Basement suites can be a good way to increase cashflow if you know what to look for and how to manage them.
You might be thinking “I wouldn’t want to live in a basement! How could I possibly ask someone else to?” While it is true that most people would prefer to be living upstairs or have the whole house to themselves, there are financial considerations that are a reality for normal people. In fact, there are some perks to living in a basement suite, that we will discuss below. As a real estate investor, you must not cloud your judgment of a property with your own personal preferences – you will not be living there.
Here are some reasons why a basement suite will appeal to tenants:
- Lower Rent
Compared to main floor suites, the main attraction will be paying as much as 25% lower rent.
- Less Responsibility
While upstairs tenants are typically responsible for upkeep of the yard, the basement tenant would not.
- Easy Budgeting
Tenants renting a whole house would pay utilities which vary month to month. If you include utilities, such as you would with a suite, monthly housing costs are known and it is one less worry for tenants. As well, they don’t have to worry about dealing with the utility company and putting down a deposit with them as is usually required.
- More Privacy
Compared with a large apartment building, they are getting a similar living space, with much fewer neighbors (usually just one family suite upstairs).
When advertising and speaking with potential tenants, use these points!
Here are some reasons why a basement suite will appeal to investors:
- Increased Rental Income
Compared to a house with unfinished basement, you could be getting up to 60% more income after utility expenses!
If you don’t believe this, consider the real-world example:
$1350 for 3bdrm home with unfinished bsmt (no utils)
$1450 for 3bdrm main flr (with utils) + $1150 for 2+bdrm bsmt suite (with utils) – utils $400 avg = $2200
- Increased Property Value
Compared to other properties in the area, you will have more bedrooms, more bathrooms, extra kitchen, and more rental income. Be sure to let appraisers know the income!
- Income Stabilization
If one or the other suite is vacant, you will still be receiving an income from the other suite.
- Government Subsidies
Municipal or other programs may exist (as they do for Edmonton), to help pay for the costs of putting in a suite. This is due to a shortage in lower rent housing. You can help people AND get money to facilitate your increased home value and cashflow! Sounds crazy doesn’t it? Crazy good.
In order to evaluate if suites are for you, you also need to know the down side of basement suites:
- More Transient Tenants
Since the tenants are more likely to be sensitive to costs and rent increases, they are more likely to be on the lookout for ways of decreasing costs by moving to where rent is cheaper.
- Increased Risk of Problem Tenants
Lower income individuals seem to have an increased tendency to be untidy, not respect or understand the lease terms, and have conflicts with other tenants. This could be due to many factors such as age, lifestyle, etc. I am just reporting my findings and make no judgments about anybody. Please remember to respect all people, but to stick to good management principles and not let them do whatever they want.
- Increased Costs
It is probably the simplest arrangement to have utilities included in rent, so you will need to pay for natural gas, electricity, water & sewage. Upkeep and wear and tear are likely to be higher, especially when considering the above points. Due to increased hassle, you may also want to have a property managment company involved.
- Neighbor Issues
With more people living in a house, there is a higher chance of irritating the neighbors. Parking is the most common problem, so be sure to monitor it and make sure you either have extra parking available or discuss with tenants or maybe even the immediate neighbors to come up with a reasonable solution.
Municipal & Provincial Requirements
When renting out a property to any tenant, you have many responsibilities and duties to ensure you do not put them at risk as far as health and safety. Basement suites are more commonly where this responsibility is sometimes forgotten or ignored. This is why there are both municipal and provincial regulations and laws. You must do your due diligence to ensure that you are informed and compliant. Unfortunately some landlords have had to learn this the hard way, and you see them in the headlines from time to time. Once you understand this responsibility, you can proceed to make money with a clear conscience.
You will need to comply with the following:
- Residential Tenancies Act (Alberta)
- Public Health Act (Alberta)
- Building Code (Alberta) — new construction only
- Alberta Fire Code (Alberta) — existing suites only
- Zoning Bylaw 12800 (Edmonton)
A good overview of basement/secondary suites for the City of Edmonton: http://www.edmonton.ca/for_residents/SecondarySuiteBrochure2009.pdf
The following discussion on government requirements, codes, and laws are only intended to be for reference purposes, and are only as I understand them. Please consult the proper authorities prior to using this advice when purchasing, building, or renting out a suite.
