When my husband and I were shopping for a home, a basement apartment seemed like a no-brainer.
House prices in downtown Toronto were already sky-high, so we loved the idea of someone paying us $800 a month to live in a space we could do without. We knew we'd have to find tenants, fix leaky taps, spruce the place up, and comply with various bylaws, but these seemed like tasks we could easily deal with in order to buy in the neighbourhood we wanted and become mortgage-free sooner.
Seven years later, we've learned that finding the right tenant is more time-consuming than it appears, that things can and often do break at inconvenient times, that you can't evict someone just because you don't like their new boyfriend, and that being a landlord is a demanding, round-the-clock responsibility.
Don Campbell, the Vancouver-based president of the Real Estate Investment Network and 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."
The biggest shock for most first-time landlords, he says, is the diminished privacy. "You walk into your backyard and there is your tenant, sunning themselves. You want to have a BBQ that night with your friends or boss and there is your tenant, sitting and smoking. Most people don't think of that – they just want the 800 bucks."
To avoid problems, here is Mr. Campbell's list of considerations for aspiring mom-and-pop landlords:
1. Consider your privacy.
Can you live with seeing a stranger around your house or using your property outside? Is the extra money worth it?
2. Try to avoid renting to family.
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.
3. Sign a proper written lease.
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.
4. Don't set your rent too low.
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.
5. Do your research.
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.
6. Tell your home insurance company.
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.
7. Research the tax repercussions.
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 the capital gain when selling the property could be deemed taxable.
8. Learn from other landlords.
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.
For my husband and I, $800 a month in rental income has gone a long way (especially when I was on maternity leave) and given the choice, we'd likely do it again. But my advice for anyone considering renting out part of their home is: Do your homework and be prepared for to do the work – and deal with the hassle – that comes with being a landlord.