes.

Your costs for emergency and capital repairs will likely vary from the rates listed, which are derived from the initial NHS construction cost estimates. You may want to add additional items to the emergency replacement list based on your building. For an accurate accounting of capital repair costs, get trade experts’ estimates of replacement cost and remaining lifespan (to time your incremental savings). All maintenance costs & reserve recommentations are summed and incorporated in the ‘Cost-Benefit’ analysis.

In addition to developing a maintenance budget and plan for yourself, it is helpful to remind tenants of their responsibilities to keep trash areas clean, notify you about extermination needs, and track concerns (moisture, slow drains, etc.) so you can address issues before they become expensive emergencies or code violations.

Benefits, costs, & net values

The final calculation table, ‘Cost-Benefit Break-Even’, takes the results of your prior estimations—of capital and operating costs—and sums them to determine your annual profit or debt and year-by-year cumulative net value. For the most part this table compiles automatically. There aren’t many places to insert data or add custom values; rather, they should be adjusted in the prior seven thematic tables.

calculator contents

For ease of use, the layout is broken into three pieces:

• 1 The top section includes the key outcomes of your calculation, the break even values and a optimistic snapshot of decade-by-decade increases in value.
• 2 The middle explains where all the inputs are linked from, so you can flip back and forth between tabs as you seek to edit inputs.
• 3 The bottom sections hold all the annual cost-benefit summations, which track year-by-year profits and value accumulation.

At the top,1 the key outcome to examine is the break-even value. This tells you how many years it will take for the cumulative net value (of your building and rental income) to equal or exceed either the cost of construction (with or without financing), as derived from the bottom calculations. Consider your goals to contextualize this number: if you anticipate selling the building in five years it only makes sense to do a project that breaks even by year five. If you’re going to be there for the next 15 years, breaking even in 12 years is entirely reasonable. The ‘value growth over time’ provides a quick read out of longer term value accumulation. This over-estimates value, as appreciation rates are unlikely to stay stable over 40 years.

As described at the middle and shown at the bottom, the annual determination of nominal net value is calculated by adding your 4 annual benefits:

• rental income
• annual appreciation of building value

and subtracting your 5 total annual costs:

• home-improvement-loan payments
• mortgage payments
• property taxes
• utilities
• insurance & management costs, and
• maintenance costs. & reserve savings.

Year-to-Year calculation, for the next year’s benefit or cost in each column, is simply the prior year’s value increased by inflation. The exceptions are in appreciations, loan payments, and taxes. Appreciation is set to start once the renovation is complete, so it begins in the second year, based your neighborhood’s average five year appreciation rate. Loan payments start with both the down payment and monthly payments and then, from the second year on, only include the monthly payments. Taxes are frozen for the first four years (the home improvement exemption) and then are based on the appreciated building value. (This likely over-estimates your taxes, as the assessment cycle is much slower, but also serves as a useful hedge against unanticipated rate changes.)

In broad terms, the idea is to make sure that your gains in value (as liquid rent or fixed real-estate) are larger than your operating costs and loan liabilities, so that your annual (nominal) net value is positive. Once you’ve managed to eliminate your initial construction loan debt and balance your accumulate net value with your total construction costs (break-even), then annual net value additions are generating positive profit.