(MONEY Magazine) – For Lisa Glenn, a stay-at-home mother of three in Cross River, N.Y., turning her unfinished basement into a family rec room was an effort to reclaim the upstairs. For Gary Hirschkron, a Portland, Ore. investor, creating a state-of-the-art wine cellar out of a crawl space was a means of fashioning himself a hideaway. And for Chappaqua, N.Y. resident Connie Plaehn, a managing director at JP Morgan Fleming Asset Management, transforming her downstairs into a home theater-cum-computer center-cum-exercise room was a way of preserving Friday nights at home with her three sons following her divorce. All three say that, as lifestyle decisions, their renovations paid off in spades. As financial decisions, they may turn out to be even better.

Each year some 1 million homeowners finish or remodel their basements, according to the Home Improvement Research Institute in Tampa. It's easy to see why. Depending on where you live--and what you do with the interior--adding on to your house runs about $150 to $200 a square foot. Finishing a basement? $30 to $75. Tru Davis, a Massachusetts contractor specializing in basements, is blunt: "Where else can you spend 12% to 15% of the cost of your house and get one-third more space as a result?"

Most contractors agree it's the idea that you're transforming an asset that was just sitting there doing nothing that encourages homeowners to get creative with their basements. They put in media rooms for the big-screen TVs that would have been out of place upstairs. They take yesterday's shirt off the Lifecycle in the bedroom and make the machine the nexus of a home gym. They add a guest bed and bath, storage spaces for all their clutter, a big playroom with toy closets for the kids at one end and a pool table for the adults at the other. In the pages that follow, we'll look at projects like these. (Of course, some homeowners think even further outside the box. Portland, Ore. contractor Tom Owens of Neil Kelly Designers has turned one basement into a lap pool, another into a driving range and a third into a basketball court.)

Lately, the basement business has been booming. Garrett Oostdyk, a home-theater specialist at Good Vibes Sound in Champaign, Ill., reports that May was his best month in three years, save a couple of Christmas rushes. Contractor Sylvain Cote of Absolute Remodeling in Yorktown, N.Y. says that basements represented 80% of his business in 2001, up from 30% five years earlier. Even furniture designer Mitchell Gold, who sells sofas and love seats through stores like Restoration Hardware and Pottery Barn, felt the need to add a slew of basement-friendly sectionals to his line. "When I was growing up, I could just go outside and play," he says. "Now parents want their kids within the safety of their own homes."

But they don't necessarily want them underfoot. The basement is the solution, but it's not without its challenges. Of the 59 million owner-occupied homes in the United States, just over half have a full or partial basement. Those are the easy ones. Houses built right on a slab, most frequent in the South, are impossible. Those sitting on crawl spaces often require digging down--or out. Then there are the systems that are often housed in the basement: electricity, water, plumbing, support beams, heating, venting. Finally, there's dampness.

Nevertheless, says contractor Owens, there are ways to make even the smallest space useful. Waterproofing consultants can--and should--dry out a wet basement before construction begins. One solution: french drains, a gravel bed around the perimeter of the basement. Even a tall, narrow space, common in houses built on a steep hill, can be turned into a "walk-out," with access to the garden through sliders or french doors. Windowless basements make perfect home theaters.

In fact, it seems that just about everything is possible in a basement, particularly if you can call it something else. The contractors, designers and decorators specializing in the, shall we say, lower level, would rather you stop using the b-word. Downstairs is preferable. Even rec room will do. "Frankly," sniffs furniture designer Gold, "I rarely hear people call it a basement anymore."

BED AND BATH FOR THE IN-LAWS

Tops on the wish list of many basement finishers is an extra bedroom and bath for a live-in babysitter or frequent houseguests, according to contractor and creator of the BasementIdeas.com website, Dave Schrock. The new suite can't be its own apartment without the proper permits, but it can come fairly close. And it can restore some sense of privacy to your home.

There are a few hurdles to clear. The first is that any bedroom must have an exit. In Connie Plaehn's house, the space set aside for the new guest room had a window, but it wasn't even big enough for a child to crawl through. Her contractor, Absolute Remodeling's Cote, suggested enlarging the window from from one foot high to five feet high and digging a well outside with a built-in step (landscaping around the outside makes it look like a rock garden). This serves to bring light into the space as well as to allow for easy egress.

With the bath, plumbing can present problems. If there's a waste line under the concrete floor, typically your contractor will connect to that. "Most people don't understand that concrete in a basement is only three inches thick and generally unreinforced," says Owens. If there's no convenient waste line, you can have a sewage ejector pump--essentially a sump pump, but bigger--installed. As for newer, single-unit systems that flush waste up to the pipes on a higher floor, Owens calls them an accident waiting to happen.

