Let’s be honest—owning a home is expensive. There are taxes, insurance, a mortgage, and it seems unexpected repairs and replacements are always cropping up. Being expensive doesn’t diminish the worth of owning a home, which is after all an investment, but more and more, home owners are looking to make their house a source of income to offset some of the cost—this is where renting comes in.
Turning a part of your home into an apartment can be a great way to help pay down your mortgage. The basement is the most common area that people repurpose as a rental, because it’s usually already quite private from the rest of your home, and it’s often easier to add or build on to a second entryway that leads to just that level. It also tends to have the necessary waterlines for adding a second kitchen and washroom.
This is a major commitment, so before you start envisioning ways to spend the rental income, here are some things you need to consider:
This is a business. Just like your job, this is a business you’re getting into. Like all businesses, that means it requires work. There is the initial construction/renovation process required to establish or update your house’s apartment, then you need to find the right tenant (a very important step which I’ll come back to), and you’d better prepare yourself because this will be an ongoing job. There will always be repairs your tenant needs which you are responsible for, and you’ll have to keep on top of things like rent collection, insurance, etc. You definitely earn your rental income through work as well as letting your space, so don’t go into this project thinking it’s an easy way to make money (do those even exist anymore?).
While we’re talking about all of this in a business light, here’s a tidbit to hold onto—the importance of keep your landlord/tenant relationship professional cannot be overstated. Renting to family or friends is not something I would suggest, as it blurs the lines between tenant/loved one and can make things very complicated.
Can you imagine how much harder it is to evict your dear nephew when he can’t pay his rent? That is not a situation you want to get into. As my grandfather used to say, “Business and family seldom mix.” From the first time you interact with your new potential tenant, you want to keep things pleasant but professional—they need to see you as their landlord, someone whose rules they will respect and adhere to. Once you start spending time with them in a social capacity, it’s going to be a lot harder for you to stay strict and for them to take you seriously.
There are legalities and semantics to consider. Before you can even begin the construction required to turn a part of your home into an apartment to be rented, you need to find out if your property/neighbourhood zoning permits this. There are by-laws and regulations you will need to adhere to, and these will encompass everything from what times of the day you can have your contractor working to how many inches you need to have between your apartment’s shower and toilet (seriously). Failure to comply with these types of by-laws can result in some pretty steep penalties ($100.00 per day that you’re in violation is usually the starting amount!).
Having a rental income will also affect your taxes and your insurance. You’ll need to disclose it as a part of your income, so be aware of how this could influence your tax bracket, income tax, and tax return. You’ll need to speak with your insurance provider before you begin construction so that you know what the insurance cost will be, your liability, the necessary policy adjustments, if there are certain stipulations they’ll want you to make with your tenants, and similar things you’ll need to take into consideration.
Rent and your tenant. Finding the right tenant for you will be more time-consuming than you may expect, and recognize that most people stay in an apartment for only 1-2 years max, so it will be an ongoing part of this new venture. You want to be selective about your tenant. They will, after all, be living in your home (albeit a separate part), so you want them to be responsible, respectable, and reliable.
One of the ways to attract this type of tenant is by not setting your rent too low. Do some research into how much apartments in your area are renting for, with particular focus on ones that are a similar size and in or close to your neighbourhood (ultimately location tends to trump everything else when it comes to apartment desirability and pricing). While you want your rent price to be competitive, you do not want it to be one of the lower ones in your area, as this can attract the wrong type of tenant. Base your rent on your location, the quality of your apartment, and the pricing of rentals around you. You’ll want to be in the mid to high range, depending on the finishes and inclusions of your apartment.
Make sure that all of the rules, regulations and policies that you and your tenant agree to are firmly outlined in your lease, which you then need to have signed by yourself and your tenant. As an added precaution, I always think it’s good to have them initial by points that are especially important to you, if not all of them, as proof that you reviewed them together. It’s your responsibility to provide a signed copy to them and in addition to you keeping the original, you should make copies and give them to your insurance company, your accountant at tax time, and it’s wise to have multiple copies in secure locations.
You’ll need to do research into yours and their rights as a landlord/tenant, with particular focus in the area of what you as a lessor are responsible for and under what terms you can evict them/hold them accountable for damages. Being knowledgeable in these important matters protects you, your property, and your tenant, and being confident about your rights and liability is necessary and beneficial. It is worthwhile to have a property lawyer look over your lease (you’ll only need to do this once so that you can create a lease template) to make sure everything that should be included, is.
Adding a rental component to your home is a big process, but if you do it right and find a suitable tenant, it’s an excellent way to help pay for your property. As with everything, the more experience you get with this, the easier it will become. Be aware that while it will be work and will take away some of your privacy, it can yield a high return on your investment, and will increase your property value significantly. Rent on, home-owners!
Originally Published by The Chronicle Herald
Alexandra Kelter is a social media specialist with Central Home Improvements. Her column covers many aspects of home improvement, both indoor and outdoor, and will combine trending styles with practical applications all within realistic budgets. Kelter is also passionate about fashion, travel, living by the ocean and her bulldog.