Basement rentals can be a good mortgage helper

In 1989, Don Campbell and his wife purchased their first home and rented their finished basement as way to pay off their mortgage sooner.

“The rent from our basement suite buffered our income,” says the author and senior analyst with the Real Estate Investment Network (REIN). “In addition, we travel a lot, so knowing someone was always home offered us a sense of security.”

Campbell is a huge proponent of basement suites as a way “to get into the housing market.”

If you’re wondering if you should finish your basement right away, Campbell says doing so can potentially increase the value of your home by a considerable amount. Now, that’s reason enough …

Best of all, says the veteran financial expert, most banks will allow you to use the rental income for your basement suite to qualify for a mortgage.

That’s critical if you are a first-time homebuyer and must prove you can afford the payments under the federally mandated Bank of Canada stress test.

According to Campbell, the stress test means homebuyers with less than a 20 per cent down payment will need to prove they can afford mortgage payments based on which is greater – the Bank of Canada’sfive-year benchmark rate or their contractual mortgage rate plus two per cent.

Don Campbell’s tips for first-time landlords:

1. Protect your privacy

Ask yourself if you will be OK seeing a stranger walking around your property every day. Is this lack of privacy worth the extra money?

2. Try to avoid renting to family

As NICE as it sounds to help out, renting to a family member is fraught with potential relationship crushers. If a tenant stops paying or become a nuisance, there are ways to solve that problem.However, it is much more difficulty to use “eviction” or “collection” rules against a family member without destroying the relationship and having the repercussions ripple out into the rest of the family.

3. Sign a proper written lease

Never, ever, ever let anyone move in without both of you signing a proper lease that clearly defines rules, responsibilities and costs. And never ever let a tenant move in without providing you with the full security deposit and first month’s suite rent.

4. Know your landlord rules

Before you dive into the rental market, make sure you study up on the rules and responsibilities. They are strict and they are clear, and so must you be from the beginning of the tenant relationship. You can find these rules on the provincial government website.

5. Tell your home insurance company

Critical. You must, in all cases, advise your insurance company that you are renting out a suite.If you don’t, and there is an incident where you need to use the coverage, you may likely get denied coverage.

6. Research the tax repercussions

Speak with a real estate experienced accountant to ensure that you are claiming all of the deductions you can as well as properly planning for any change in the capital gains exemption if and when you sell your house. Do it right, do it upfront or be prepared for a big tax bill in the end.

Related reading

The Benefits of Secondary Suites