Why you should have a basement apartment. Do you want to maximize your earning potential? What would you do to earn an extra weeks pay every month? Did you know there could be tax advantages to having part of your home rented?
I want to share a story with you that changed my financial life. I have wanted to get into real estate investing for just about as long as I can remember. The strange part though is when I bought my first few homes, I did not buy a multi-family property where I would live in one unit and rent the others. I wish I could go back in time, because back in my twenties before children and wedding bells would have been the optimal time to purchase a property where I could live in one unit and rent the other / others. I am not sure if the idea of having other people in my space, or if it were the idea of the risk of having a bad tenant living under my roof that stopped me. It may have been the many critics that I met in person or read stories about that made me think it was not a good idea. That all changed out of necessity, as a method to prevent homelessness.
We had purchased a home to fix up and live in at the same time. The house was up for sale for a while, and then all of a sudden the market turned and it sold. The challenge was that since it was on the market for so long, we had stopped looking for houses to move into. This is where it gets interesting. While this house was listed, we had formed a company to buy rental properties. We were searching for a set of flats, and that is where the stars lined up. We found a set of flats with a vacant upper unit. We purchased it in our company name. Since we did not have our next project home lined up, we decided to move into the vacant unit and rent it from our company. We were nervous about this because at this point Shelly and I were married and had a new born baby. Here we were moving into a property with a stranger living in the lower unit, along with a shared yard and driveway.
This is where it gets interesting, and made us wish we could go back in time. We discovered that even though another family was living in the same house we hardly ever heard them or crossed paths. We had really great tenants, which I am sure made a big difference. It also made us realize that we had been missing out on what one of the greatest and easiest real estate investment opportunities available. It is a strategy that is so simple and obvious, that we did not see it. The next property we bought had a rental component. We soon discovered some additional financial advantages at tax time (you will need to check on the tax laws in your area). It was one of those ah ha moments.
When I speak with first time home buyers, as well as those who want to invest in real estate I tell them this story. I also point out how simple building wealth investing in real estate can be.
I can remember meeting with a young person one night at a real estate meeting that had secured an old house in an amazing area that was divided into five flats. He was asking about ways to leverage the property to buy more. I asked him about what he wanted to accomplish as an investor, and pointed out that he could not only live well, but be financially independent just by staying in this one house and paying it off. You see depending on a persons end goal, real estate investing can be a simple and straight forward investment strategy.
My friend and fellow real estate investor / coach Mike Burgess says it best in his part of a book published by the Private Investment Club Corp. He wrote a chapter titled Passive Income From Your Home. A couple of my favorite quotes in his chapter are as follows: “I chose to share my home with a tenant rather than try and find a fifth week in each month”. “Just building a rental suite in your house will not make you wealthy, but it can be an important component in achieving your goals”.
You can buy an existing multi-family property, or another great way to build additional value to a property is to add an income suite. You will need to check local zoning by-laws as well as building code rules to make sure it is feasible. There are some challenge areas with basement suites that may not make it possible or very expensive. Some examples would be ceiling height requirement, square footage requirement, and Bedroom window egress requirements.
If your property meets all the building requirements, there are several ways to add a suite to a property, the most common is a basement apartment, but do not rule out building up, off the back, or even on top of a detached garage. You can add significant value to a home by adding a suite, especially in this era of families looking after elderly parents, who may want a home with an in-law suite in its literal form, or of course the growing popularity of Airbnb or similar types of short term rental models.
Pros:
- Additional income may cover part or all of your mortgage payment.
- Quicker equity building. This could be accelerated if you were to save the additional monthly income and make an annual lump sum payment with the rental income.
- Potential tax benefits
- Increase in the value of your home when you sell, especially if you sell it with an existing tenant and well documented steady revenue.
- Increase in the value of your home if you add one or more rental suites.
Cons:
- You will reduce the personal usable space in your home. If you build a basement apartment, you may lose significant living space.
- You will give up privacy. It is inevitable that you will cross paths with your tenants at some point.
- Noise awareness. Shelly and I would never say we are the most quite family around. Noise irritation can work both ways, and when the tenant is your paying customer, you may need to adjust the volume of your families daily activities.
- Neighbors may not always share in our excitement about adding a rental component to your home. You will need to be aware of any neighbors who oppose your idea of adding a rental suite to your home. If you buy a home with an existing rental suite, this will not likely be a problem.
- You will become a 24/7 Landlord and property manager. You will need to set boundaries up front, so that you are not getting a knock on the door at 2:00 a.m. for a non-emergency repair.
Until next time,
Design your landlord experience,
Michael P Currie
My parents are thinking about renting out their basement as an apartment. It is good to know that basement apartments can provide additional income. I will make sure my parents get the proper permits to rent their basement legally.