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ADDING A BASEMENT SUITE

If you're shopping for a house, you may want to consider a home that can actually make you money such as properties with potential for basement suites. Property investment expert Carol Garrett reveals practical tips on how to pick the right property and add value through renovations.

Buying the best house in a good location is not always possible for many first time homebuyers. However, finding a property that would earn you an income while paying your mortgage may enable you to buy in cities and areas where prices are high.

Homes with the potential for a basement apartment is an option for would-be homeowners who are keen to share their homes in return for rental income.

Often the extra monthly income from renting out a basement suite can be enough to cover most, if not all, of your mortgage payment. But it costs money to renovate a basement, and there are key criteria to look for when undertaking such a project. Everything from your renovation budget to privacy and security has to be considered to help you add a profitable rental suite in the right property, with the right tenant in the right location.

Criteria

 For both you as a landlord and your prospective tenants, the No. 1 criterion for such apartments in a large city is proximity to public transport. This is especially the case in major centers with high rents, as tenants may not be able to afford a vehicle. However, you need to have some parking available in case they do own a care or host overnight guests.

The most suitable choices are properties in or near major cities , especially if close to public transit. In Toronto and Vancouver, for instance, most people living in the downtown need to be close to bus and train routes. One common rule of thumb is that properties within 800 metres of mass transit lines generate higher rents.

If your property is in the suburbs, other features such as nearby bike paths, lakeshores and parks might be big drawing cards for potential tenants, and you should highlight these in any advertising you do, along with other appropriate amenities such as parking and storage. If there’s a university or college close by, consider appealing to serious students who might appreciate a quiet, low-key suburban environment. A separate entrance that is suitably distanced from the other living space in the property is also important, since resident don’t want to constantly hear each other coming and going. Other considerations include whether to allow pets or smokers, since you or others living in the building will definitely notice.

Checklist: What to look out for

1. Is the basement apartment safe?

When you’re scouting out properties with basement apartment potential, safety is a prime concern. You must make sure there is a clear safety exit – or the ability to add one – and that the windows are accessible for evacuation in case of emergency. As the landlord, it is your responsibility to create a separate emergency exit plan for the tenant. Ensure that you make your tenants aware of the plan upon move in. Again, posting the plan is an excellent idea for both your tenants and potential guests.

2. Is it legal?

Make sure you can legally rent out the basement as an apartment. Check with the city and the neighbours. If you are creating a suite in an existing home or muli-unit, make sure you can do so legally. Check the local bylaws. A lot of novice investors count the basement as income when they but an investment property, but are later unable to rent it out due to bylaws. If you put yourself in this situation, all of a sudden you may not be able to afford the property.

3. Does it conform with building specification?

Another key consideration is ceiling height, which usually needs to be about seven feet high and local bylaws may require even more space.

You must double-check with the city beforehand. A critical item is fire barriers, for which you should consult your local fire marshal, even before you close on a new property. You may even be able to make fire inspection a condition of the purchase and sale. Fire officials can make simple suggestions, such as adding drywall barriers or fire-rated doors, and you may be able to pass that cost onto the existing owner, requesting it be fixed prior to closing, or negotiate a reduction on the purchase price. There have been cases where getting insurance is contingent on getting a fire inspection and bringing the property up to code. It is cheaper and eliminates surprises if the owner checks this out beforehand.

Adding a suite

If you’re currently in a home and want to help pay down the mortgage by adding a basement suite, take stock of your existing space and see if it is possible.

Since this is your primary residence, technically, the tenant will be in your home. Make sure you take all potential issues into consideration.

If your laundry room is also in the basement, for example, you may have to agree on the hours you can run the machines, so as not to disrupt your tenant’s privacy.  Other factors to consider include noise levels from TV and music, their basic lifestyle and hours that they can contact you if there’s a problem.  Make a list of all of the issues that might bother you if you have a stranger living in your home, and make sure the extra income is worth it.

Renovating

When renovating a basement into a rental apartment, the costs can vary widely depending on the work needed, which projects you can do yourself and for which you need a skilled tradesperson.