When it comes to aesthetics, homeowners want these underground bedrooms and baths to be just as nice as the ones upstairs. Plaehn says her new bath--complete with a steam shower--is the nicest one in her house. But that doesn't mean she wanted to pay upstairs prices. Her $14-a-yard carpet is industrial, and her tiles cost $4 a square foot.

Lisa Glenn tells a similar story about her new downstairs bath. She was sure she was on a modest budget, but even a Formica countertop for her standard vanity with a single sink was running $500 or more. Finally, frustrated, she said to her salesperson at Best Plumbing in Yorktown, N.Y., "Don't you have any mistakes you could sell me in the back room? Don't you have an 'oops'?" She went home with an $800 travertine countertop the store had cut for one sink instead of two. Her bill: $250.

EXERCISE ROOM

The best news about putting an exercise room in your basement is not the money you save on gym memberships or even the time you save on trips to the health club. Fitness expert Stephanie Oakes of the Discovery Health Channel says the big plus of putting in an exercise room is that you'll really work out: "For some reason, when people say 'I'm going to put in a gym,' as opposed to a treadmill in the bedroom, they actually use it."

That was Connie Plaehn's thinking. She knew that she wasn't a gym person. At home, she figured, she'd make time to work out as long as she had a floor that was warm enough to stretch on, a dedicated TV so she wouldn't be fighting her three boys for the remote and enough room for her NordicTrack and Pilates equipment. "Sometimes tight spaces get really stinky," she says. "I wanted to avoid that."

To put in a gym with fairly modest equipment (two pieces of cardio equipment plus a weight bench and dumbbells), you need at least 120 square feet of space and a seven- or eight-foot ceiling. Richard Miller, president of Gym Source, a New York-based seller of home gyms, suggests covering the concrete floor with rubber at least three-eighths of an inch thick. At $1.40 to $5 a square foot, it's considerably cheaper and offers more protection than carpet; it's maintenance-free (you clean it with a damp cloth), and it helps to even out floors that aren't quite smooth. Unless you have a window, a television or stereo system is a must to stave off boredom. Finally, it's best to mirror at least one wall, preferably two, at a 90[degree] angle. Says Miller: "It's okay to use a small space to do your exercise, but you need the perception of a lot of space to feel comfortable doing it." Mirrors create that illusion.

To furnish the space, go to a specialty fitness dealer who will service the product if it breaks, and get a warranty of at least six months. Start with cardio equipment. If you're limited by budget or space to a single piece, both Oakes and Miller suggest a treadmill. Miller recommends a top-of-the-line True, Cybex or Trotter, all of which begin at around $2,000 and are easier on aging knees than cheaper brands. Buying used can save you 50% or more.

You also need weights. A $300 set of dumbbells with a $170 weight bench alllows you to do more exercises than an $1,800 home gym, says Miller. He recommends Hampton Durabells; they're chrome with ends of solid rubber, so they won't mark up your furniture and they'll hurt less when you drop them. And look for a bench with wheels.

MEDIA ROOM

At the Plaehn household, Friday night is movie night. The kids choose the program (they're working their way through the first Star Wars trilogy) and the menu (generally macaroni and cheese or pizza). Plates on their laps, they plop down in the media room, flip on the big screen and watch.

It's a scenario audio expert Garrett Oostdyk has seen over and over again. When people move into a new house, he gets a call to wire the upstairs (and for an extra $150, the downstairs too). Four or five years later, he says, "If people are still living in the same home, the investment they've made initially has been absorbed to the point that they're comfortable spending again. They're ready to drop $10,000 to $50,000 doing something really cool in the basement."

A modest expenditure can give you a better TV-watching experience than you have in your living room. If you're willing to spend over $20,000, you can buy something approaching a true theater experience. The equipment matters, of course. (See "Home Movies" on page 108 for systems at three price points.) But, says Oostdyk, "If you spend $5,000 on audio equipment and another $3,000 on room treatment, your system will sound better than if you spent $15,000 on equipment with no room treatment."

What should you get for your three grand? Ceiling tiles, to start. The sort of acoustic tiles you'd see in a recording studio. They cost about $5 for a two-foot-by-two-foot square. Thick carpeting on the floor can also help absorb the sound. So will a "sound-dead" space--a wall with fabric-covered panels or acoustic tiles--at the front of the room, beside or behind the screen. And if you're putting your theater right under a child's bedroom and like to watch movies in the wee hours, you may want a double ceiling with an additional layer of insulation.

What happens if, after you've invested in a family entertainment center like this one, your company moves you a thousand miles away? You could take it with you, but as most systems are designed for a particular space, you may want to sell it with your house. A few years ago, Oostdyk put a $12,000 home theater into the home of a local businessman. When the family moved two years later, the new owner paid $7,000 for it.

A PLACE FOR EVERYTHING

If your favorite catalog is Hold Everything and your favorite chain is the Container Store, chances are pretty good that your finished basement will be chock full of storage. Connie Plaehn, for one, put in 1,200 square feet of cabinets that cost $10,000 at Home Depot. As with media rooms and wine cellars, you can spend a mint--or considerably less--on closets and get much the same result.

