Investing in real estate is one of the best and most effective ways to build wealth over the long run. And in many cases, it can even be a source of regular income.
While you can always purchase an investment property, a more affordable option may be to use the space within your own home to rent out and help pay the mortgage.
While you can easily rent out a room in your home, a more convenient way to rent out part of your home to maintain some level of privacy is to rent out your basement suite. But before you do, it’s important to understand the rules surrounding basement suites and your role as a landlord.
Key Points
- Renting out your basement can provide additional monthly income to help pay your mortgage.
- Basements must meet specific regulations to be deemed legal.
- You’ll need to report your rental income when you file your taxes, though you may be able to deduct certain expenses to bring down your taxes.
Can You Rent Out Your Basement?
While your basement might be finished, it might not be suitable for separate living quarters, especially if you plan to rent it out.
Every jurisdiction has unique minimum standards for basement suites to be considered legal separate units, so you’ll want to find out what the rules are in your particular area.
In general, to legally rent out your basement, it must have all the amenities that a home would have, including its own kitchen, bathroom, living area, and entrance.
Further, basement windows must be big enough in the bedrooms to allow for an escape route in the event of an emergency, such as a fire. Again, the exact dimensions depend on the location and jurisdiction.
What Is A Basement Suite?
A basement suite is like a separate apartment in the basement of a home. To ensure you’re legally renting out your basement, make sure you obtain the right permits and meet all the requirements.
Requirements To Rent Out Your Basement Suite
Basement suites are subject to local building codes and bylaws, so you’ll want to find out what these standards are to ensure your unit meets them.
Make Sure You’re Up To Code
Basement suites must be self-contained and have a separate kitchen, bathroom, and living space. Every jurisdiction has its own requirements. For instance, in Toronto, your basement suite must meet the following criteria:
- Be part of a detached house, semi-detached house, or townhouse
- Only one secondary suite is permitted per house
- Minimum ceiling height is 6’5″ and must be continuous
- Bathrooms must have fans or windows
- All areas must have adequate ventilation
- The interior floor area must not exceed 45% of the interior floor area of the home it’s located in
These are just some of the specific requirements a basement suite must meet in Toronto. Consult your area’s codes and bylaws to ensure you’re meeting all the requirements.
Obtain Building Permits
If you need to renovate your home to outfit it with a legal and separate basement suite, make sure you obtain the proper building permits before construction starts. Building permits give you permission to complete your project and ensure it complies with local building codes and zoning by-laws. Plus, permits will help ensure that the project will result in a structure that’s safe and habitable.
Be Mindful Of Zoning Restrictions
Find out what the zoning restrictions are in your specific location before constructing a basement suite. Zoning regulations determine what types of properties can be rented out and how these properties may be used. In other words, make sure renting a basement is allowed within your zoning area before finding a tenant.
What Are The Benefits Of Renting Out Your Basement Suite?
There are several reasons why you may want to open your basement to renters, including the following:
- Rental income. The biggest perk to renting out your basement is the extra income you can generate from it. You can then use that extra money to help pay off your mortgage. If you’re already mortgage-free, that extra cash can be used to invest in other projects or pay down other debt.
- No need to buy a separate property. Buying a rental property can be financially impossible for many Canadians. But if your home is equipped with a basement, there’s no need to invest hundreds of thousands of dollars into a second property to enjoy a steady rental income.
- Extra security when you’re away. When you’re away on vacation, there will still be someone living in your home to watch the place and maintain it while you’re gone.
Tips On Renting Out Your Basement
In order to make the most of your newfound role as a landlord, consider the following tips.
Screen Tenants Thoroughly
Being a landlord may be profitable, but it can cost you if you don’t vet your tenants. Before renting out your basement suite, be sure to thoroughly assess prospective tenants before signing a lease. Ideally, you want a tenant who will pay rent on time, take care of the property, and be respectful of all house rules.
Screening tenants should involve the following steps, which you may be able to delegate out to a property management company for a fee:
- Application process
- Credit check
- Criminal background check
- Employment and income verification
- References on rental history
- Security/damage deposit
Get Insurance
You’ll need to let your insurance company know that your basement is being rented out. Consider buying a landlord insurance policy to protect you against any damage to the property or liability claims, or requiring your tenant to hold renter’s insurance.
Have A Written Agreement
All leases should come with a written agreement signed by both the tenant and landlord. Before you allow your tenant to move in, be sure you have given them a lease that includes all terms to protect you, including the following:
- Start and end dates of the lease
- Rent amount
- When rent is due for payment
- How rent is to be paid
- Names of all people living in the place
- Rules governing how the place can and cannot be used
Make sure you and your tenant(s) sign and date the lease. When in doubt, have a lawyer or real estate agent draft up a lease agreement for you so it’s airtight and doesn’t leave you vulnerable.
Document Everything
Before the tenant moves in, take detailed photos of the place and document all its characteristics and the condition that it’s in. That way, you’ll have proof in the event that the tenant damages any part of the unit while living there. In this case, be sure to take photos of any damage done that can be compared to the before photos you took in case a disagreement ensues, or if you end up in court.
