There are all kinds of income producing properties but my focus for this post is on basement apartments in Single Family Dwellings & the average Buyer....
via Toronto Life
I love to do Open Houses! I meet lots of Buyers at Open Houses & more often than not, those Buyers are looking for a house where they can rent out the basement to help pay their mortgage. Many of them are not that picky as to whether they're legal or not...as long as they can get the cash flow going, they're happy!
Here's why you SHOULD care!
1. Financing - You can't use the potential rental income on an illegal apartment to qualify for a mortgage. The benefits of buying a home with a LEGAL income suite are that you can CAN use that income to qualify for a mortgage on a more expensive house because of that rental income. Illegal = out of luck, end of story.
2. By-Law Enforcement - The Municipality can come shut you down. If this happens, you're going to be in deep doo-doo when it comes to your Tenant! You will probably have to cover their costs to move & to rent a new apartment. You could face charges & have to go to court & the courts may require you to convert the home back into a Single Family Dwelling at your expense.
3. Big Responsibility - Being a Landlord is not just taking cheques to the bank each month, it comes with a lot of liability. The rules are geared towards protecting Tenants & not Landlords so it's crucial that you understand & follow those rules. Ever see the movie Pacific Heights with Melanie Griffith? There really are so-called "Professional Tenants" out there who know how to work the system to their advantage, which usually translates into YOUR disadvantage!
4. Your Problem - That's right, lol, once you own the property, these & the issues I mentioned in my post for Sellers become your problem!
Other things to keep in mind:
Bait & Switch...Suppose you've purchased a home, with the illegal basement apartment & you've paid a premium for the "perceived" value of this income producing apartment...you choose to rent it out & then you get caught. The Municipality makes you renovate the space to revert it back to its Single Family Dwelling status (at your expense). Is the home still worth what you paid for it?
Slightly off-topic but here's another scenario...I met a nice couple this summer who purchased a re-sale 4bed/3bath home. They paid the going rate for a 4bed/3bath home in that neighbourhood. They later found out that the 4th bedroom was actually an open "bonus" space in the original builder layout that the previous owners framed in themselves to create that bedroom. The new owners, the nice couple, found the room to be too small & awkward so they changed it back. They now own a 3bed/3bath home...is it still worth what they paid for it or did they fall for a bait & switch as well?
Taxable Income...The rent you will receive is taxable income, at your marginal rate, minus expenses (& you have to be careful what you claim as an expense). Are you planning to claim that additional income which will mean paying additional income tax? And if you're not, will your Tenant claim their rent on THEIR taxes? The CRA might not catch on right away but they probably will put 2 & 2 together eventually...
Capital Gains...Those dreaded taxes again! This will come up when you eventually sell the property. Tax advice is best given by Tax Experts so please do seek out a professional for guidance...To get you started, you can find more information HERE, HERE & HERE
So if you see the following statement in an MLS® listing...“Seller and Agent do not warrant the retrofit status of basement apartment” that's a dead giveaway that it's an illegal apartment. If you decide to purchase that property then a savvy Listing agent will have inserted clauses in the offer to protect their Seller & you will be left holding the bag. Now maybe that bag is full of money, but it could also be full of problems! As with any transaction, you want to go into it armed with as much information as possible & have a good grasp of the risks (& your tolerance for them) as well as the rewards.
Happy House Hunting!
(And of course, if I can help in any way, I'm just a phone call, text, or email away... :))
Related: Is Your Tenant Killing Your Sale? 4 Things To Consider When You're Selling!
Related: Is Your Tenant Killing Your Sale? 4 Things To Consider When You're Selling!
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