How Your Basement Can Help Pay Your Mortgage

It’s one way to pay for your house using something you already have – existing space.

It’s hardly a new idea to fix up your basement and rent it out to supplement your income. But in hard times, when people are losing their jobs and mortgage payments seem to come more often with less cash available, it’s getting a second look from many.

It’s not cheap and you have to do it right or it won’t be approved by the city, which has all kinds of regulations about what you can and can’t do with your fixer-upper. The initial outlay can cost you anywhere from $20,000-$40,000, depending on how much work you need to do and how elaborate you want to get.

Some, like the basement seen top left, may run you on the higher side.

But Adam Mernick – who’s both a renovator and a landlord, gets $800 a month from his revamped basement and past the initial outlay, there’s not much he has to do but collect the rent.

“For what you lay out in the beginning for the return monthly, it works out pretty well,” he concludes.

He knows the amount you have to spend to make it happen is more than some can afford these days, but he claims it’s worth it in the end. “If somebody falls on hard times it definitely makes the monthly expenses a lot easier.”

Doing the work yourself can help cut the costs by up to two-thirds. And some places, like the Home Depot, offer workshops in how to do the simple tasks.

And while the city will force you to comply with a host of rules and regulations, the federal government will give you a major boost. Last month’s budget allows for a tax credit worth as much as $1,350 for upgrades or additions to your home.

Just make sure you don’t cut corners. “To do this properly is simply a matter of following the steps,” assures Mernick. “Cutting corners doesn’t really get you anywhere because it can absolutely come back and bite you later.”

Most basement apartments were declared legal in the city of Toronto in the year 2000, as a means to ease the housing crunch. But there are still a lot of rules you have to follow to ensure you stay on the right side of the law. Check some of them below.

The Bank

Before you get started, you’ll need to check with your mortgage lending company.  Some mortgages prohibit the rental of a dwelling or any part of a dwelling.  Check with your bank first!

Permits

First, there’s the issue of construction. You’ll need specific building permits for whatever work you want to do. You can find more information on them, along with the forms you have to fill out, here.

Then you have to be sure whatever changes you make conform to Ontario’s Building Code. While most reputable contractors will be aware of what’s in it, you can take a look at what it means for your renovation project here.

Hiring A Contractor

So you’re set – or are you? Hiring a contractor can be a tricky business. The good ones are generally busy. And while there’s nothing wrong with getting a great price for the work, too good a deal should raise some red flags. What else should you watch for? The Canadian Homebuilders’ Association has a list of the warning signs here.

The Conditions

While the second suites are now lawful, there are still a host of conditions that have to be met before they’re actually approved. Among them:

• Homes must be single or semi-detached.
• The unit has to be self-contained and sport its own kitchen and bathroom.
• In most cases, you’ll need to provide a parking space for your tenant, although there are exceptions to the rule depending on where you live in the city.
• The house itself has to be at least five years old
• The apartment has to be smaller than the rest of the units
• All Building and Fire Codes have to be observed in the second apartment, including the mandatory smoke alarm rules, and you may need to have it inspected once it’s done to be sure you’ve met the requirements. There’s a fee for that, of course.

The Taxes

And don’t forget the tax implication of that extra income. It may be helping you to pay for your home, but the government wants its share of what you’re making – although there may be some business deductions you can make as a result of your reno along with that federal tax credit. Depending on what you do, it shouldn’t affect your property tax bill, which is already high enough.

But every situation is different, and your accountant or financial advisor can tell you what works best for you.

What About Other GTA Cities?

Toronto’s laws don’t apply elsewhere. For example, basement apartments built after November 1995 aren’t legal in Brampton. And no units are considered legal in either Richmond Hill or Vaughan, although Markham was said to be at least looking at the idea.

If you live outside Toronto, be sure to check with your local municipality before paying for a basement rental renovation that could cost you more than you bargained for.