But in the vast majority of cases, the cost of renovate a basement into a rental suite will be between $50 and $100 per square foot.  Keep in mind that if your basement is wet or not insulated, then the price goes up significantly as you’ll require venting.

Expect at least two weeks for a basement reno, but as much as four.  Also, you need to ensure that there is sufficient heat as tenants will be sleeping below grade and the area has to be dry and warm or you will have trouble keeping tenants.

For professional work, it is essential you get at least three quotes, ideally from contractors who have previously completed rental properties or basement apartments.  Many cities require contractors to be licensed.  Ask for credentials before the contract is signed.  Also, ask if they are done rental properties before.  The contractor would have a better handle on the controlling costs if they understand what a rental unit needs.

Your goal should be to determine if this project  will pay for itself in 12 to 18 months.  Beyond that, timeframe and the return on investment is not worth it.

How to maximize your rent

Ideally, you want to get the maximum rent possible with minimum tenant turnover.  The following are cheap and easy ways to achieve that.

  1. Make the bedrooms as large as possible.  Most people own queen size beds and want to make sure they have the room to use it.
  1. The bedrooms should be bright and the ceilings high.
  1. Stand-up showers are standard fare, but a bathroom and nice fixtures might help distinguish your property from the competition.  A tub is especially important if, for example, your tenant demographic might include couples or single parents with young children.  In the shower or bath, make sure you install a “pressure balance” faucet to prevent temperature changes in the shower caused by water use in other areas of the house, should someone flush the toilet.  You might even want to install these in the bathrooms in your primary residence so your tenant’s water use doesn’t affect your own shower.
  1. In the kitchen, decent cupboards are a must – not the castoffs from your old kitchen, unless they are in good shape.  This is very important if a tenant is going to stay.
  1. Quality window coverings for the bathroom and kitchen are paramount for safety and help conserve on heating. Basements can often be cold and damp, so making sure yours is well heated and ventilated will keep your tenant staying and paying the rent.
  1. You should also look at the exterior of the property, to ensure the entrance to the basement apartment is well-lit and has some curb appeal.  It’s important to ensure the tenant feels he or she is “home” when entering his or her unit.  Curb appeal, for the home overall, but also the apartment and its entrance, will determine as much as 30 per cent of a potential tenant’s decision whether to rent from you.  Lighting the entrance with motion detector lights and having a clean, well-dept walkway will go a long way to attracting and keeping tenants, and encouraging them to look after the property.
  1. Look at including some extras such as installing ceramic tile instead of the peel-and-stick variety, in the bathroom and kitchen.  Yes, it costs more and is cold to the touch, but the tile really draws a crowd of potential tenants because it appears more high-end.
  1. New six-panel doors, painted white with new hardware that works is an inexpensive but effective way to make the property look new, clean and well kept.  Bright overhead lights, especially new styles, will make your basement suite look new and livable.  You may also want to provide some neutral area rugs.  There are many inexpensive options on the market that will provide that homey feel.
  1. New faucets in both the bathroom and kitchen will help prospective tenants choose your suite over the competition.  In-suite laundry is always a real bonus, and there are some very affordable stackable washer and dryer combinations available.
  1. Including utilities may be somewhat risky since you don’t know what their electricity consumption might be, for instance, but it will make your suite more attractive.  Simply do the math to make sure the rent covers such an extra, or consider including utilities for a limited time, such as the first year of the lease.  Check with your local Landlord and Tenant Act to see what the rules are around the charging extra for utilities.  This will ensure the options are kept open if you decide to charge for utilities at a later date.  Look into “Smart Meters” as a way to control utilities.

Bylaws

Different municipalities often have varying rules on basement apartments and you should check with your city before you buy or renovate such a property.

It is imperative you do everything you can to make your unit bylaw-compliant and fully legal, including everything from fire safety regulations to installing property hand railings on stairwells and entrances.

The one point to be made is that if you have a ceiling below seven feet in a basement, don’t even consider a basement apartment.

