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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 a home or condo and rent it out, you may be able to use space within your own home to rent out and help pay the mortgage.
The most convenient way to rent out part of your home while still maintaining 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.
A basement suite is pretty much what it sounds like: a separate apartment in the basement. While your basement might be finished, it might not be suitable for separate living quarters, especially if you plan to rent it out.
If you want to rent your basement suite, it must have all the amenities that a home would have, including its own kitchen, bathroom, living area, and entrance in order for it to be legally deemed a separate unit. Every jurisdiction has its own unique minimum standards in order for basement suites to be considered legal separate units, so you’ll want to find out what the rules are in your particular area.
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.
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Before you fix up your basement as a separate apartment and find a tenant, you should weigh the pros and cons of this type of arrangement first.
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Rather than paying a lump sum out of pocket, you can finance your basement suite renovations through a personal loan. A personal loan will help cover the entire cost of the renovations while allowing you to repay the cost over a set period of time with interest. If you have bad credit, you may have to apply with an alternative lender as they have more flexible requirements than banks. However, if you do, beware of high-interest rates and fees.
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 – 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.
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 charge much higher interest rates than a bank. The reason being, basement contractors will add a margin to the rate their partner offers for a profit. While contractor financing may be easier and faster to access, it is important to weigh the pros and cons and see which option best meets your needs.
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In order to make the most of your newfound role as a landlord, consider the following tips.
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 start and end dates of the lease, the amount of rent being charged, how and when the rent is due, the names of all people living in the place, and the rules governing how the place can and cannot be used.
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.
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Basement suites are subject to building codes and bylaws, so you’ll want to find out what these standards are to ensure your unit meets them. Unlike apartments, basement suites, otherwise known as second suites, must be self-contained and have a separate kitchen, bathroom, and living space. They must also have a minimum ceiling clearance of 6 feet by 5 inches and have a minimum of two unobstructed modes of escape.
Of course, every jurisdiction has its own requirements, for instance, in Toronto, your basement suite must:
These are just some of the specific requirements a basement suite must meet in Toronto. Others may include having an interconnected smoke alarm and having a door that directly leads to the outside. Be sure to consult your area’s codes and bylaws to ensure you’re meeting all the requirements.
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.
Rental income is taxed at the same rate as your regular income. To help reduce the amount of taxes you owe, you may want to consult a tax specialist. They can show you the expenses that you may be able to write off when it’s time to file your taxes. That includes your net rental income, advertising the unit for rent, and a portion of your mortgage interest, property taxes, utilities, home insurance, repairs, and maintenance.
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. Just be sure it’s considered a legal separate unit in the eyes of your local city officials.
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