When a suite is not permitted by the city, it is deemed illegal, and does not comply with the local bylaw. It seems that most basement suites are illegal, although it is hard to quantify since they are not reported. This is due to many reasons. The most common reason is probably that most people do not want to attract attention, for fear that they may have added costs such as taxation, zoning & approval, permits & inspections, and costly code violations & building upgrades. Do not be surprised when purchasing a property with a suite, if there is a statement on the purchase agreement that the vendor does not guarantee that the suite is legal. It is up to you to make sure the suite is legal and meets all regulations before renting it out.
If you have a suite that the city finds as illegal, they will most likely try to work with you (due to low-cost housing shortages), but you will need to have a plan to comply once it is reported. Otherwise, they could force you legally to cease renting out the suite, and may even have it forcibly removed. There have been reported cases of the city having the electrical supply for the stove removed. In some cases, bylaw enforcement may just require that there are no doors between the upstairs and downstairs with locksets (locked with a key) — it is ok to have friends or family living up/down as long as it is considered a single tenant with one lease agreement. When purchasing a property with a suite, watch for signs of removed components as you may not want to take on a property with a history.
For the City of Edmonton, zoning has been opened up recently to increase affordable housing. They are now allowing basement/secondary suites in most areas. Some of the main requirements are:
- must be single detached housing (no duplexes, row houses, or townhouses)
- lot size must be at least 3,875 ft² (360 m²) — check your Real Property Report or MLS listing page
- suite must be at least 323 ft²
- only 1 secondary suite per property
- must have at least 3 on-site parking stalls (2 for upstairs + 1 for every 2 bedrooms of secondary/basement suite)
See http://www.edmonton.ca/for_residents/SecondarySuitesSummaryTableFeb2009.pdf for more detail. Please note that there is also info there for garage and garden suites which I do not discuss specifically here — they also have tighter location restrictions.
The Edmonton bylaw is located at http://webdocs.edmonton.ca/InfraPlan/zoningbylaw/ZoningBylaw/Part2/Residential/140_(RF3)_Low_Density_Development_Zone.htm
Know your local building code. Many provinces and territories will probably be similar but there may be a few odd ones that could cause you many problems later if you don’t know about them.
For suites that have been constructed previously:
- Secondary (basement suite) must have an exit to the outside either directly or through a common area. Usually not a problem.
- Bedrooms must have means of egress — windows must not have any dimension less than 15″ wide. As well the opening must not be less than 542.5 in².
- Bedroom windows which have security bars must have a release from the inside without need to use a tool
- Smoke alarms are required outside of all sleeping areas (bedrooms) and in every common area.
- Smoke alarms are to be powered from 120V and must be interconnected to alarm simultaneously
- Any gas water heater or furnaces must be located in a utility room with 1/2″ drywall on ceiling and both sides of walls separating them from living spaces
- Common areas & stairwells used for exit to the outside must have 1/2″ drywall on ceiling and walls
For new construction:
In addition to the above requirements, there are also a few more when building a new suite:
- ceiling height must be at least 6′-5″
- must have separate heating/ventilation for each suite (separate furnace and ductwork)
As well, do not forget about general dwelling unit health code requirements. Good guidelines are:
- good solid handrails on stairwells; stairwell width and tread depth need to meet code
- each bedroom must have an openable window for ventilation (must have a screen also) — see dimensions required for fire code above
- bathroom walls/ceiling/floor must have smooth surfaces to easily keep clean, without cracks or gaps
- each bathroom must have ventilation through a fan or openable window (must have screen also)
- using the furnace, temperature of all rooms must be able to be heated to 22°C, or at least 16°C with excessively low temperature outside; main means of heating must not be a space heater or cooking device
- if the heating is controlled by someone other than the occupant (such as a single thermostat in upstairs suite, which is very common), temperature needs to be maintained at 22°C
- must have a fridge unless there is a shared kitchen
- windows and doors must be securable from inside