When people tell Tanis Frame that renting out a suite in their home is "passive" income, she just laughs. The Whistler, B.C., resident recalls an early-morning visit by a fridge serviceman as just one example of how not so passive the role can be.
"He walked through dog [droppings] on the grass and tromped dog [droppings] across their deck and into their place, and there I am cleaning up dog poo before I'd even had coffee yet," Ms. Frame says. "There's a lot of stuff like that, and you've got to be willing to take it on. If the toilet breaks, you've got to deal with it."
The married mother of two young girls says that, despite essentially being on call 24/7, having rental income has allowed her family to do more than own real estate. A life coach, Ms. Frame says it helps them align their lifestyle with their values – which include living close to nature and spending significant time outdoors.
It's not unusual for homeowners to rely on rental income to help pay their mortgage, especially in the country's real-estate hot spots where prices are through the roof. But for some, there is more to it than that.
Ms. Frame and her husband have had tenants for well over a decade, first in Vancouver then on the Sunshine Coast before they moved to Whistler nearly two years ago.
There, they went on to build a smaller unit that they rent out in addition to the suite in their home.
It may sound like merely an easy way to help pay their mortgage, but Ms. Frame views sharing their space to renters as one small way they can help address the dreadful housing situation in the place where they have planted roots. Whistler has a severe shortage of affordable accommodation for locals, and, as in Vancouver, housing prices are exorbitant. The family would make more money renting space as vacation units, as so many people on the West Coast do, but Ms. Frame says they see providing space for those who desperately need a place to live as a kind of social responsibility.
"I deeply believe that wherever we're running into scarcity, there's an opportunity for synergy, and this housing challenge is a scarcity we're all facing," she says. "Where do we look for synergy? We pull together with other people and share. You share land and houses, whether it's a suite or co-operative ownership or another housing model. You get creative."
Even with a desirable income stream, however, renting a suite is hardly straightforward, Ms. Frame cautions – and not just because of the potential for difficult tenants. Although the vast majority of their tenants have been wonderful, the family did have a "nightmare" not long ago: Tenants found a key to their home, used the premises while they were away, and caused thousands of dollars' worth of damage.
Then there is the financial pressure: Bigger homes come with bigger mortgages, and even with rental income, there is financial risk.
"Everyone handles financial stress differently," Ms. Frame says. "We are very leveraged as a family, and that's a conscious decision. That's a choice that we're making. Some people would be so stressed every day watching real estate and mortgage rates, but that's no way to live. You've got to decide what kind of stresses you want to take on.
"I frame it as one of my jobs," she adds. "Tenants, rentals, deliveries, and dog poo are part of how we make money as a family. … We couldn't afford to live here if we didn't do that. There are lots of compromises. It's a good fit for us, but it wouldn't be a fit for everyone."
Anyone hoping to buy a home or upgrade to a larger one based on the money they can generate from a suite needs to go in knowing exactly how lenders view rental income, says mortgage broker Karen Gibbard, president of Gibbard Group Financial in North Vancouver, B.C. And qualifying for a mortgage may be harder than people may think.
Lenders generally will only use rental income to help with qualification if there is a suite already established in the property. If there isn't a suite in the home, chances are the lender won't count any "expected" rental income from the suite.
There are many different methods lenders use when calculating how much rental income can be used in helping a client qualify for a mortgage, Ms. Gibbard notes, and several factors that will affect the calculation – for instance, whether the mortgage is high-ratio insured or not.
"One thing for sure is that most lenders will not allow the use of any rental income coming from a rented room – if there's no suite – when qualifying a client for a mortgage," she says. "They will only consider income from a suite with a full kitchen and bathroom." Also, clients need to confirm with their lenders if they will accept rental income from an unauthorized suite, she adds.
There are a few different methods financial institutions use to determine qualification, she notes.
Rental offset is generally perceived as the most advantageous for qualification purposes, as it takes certain costs of owning a property, such as mortgage payment and property tax, and subtracts a portion of the rent with any shortfall used in the qualification figures. Lenders who use this method may use anywhere between 50 per cent to 90 per cent of the rental income for offset purposes.
The most commonly used method is what is known as rental addback, which is the least advantageous to aspiring homeowners. Lenders take a percentage of the rental income (anywhere from 50 per cent for conventional mortgages to 100 per cent for some high-ratio mortgages) and add it into the client's income. From there, the qualification is worked out on the client's full housing costs and debt load. This method gives people a very small percentage – about 20 per cent – of the actual rental income toward qualification.
Here is an example: If you rent out a basement suite for $1,000 a month and the lender allows the standard 50 per cent addback of the income for qualification purposes, you would be looking at $1,000 times 50 per cent ($500) a month added to your income. Even if people have good credit, lenders are only able to use up to 39 per cent of their income for qualification. Here is where it gets more complicated: This means that out of the $1,000-a-month rent, a lender is only using 39 per cent of 50 per cent of the rent ($500 times 39 per cent) – in this case, $195 a month of rental income – to help qualify for the mortgage. This would cover about $42,624 of a mortgage based on a five-year term at 2.69 per cent and a 25-year amortization period.
Once people do get approved, they have to consider other factors, such as loss of privacy and space in their own home, wear and tear on the unit, and how they are going to split utility costs with their tenants.
"Then there are income-tax implications," Ms. Gibbard says. "Clients will need to speak with their accountants on how best to strategize claiming the suite rental income," she says.
The process can be overwhelming, as Navdeep Chhina and his wife have discovered. The parents of two are rebuilding their Vancouver home to include a suite as well as a laneway home. They are renting a place themselves during construction, which will take up to nine months.
"The process is very daunting," Mr. Chhina says. "We spent months trying to figure out how to do it, and we're still figuring it out."
Just as for the Frame family, for the young couple who emigrated from India, having rental suites is about more than paying the bills.
"Everyone talks about affordability and how there's not enough rental space, but they don't want anybody in their backyard," Mr. Chhina says. "My wife and I took this as a chance to contribute to solving the problem and do what we can. Initially it will help us with the mortgage, but we know what it's like [to rent]. Having kids is as bad as having pets.
"We feel grateful to live in an excellent neighbourhood," he adds. "We'll have just the space we need. We want to make sure we give others space and give back, as well."