Meeting specs

Most cities, and certainly the larger centers, will have information regarding basement apartment bylaws readily available, often on their websites.  Noncompliant or illegal suites can be shut down, and all it takes is one phone call from a neighbour to have it inspected without prior warning.

Fire and building codes are critical.  As a landlord, you should rely on the fire marshal or other fire safety services to inspect your property to make sure it is up to code.  Systems such as electrical and plumbing must be capable of handling the additional load from a tenant.

If you are building a new entrance to the basement, you may require a construction permit, which will govern certain standards are met, including that it meets guidelines for property structural support.  Make sure any contractor you use for such projects is knowledgeable in these areas and conducts the necessary due diligence before work begins.

Insurance

This is not an area you should scrimp.  Make sure you fully divulge to your insurance company that you are renting out a basement suite to ensure you have adequate coverage for floods, fire and other accidents.

Your own regular policy won’t be much good when it comes to protecting your tenant and their contents – not to mention your own liability – should something happen and you weren’t completely transparent about your rental suite.

Your insurance company should be able to pvide you with information for your tenant, prior to moving in.

One important inclusion in your insurance is protection against sewer backup.  Usually, it’s not much more expensive, and it can save you thousands.

Also, make sure your insurance will cover your loss of income if your tenant is forced to move elsewhere due to an accident.  For example, you can get a policy that covers the cost of finding the tenant a new place to live and moving expenses.

Potential rent

You will need to ensure you can generate sufficient rent to cover any renovation costs and support your mortgage payments.

Again, conducting a basic market assessment by checking out your competition will help you determine a general price point for your suite.  If you want to distinguish your property from others, creating some kind of “wow factor” by making it bright, clean and new looking, with some of the little extras that will attract attention.  And factor in that in many provinces you can only increase the rent by set amounts each year (for example, in Ontario it’s 1.8 percent this year), so you need to get this right from the outset, otherwise you could be out of pocket down the track.

Tenant Profile

You are more likely to get higher cash flow in areas outside of major cities, as the cost of living tends to be higher in major centres such as Toronto, Vancouver and Clagary, and therefore so will your costs.

It is critical to understand your tenant profile, in this regard.

In Hamilton, ON, for example, several hospitals and universities in the area means typical renters would likely include interns.  They work long hours, make a good wage and likely are committed to staying in the area for a few years.  They also tend to want a certain lifestyle – such as a clean and quiet living environment – and might be willing to pay a little extra for it.

Screening Tenants

It’s crucial to devise a thorough screening process, which will enable you to secure your ideal tenant.  Make sure to secure you have a list of questions handy and don’t be afraid to ask questions more than once, as this can often help to spot a discrepancy with what the tenant has said previously.

There are several different ways to screen a tenant, including on the phone and in person.  Be sure to call references, check credentials and use your gut instincts.

Screen on the phone.  Have a list of questions to ask the potential tenant when you can get a hold of him or her.  Fill out the sheet and keep it on file as part of the tenant file.  Here is the information to enquire about in you call:

    • Name
    • Contact Information
    • Budget for Rent
    • What property are they calling about?
    • Has notice been given at current rental?
    • Reason for leaving current rental
    • How long at current rental
    • What type of pet?
    • When do they want to move in?
    • How many will be moving in and have they lived together before?
    • Job information
    • When would they like a viewing?
    • Can an application be emailed?
    • Can they provide references for work and former landlord?

Screen during viewing.  This face-to-face interaction will allow you to play judge and use your intuition.  Get friendly, giving them permission to speak freely and ask about their job and what they like about it.  Also ask if they would like to fill out the application right now for quick turnaround.  Check out the state of their car – is it clean?

Screen from application.  Perform credit checks for everyone going on the lease.  Also check references including they employer, current and past landlord, and friend or family member.

Lastly, it is always a good idea to Google any potential tenant’s name and see what comes up including associations they might belong to, employment information and personal websites they may own and manage.

Buying Your First Home

Winter 2010

 

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