5 Things You Need to Know About Renting Out Part of Your Home
Craig Sebastiano for Ratehub.ca
You’ve probably watched television shows where people renovate a part of their home in the hopes of finding a tenant to help pay down their mortgage. While it looks great on TV, having a rental unit isn’t always a piece of cake.
There are a number of things you need to keep in mind if you’re thinking about buying a home with a rental unit or converting part of your property into an income suite. Here’s an overview:
- You need to find a good tenant—If you’re buying a home, sometimes you’re lucky and are able to find a property with a tenant who wants to stay. But in most cases, you have to search for a tenant. While it’s easy to find someone willing to rent, it’s hard to find the right person. Jim and Natalie Taylor (who didn’t want their real names used) bought a home in Pickering, Ont. with a rental unit and had trouble with their first tenant. After renting out the basement apartment for a few months, both they and their neighbours noticed another car in their driveway on a regular basis. They soon found out their tenant was leasing the unit to a co-worker without their knowledge. Even the tenant’s co-worker didn’t know he wasn’t given permission to live there. The tenant didn’t stay much longer after that incident.
- You shouldn’t rely on rental income—If you’re hoping the rental income will pay for a portion of your mortgage, it depends upon where you live. While Toronto and Vancouver may have hot rental markets, other cities aren’t as popular.According to a 2017 Canada Mortgage and Housing Corporation (CMHC) report, vacancy rates in Vancouver and Toronto were 0.9% and 1%, respectively. However, the rates were higher in Edmonton (7%) and Saskatoon (9.6%).When the Taylors bought their house, they never wanted to be in a situation where they had to depend on rental income to make their mortgage payment. They have had periods of time where they didn’t have a tenant and haven’t been in a rush to find someone.If you do decide to rely on the extra income for your living expenses, you should be prepared in case you don’t have a tenant for a long period of time. That money can also come in handy in case you need to make repairs to the rental unit.
- You should know the tax rules—The income you earn from a rental unit is considered taxable so you must include it on your tax return.The Canada Revenue Agency (CRA) allows you to deduct a number of rental expenses. While you can only deduct a portion of your insurance costs, mortgage interest, and property taxes, you can deduct the cost of advertising your home for rent in full. It’s important to keep track of your income and expenses in case the CRA decides to conduct an audit.
- You should know the laws—Being a landlord means you need to comply with the law. The laws vary by province and you should be familiar with them where you live.In Ontario, for example, the laws were recently changed. Rent controls were expanded to all rental units, not just ones built before 1991. Also, landlords must give a tenant one month’s rent as compensation if they plan on evicting them to use the unit for themselves or family members.
- You should consider a flexible mortgage—A mortgage with flexible payment options is often the better choice. You can use the additional income you earn to make additional payments or to increase your regular payment.In the event you rely on rental income, some mortgages allow you to skip a payment. If you’re thinking to yourself, “how much mortgage can I afford?” that’s when a mortgage affordability calculator comes in handy before buying a property.
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