All so-called closet systems customize a boxy space for your particular needs. (For two options, see page 113.) The differences are the materials, the finishes, whether a system is built-in or hangs from a track and--the biggie--whether you install it yourself. If you're putting in a cedar closet to store all those off-season clothes, cedar tongue-and-groove paneling looks better, but cedar veneer plywood costs about half as much.

Rather than buying a closet system, Lisa Glenn had her contractor build a special 15-foot-by-eight-foot storage room under her basement stairs with shelves and hanging space for her daughters' games, toys and dress-up clothes. Total cost: $1,500. Now, she says, the closet "has become a sort of playhouse for them." Glenn even outfitted the closet with a tunnel, beaded door and miniature couch. Best of all, even when it gets disheveled--and let's be honest, it often does--she can simply shut the door and hide the mess away.

WINE CELLAR

Wine cellars may be a luxury, but they're a luxury lots of Americans want these days. Since Sept. 11, says Bob Orenstein of International Wine Accessories, a catalog and website (IWAWine.com), sales of self-contained wine refrigerators (the sort you might tuck into a dining nook) fell off sharply. But demand for cooling units for built-in wine cellars spiked 30% and has stayed high.

Gary Hirschkron, in Portland, Ore., was one of those buying. Walk through the arched doorway into Hirschkron's wine cellar and you feel as if you've entered Tuscany. Make that Techno Tuscany. Hidden in the walls of the cellar is a cooling unit that keeps the wine at 55[degree]F and a manual bypass that will boost the temperature of the room to 70[degree]F in five minutes without raising the temperature of the bottles by even a tenth of a degree. There's a humidifier to moisten the air, a dehumidifier to dry it out and a phone and high-speed data lines so Hirschkron can monitor his investments there in peace and quiet.

"We had let the kids, now 15 and 19, take over the downstairs," Hirschkron says, explaining that the basement project was part of his and his wife's effort to reclaim their space. The bulk of the renovated space went to housing the couple's thousands of books, an area for reading and another for the couple's fitness equipment. The 300-square-foot wine cellar was a bonus. "This used to be a crawl space, so I wasn't taking away from anything else," he insists. "I use it as an office as well."

The price tag--$150,000--is tougher to justify. Even though half of the money was spent solving drainage problems, there's no denying Hirschkron did it up. "It's like a good restaurant meal--nothing I'd have buyer's regret about," he says. "But I'm not sure I have anything more rational to say."

Clearly, Hirschkron--who has built a collection of 2,000 bottles over more than a decade--was inspired by passion. But what if you've simply amassed more good bottles than you can drink short term? If your basement is relatively cool, couldn't you just stash them in a closet? Not necessarily. "What kills wines," says Mark Pope, who sells California cult wines through his Bounty Hunter website (www.bountyhunterwine.com) and catalog, "are heat spikes, vibration and light." Your basement closet may not be consistently cool enough, especially if it's near your heating system.

But you don't have to match Hirschkron's investment to build a wine cellar big enough for 800 to 1,200 bottles. To convert a space roughly eight feet by six feet by eight feet high--after insulation it will be about 300 cubic feet--can run from $3,000 to about $10,000.

Basically, Orenstein explains, you're building a freestanding refrigerator. The key is properly insulating and vapor sealing the walls. Orenstein starts by putting foam-board insulation between the studs. Next, the room is wrapped with a sheet of heavy-duty plastic as a vapor seal. Then comes the paneling--and the difference in costs. Redwood walls can run $3,000 for a room eight feet by six feet by eight feet. But after the racks go up, you can't really see the walls. The value alternative: a few hundred dollars worth of five-eighths-inch plywood. The cement floor needs to be sealed--Orenstein uses Thompson's Water Seal, then lays down rubber or indoor/outdoor carpeting--and the door must be tight. Hirschkron's door cost $3,000, but for about $179 you can get a foam-insulated steel door from Stanley with weather stripping on the frame.

Turning to the interior, it's worth investing in open redwood racks to hold your wine. Pine will eventually warp. And though you can build your own solid diamond bins out of just about any wood, too much solid wood in a relatively small space prevents air from circulating and can cause your cooling unit to malfunction. The difference between the less expensive redwood racks and the more costly ones is that the former are milled as thin as they can possibly be and still support the weight of the wine. Both will do the job. (For a price comparison, see page 113.)

Lastly, you need a cooling unit. The Breezaire ($775 for a unit that cools 265 square feet) is the de facto standard, though it may not be the best on the market. "It's the Robert Mondavi," Orenstein says, "the benchmark everything else is measured against." And should you need to get it fixed, the fact that it's manufactured in the U.S. is a huge point in its favor. So is its five-year warranty. Besides, as long as you did everything else properly, it should function well in your new basement for many years.