By Penelope Graham, Zoocasa
Special to the Financial Independence Hub
As Canadian real estate becomes steadily more expensive, homebuyers are increasingly exploring new affordability options. Renting out a portion of your home to help offset mortgage costs has become a popular method – and with the price of an average detached house well past the $1 million mark in the Toronto real estate market, it may be the only way some buyers can move beyond condos and townhomes.
For these buyers, assuming the role of landlord in exchange for a bigger house or better neighbourhood seems a smart trade-off. However, renting out part of your property – especially when you also dwell there – can be a complicated undertaking, and requires extensive research and resources. Here’s what those considering the purchase of a home with secondary suite should take note of.
What is a secondary suite?
Also referred to as an income suite, secondary suites are separate units within a principal residence. It must have its own private entrance, kitchen, sleeping and living areas. In order to comply, and be protected by, your province’s Residential Tenancies Act (RTA), you cannot share any of these living facilities with your tenant, as they’re otherwise considered a boarder.
While most secondary suites are located in the basement, they can also be on any floor of the house or in a separate building or garage on the property (also known as a “garden” suite or “laneway house.”) There may be only one rental unit per property, and the home must be a detached, single-family residence.
Why get a secondary suite?
Renting out part of your home offers significant financial perks, and is a practice encouraged by the Canada Mortgage and Housing Corporation (CMHC), for being an important contributor to affordable rental housing. For example, the Crown Corporation estimates secondary suites account for one fifth of all rental supply in Vancouver, a city with nearly zero (0.6%) rental vacancies.
“Not only are secondary suites a source of affordable rental housing, they can also provide the needed extra income to first-time buyers for whom that additional income makes housing affordable in high-cost areas,” the CMHC states on its website. In September 2015, it also passed new rules to make it easier for landlord homeowners to qualify for loans and mortgages – 100% of gross rental income can now be included as part of their debt-servicing ratio.
While that’s a big draw for cash-strapped buyers, the CMHC points out that income suites are also a great option for retirees who may not wish to downsize and leave their homes. “For older households who no longer need a larger house, the addition of a suite can generate needed income and security, as well as allow them to continue to live in their neighbourhoods and age in place,” it states.
Do your research
Renting out a portion of your home is more involved than advertising the listing and collecting rent each month. Many first-timer landlords underestimate the commitment required, or the extent of their legal obligations. In addition to maintaining the unit, and paying for necessary (sometimes emergency!) repairs, some of the most commonly overlooked areas include:
Is it legal?
Not all secondary suites are developed in accordance to necessary bylaws or municipal zoning. Some suites, especially in older homes, may have been built prior to changing rules, or no longer hold up to safety and fire codes. It’s important when buying a home with a suite to confirm its status. If it is out of date, what improvements must you make to get it up to compliance or code? Some municipalities may not allow income suites at all, or restrict them in some locations. As well, only legal suites qualify for the CMHC’s income qualification.
Know your local legislation
In Canada, secondary suites are governed under each province’s separate legislation and tenancy acts. Rules around deposits, evictions, and security funds can differ depending on where you live. Be sure to read up on the CMHC’s Provincial and Territorial Fact Sheets before you proceed.
Consult an expert
It’s a smart idea to connect with a legal expert who specializes in landlord and tenant issues in your region. They can answer any questions you may have not covered in the RTA, such as how previous disputes have been handled and other legal precedence.
Brush up on privacy laws
As a landlord, you’ll need to ask your prospective tenants questions, as well as keep their personal, contact and financial information on file. Depending on where you live, you may have to abide by specific privacy laws when storing this information.
Hire an accountant
Or at least get up to speed on business bookkeeping – as you are now running a business, you must keep all relevant records and receipts for costs associated with your tenant and unit. It’s wise to bring in a pro to help keep expenses and assets straight. They can also help at tax time when you need to claim the income you’ve made on your rental, as well as when you sell your home.
Know the rent requirements
It’s important to know the fair market rate for rent in your region; will the rental payments effectively help offset your mortgage carrying costs? Does the rent charged reflect available amenities, or lack thereof? For example, rentals located close to transit, or are newly renovated, may fetch a premium. There are also differing rules around increasing rent, how often you hike it, and the notice you must give to do so, depending on your province.
Can you afford a dispute?
There are a number of horror stories of tenants who refuse to pay rent, damage the property, or throw frequent, noisy parties. It’s important to know what recourse you may have as landlord if you need to evict your tenant or settle an issue. If they stop paying rent, for example, you’ll often need to provide them notice, give them a window of time (14 days in Ontario) to pay up, file an application for arrears with the landlord and tenant board, and attend a hearing to determine the outcome. This process can take time, not to mention an emotional and financial toll. Could your finances withstand missing rent while a dispute is being solved?
Have a plan in place
While a savvy financial move, being a landlord isn’t an ideal option for every homebuyer – it’s a living arrangement that requires sacrificing some privacy, personal time and energy, and can also be a money pit should things go awry. It’s also important to have a plan for your rental unit. Do you expect to rent it out indefinitely, or will you occupy the whole house someday? Will you convert the suite back into a single-family residence, or leave it as is for added equity when you sell? Be sure to take these points into consideration before adding the title of landlord to your resume.
Penelope Graham is the Managing Editor of Zoocasa.com, a leading real estate resource that uses full brokerage service and online tools to empower Canadians to buy or sell their home faster, easier, and more successfully.