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For rent sign in this undated file photo.iStockphoto/Jay Spooner

A family member recently decided to renovate her basement to create a rental unit. She's nearing retirement age and thought it would be a great way to generate some extra income, particularly in her retirement years when she's living on a pension.

It's an appealing idea – putting your home to work for you. If you're living in an area that is desirable to renters and you have a house with more space than you need (an empty nester, perhaps?), it seems like a no-brainer. But is renovating to rent a sound financial decision?

Judith Kane, financial adviser and president of Antara Financial Group in Ottawa, says that creating a basement apartment can be a fantastic way for the 50-plus crowd to supplement their income.

"I think if you can handle having someone living in your house then it's always worth it," she says. For someone going into retirement with a mortgage, renting out a part of your home can be a way to pay that mortgage off.

"If your total mortgage is $1,200 or $1,500 a month and you can get $1,000 in rental income from the rental unit in the basement, you're living pretty inexpensively. It may impact when you retire or the kind of life you have in retirement," said Ms. Kane. "Or if your nest egg has gone down or you've lost your job and you don't have the pension you thought you did, this is another way to supplement your income."

In addition to the income generated from the rental unit, you get a newly renovated basement – another big plus, says Ms. Kane. The renovation will increase the property value of your home, and it won't have cost you anything to renovate it. (For example, if it cost $30,000 to do the renovations and you're charging $1,000 in rent, you will have gotten your renovation costs back in less than three years of renting.) Plus, if you're a senior who travels, you'll be able to earn income while you're gone, and have someone in your home instead of a vacant building.

"I think it's a great idea," she said. "I have clients who are maxing out their RRSPs and they're like, what else can we do?"

But what about the nightmare scenario of spending a large sum on a renovation, then not being able to find a renter? Ms. Kane says although renovating to rent can be a great idea, homeowners need to do their homework before embarking on a project of this magnitude.

Find out what comparable units in your area are renting for on websites like Craigslist (and note how long they sit before they are rented). Check with your local planning department to ensure there are no by-laws that would prevent you from creating a separate apartment. Find a reputable contractor that "passes the Mike Holmes test," says Ms. Kane. And get the right insurance.

"Make sure you are insured for having a renter in the building," she said. "Don't try and cheap out, like people who say, 'I never drive my car to work,' in order to get cheaper insurance. Get the right kind of insurance if you're going to have renters in the house."

And when it comes to how much you should spend on a basement renovation, Ms. Kane suggests spending between $30,000 and $70,000 (depending on the current condition of the basement). Though you may be tempted to splash out on granite and custom cabinetry, resist the urge.

"Remember it's a rental unit. So you don't have to put in cherry and granite and hardwood, just make sure it's warm and comfortable," she said. "Look for what's on sale." For one example, Ms. Kane recommends checking out Habitat for Humanity stores to find great deals.

"There are people ripping out brand new cupboards because it's not their style," she said.

Keep in mind resale value when renovating as well, advises Ms. Kane. A separate entrance is a great investment because it's desirable to renters, but if you have an interior door and stairs leading into your basement, think twice before you rip it out. It might be appealing to future buyers looking for an in-law or nanny suite.

When it comes to finding your renters, says Ms. Kane, do your homework. Check with your province's landlord and tenant board to get information about renting your property – find out your rights, responsibilities and recourse. And if you do get to the stage of finding renters, do your due diligence before choosing anyone.

"Get yourself signed up so you can do credit checks," said Ms. Kane. "Check the references, don't be afraid to call the person's work and ask if they work there. Get references from places they rented before."

Ms. Kane also advises prospective landlords to check with their accountant on what the tax implications are. You might, for example, be able to write off some of the costs pertaining to your rental unit, such as renovation costs, utilities, snowplowing, etc.

"And check with your financial planner to make sure it fits in with your plan," she said. "I would not recommend doing this over buying RRSPs, but renovating your property to create a rental income is a great way to solve a whole lot of issues."

As for my family member who is a new landlord? So far, it seems to be working out swimmingly. Her basement apartment reno is completed, she's found a renter she's happy with and she's starting to bring in that extra income she was looking for.