On the surface it seems like a fabulous idea: Carve out a portion of your home, rent it out and use the rental income to pay your mortgage. You get to live basically "rent free" while at the same time reaping the tax benefits of writing off some of the costs associated with accommodating a rental apartment in your home.
With the Canada Mortgage and Housing Corp.'s recent announcement of relaxing the rules for how homeowners looking to rent out apartments in their principal residences can borrow money, getting some rental income seems like a sure bet.
In reality, however, it is not. From difficult tenants and unanticipated costs to insurance claims to the simple and sometimes inevitable experience of not being able to find a stable, long-term renter, there are many things that homeowners need to consider before taking on the role of landlord.
Second source of income
The most obvious gain is the extra money that you will be receiving each month. This money can help you pay your mortgage, property taxes or other bills, which is a sweet deal if you are renting out a part of your home you rarely use anyway.
Renovations increase value
Aside from the monthly payoff that you receive from your new tenants, the renovations that you make may also be a future investment. At the time, you may renovate to make areas of your home accessible to tenants, for example finishing your basement, but such renovations will also increase your home's resale value.
Investing and responsibility
First of all, it is an investment before it is a benefit. In order to rent out part of your home you need to ensure that it is in prime condition. This means that renovations will most likely have to be made. It also means that every problem that your tenant has becomes your problem. There is no putting off a repair; you are now a landlord and have inherited a responsibility to your tenant(s).
Impact on resale value
There is also re-sale valuation to consider. While you may have no intention to sell your home now, you still need to consider what it will be valued at with a rental suite later. While many potential buyers will appreciate having a turnkey rental apartment that they too can reap the economic benefits from, some may not want the same kind of setup, reducing the prospect of a sale.
It seems like the great idea to be able to rent your home, but you are now depending on someone else to pay you. Not all tenants are reliable, and it can be difficult to trust a stranger to hold up their end of the bargain. A quick glance through the Landlord and Tenant Act can provide a good snapshot of some of the issues landlords face.
While it differs by province and city, renting out part of your home automatically puts you under numerous provincial and municipal regulations, many of which if not followed can result in hefty fines. When a landlord can enter the area rented differs across the country, as one example, as does the types of property that fall under provincial or territorial tenancy legislation -- a detached home versus a duplex or condominium, for instance. Both landlords and tenants should inform themselves of the laws applicable to their location.
Repairs can be extremely expensive and seem to occur a lot more often when housing tenants. You can potentially avoid recurring repairs by calling professionals the first time around, but try to budget for repairs when renting out your home.
Six key things any homeowner considering renting out a portion of their residence needs to consider:
1)Know the laws and follow them: Before renting your home, look into the provincial and municipal laws to ensure to take the appropriate steps. Always draft a contract that acknowledges the regulations set by the Canadian Mortgage and Housing Corporation that are applicable to your location.
2)Have a backup fund: Do not depend on rental money as a primary source of income. Always have some extra money in the piggy bank for possible repairs or tenant issues and, of course, to cover your own bills.
3)Mortgage flexibility: A flexible mortgage is recommended when renting out part of your home. It can give you wiggle room on the requirements for monthly payments should something go wrong. This allows homeowners to avoid penalties that occur in a fixed mortgage rate when a monthly payment is missed. Flexible mortgages also give homeowners the opportunity to pay off their mortgage sooner as you can accelerate payments.
4)Have rules in place: Renting out part of your home should be seen more as a business deal then a simple rental agreement. Always have written and signed documentation to cover all your bases. This ensures liability on both your end and the renters.
5)Check-in: Make a habit of checking in with your tenants on a regular basis to ensure both your happiness and theirs. You can have monthly visits to ensure that your property stays in good shape and they are properly accommodated.
6)Hire professionals: A real estate lawyer should be at the top of your list, as well as a mortgage expert and other professionals who can help navigate the legalities and other circumstances of being a landlord.
Overall, renting your home can be a viable source of income if you do it properly. Following the rules and maintaining your property are extremely important and necessary. Renting property comes with responsibility and patience, and should not be done as a get-rich-quick scheme.
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