Are There Any Tax Implications For Renting Out Your Basement?
Rental income earned from your basement suite must be reported when you file your income taxes. The income you collect from renting out your basement suite will increase your taxable income, which means you may pay more in taxes. This income is taxed at the same rate as your regular income.
However, you can reduce the amount of taxes you owe by making eligible deductions. You may want to consult a tax specialist, who can show you the expenses that you may be able to write off when it’s time to file your taxes. Eligible deductions may include advertising the unit for rent, and a portion of your mortgage interest, property taxes, utilities, home insurance, repairs, and maintenance.
Things To Consider Before Renting Out Your Basement Suite
While there are many perks to renting out your basement suite, there are some drawbacks you should consider:
- Less privacy. Since there’s technically someone living in your home, you won’t have as much privacy as you would if your basement wasn’t occupied.
- Cost of upgrading your basement. Before you can rent out your basement, you’ll have to finish it and ensure that it’s up to code to be considered a separate legal unit.
- Increased costs in utilities. If you include electricity and gas in the rent, you’ll have to cover these costs, which can be quite high depending on how much energy the tenant uses. But you can mitigate this issue by charging the tenant rent plus utilities rather than making the rent inclusive.
How Much Does It Cost To Renovate A Basement Up To Code?
The cost to bring a basement suite up to code can cost anywhere from $40 to $100 per square foot. So, if your basement is 500 square feet, it may cost $20,000 to $50,000 to renovate it.
How To Finance A Basement Suite Renovation?
As mentioned, there are costs to preparing a basement suite to ensure it’s considered legal and ready for occupants. This can add up to a few thousand dollars. If you don’t have the liquid cash available to fund these expenses, there are financing options available to help:
Government Programs
The federal government offers low-interest loans to those who qualify. The government recently announced the Secondary Suite Loan Program as part of Budget 2024, which will allow eligible homeowners to access up to $40,000 to cover the cost of adding a secondary suite to their homes.
There are also provincial and municipal government programs available to help with costs:
| Calgary Secondary Suite Incentive Program | Learn More |
| Hamilton – Ontario Renovates Secondary Suite Forgivable Loan Program | Learn More |
| British Columbia – Secondary Suite Incentive Program | Learn More |
| Newfoundland & Labrador — Secondary Basement Suite Incentive Program | Learn More |
| Nova Scotia – Secondary and Backyard Suite Incentive Program | Learn More |
City Of Calgary — Secondary Suite Incentive Program
Calgary’s Secondary Suite Incentive Program provides eligible homeowners with up to $10,000 to cover the cost of building a secondary suite. This incentive only applies to units built in the main home, and not any detached suites.
City Of Hamilton – Ontario Renovates Secondary Suite Forgivable Loan Program
The Ontario Renovates Secondary Suite Forgivable Loan Program provides 15-year forgivable loans up to $50,000 to qualifying homeowners to build secondary suites as a way to generate additional income and boost affordable housing. The program also provides an additional $5,000 grant if accessible modifications are included.
BC — Secondary Suite Incentive Program
The Secondary Suite Incentive Program in BC provides funds to homeowners to cover the cost of creating secondary suites on their properties to rent out for below market value. Qualifying homeowners will receive up to 50% of the renovations expenses up to $40,000. The program provides a rebate in the form of a forgivable loan, which means the loan won’t have to be repaid if all rules of the program are followed.
Newfoundland & Labrador — Secondary Basement Suite Incentive Program
The Secondary and Basement Suite Incentive Program provides qualifying homeowners with up to 50% of the cost of renovations up to $40,000. The program provides a rebate in the form of a forgivable loan.
Nova Scotia – Secondary and Backyard Suite Incentive Program
Nova Scotia’s Secondary and Backyard Suite Incentive Program provides funding up to 50% of the cost of renovations up to $40,000 to build secondary or backyard suites on a primary residence. Terms are available for up to 5 years.
Tap Into Your Home Equity
If you don’t qualify for any government programs, you can tap into your home equity for low-cost loans.
- A home equity line of credit (HELOC) is a form of credit that allows you to borrow money against the equity of your home. HELOCs often come with low variable interest rates, and you aren’t required to pay the principal until the draw period ends, which is usually 20 to 25 years. Until then, you simply need to make your interest payments. This form of financing is a great option if you’re looking for flexible repayment options and ease of access to funds.
- A home equity loan also allows you to borrow against your home’s equity. However, unlike a HELOC, a home equity loan provides you with a lump sum of money upfront, which you can use to fund your renovations. Then, you’ll repay your loan through regular installment payments over a set term, with interest, until the full amount due is repaid.
Contractor Financing
Some basement contractors will provide in-house financing through their partners. This form of financing is usually easier to qualify for higher amounts. However, they typically come with much higher interest rates than what you might get from a bank. That’s because basement contractors may add a margin to the rate their partner offers for a profit.
Final Thoughts
If you’ve got a full basement that you can live without, you might want to consider finishing it as a separate apartment and renting it out to help out with the mortgage. But before you do, make sure it’s considered a legally separate unit in the eyes of your local city officials, and don’t forget to report your additional rental income when you file your income taxes.
