With the price of homes very high in many locations, often aspiring homeowners will consider buying a property with intent to rent out part of the space, such as a basement or spare bedroom, to tenants or roommates. The plan is to use the rental income to offset the mortgage payment, hence the term 'mortgage-helper suite.'
When the space is a self-contained suite, fully compliant with municipal zoning (i.e. the suite is legal/permitted), the borrower can use the (projected) rental income added to their own to help qualify for the mortgage. For example, a client could buy a legal 4-plex, occupy one unit and use the rent from the other three added to his own to make the mortgage qualifying debt-to-income ratio work. Here's another example.
However, when the space is a room in your house, or income from a non-permitted (illegal) suite (basement, garage, etc.) that income is generally not allowed to be factored into qualifying as the municipality could force you to shut down your suite (or you don't/can't keep a roommate for whatever reason), and there goes the income you were relying on to help pay the mortgage. Doesn't mean you can't rent out a space in your property; just means you can't use the projected income to help you qualify for the mortgage because the income is unreliable from a mortgage lender's point of view.
To prove the amount of rental income a legal space could generate, lenders often require an independent assessment from a licensed property appraiser. Your mortgage professional would help you coordinate this. If leases are already in place, then those can be used to prove income instead.
When you owner-occupy the property, the minimum down payment is as low as 5% provided the property is a 4-plex or less. When you do not intend to live in one of the units, then the down payment requirements are much higher, currently 20% down for a non-owner-occupied rental.
Certain lenders are better to work with than others for qualifying mortgages where the potential rental income is required to make the numbers work. Ask your mortgage professional for help.
Continued below, the practical side of ownership...
As licensed professional mortgage brokers, we know exactly what it takes to qualify you for a mortgage and we do more than just get you a great mortgage at a great rate, we will show you the way, too.
So now to the practical side of owning a home with a basement apartment or other rental suite. It might seem like a no-brainer, but keep in mind the following things you will need to do:
Scott McGillivray, host of HGTV Income Property, says there is no better return on investment than an income suite, bar-none. Don Campbell, the author of a number of books on real estate investing, says a rental suite can be an effective way to help pay the mortgage, but you have to treat it like the business it is.
“It is a great way to get on the property ladder and live in an area you want but can’t otherwise afford, but it comes with a cost,” he says. “If you don’t do it right, it can drive you crazy, both financially and psychologically.”
Can you live with seeing a stranger around your house or using your property outside? Is the extra money worth it?
It is best not to rent to family, as it completely changes the relationship and is difficult to use “eviction” or “collection” rules against a non-paying family member without destroying the relationship and having the repercussions ripple out into the rest of the family.
Always – even with family members – have a properly written lease between you and the tenant that clearly outlines the rules, late rent penalties, expectations, and length of term. It must be signed by every adult who is to reside in the suite.
Never be the lowest rent in the market – you will attract the type of renter whose focus is solely on dollars. It will also lead to more rapid turnover as they leave to the next “lowest rent” spot. To set the proper rent for your suite, go online and search for available units in your area. Make sure to look at a number of different sites and be location-specific in your comparisons. Look at the amenities and picture them through the eyes of a potential renter. Then place your price in the middle or higher end of the average comparable.
Each province and territory has its own landlord-tenant legislation so make sure to read up on the rules that apply where you live. In addition, make sure to research your local municipal bylaws, which include things like guidelines and standards for fire and building safety. Municipal bylaws also cover issues like zoning and permits. For example, some cities are now looking to shut down secondary suites in specific neighbourhoods. Not conforming to these rules means you could be shut down at a moment’s notice, so check with the city to make sure that your suite is legal. The Canada Housing Mortgage and Housing Corp. has a useful website with many good links.
When you rent out a unit in your home, you are obliged to inform your home insurance company – something that the vast majority of people fail to do. If anything were to happen, for instance if a fire starts in the rental suite, the insurance company could say they were not informed of the tenant and that the policy is voided.
Once you have a rental suite in your home, you have to claim that rental income on your tax return. In addition, once you start using the property for revenue, a portion of any capital gain when selling the property could be deemed taxable.
Knowing the tricks of the trade is important and who better to learn from than other landlords? A great free way is to visit www.myREINspace.com and use the search function to read discussions between Canadian property owners and their experiences and strategies when dealing with tenants.
The money a rental suite can generate can go a long way to helping you achieve your financial objectives, whether to live in a certain part of town, create the option for someone to take maternity leave or a sabbadical, or to simply help pay down the mortgage faster. If you are considering renting out part of your home, our advice is do your homework and be prepared for the work (including the hassle) that comes with being a landlord.