legal vs. illegal suites

[RedlineBrett]

Thomas I noticed you posted your thoughts in a couple threads and I thought I would create a new one so that interested investors can more easily engage the conversation.



[quote user=ThomasBeyer]Why ?



All the hoopla is grossly over-rated. It costs a lot of money to build a
legal suite and there is no return on the $s invested, as you will get
almost the same rent as an "illegal" one.


For the most
part I agree with you. I own and my company manages several perfectly safe 'illegal' suites
that perform very well. But legalizing does reduce risk, most noteably
that in most places all it takes is one phone call from an unhappy
neighbor or previous tenant and you are now faced with the prospect of
losing nearly half the income from the property.



Some investors - however silly the laws might be - simply do not want to do anything outside of the lines. These are the ones that choose to legalize off the hop.



Our company has embraced the legalization concept in the last six months, mostly due to investor demand. I will say that the suites we have retrofitted are doing much better than I anticipated. $1225 + utilities for an ~800ft two bedroom basement suite in ranchlands being our latest example. Time will tell, but I suspect that tenants may ultimately place a premium on legalized suites.

 

[Sherilynn]

In municipalities such as Calgary, where secondary suites are so passionately debated, perhaps tenants will pay a premium for the security of knowing that the suite will not be shut down. However in places such as Edmonton, where secondary suites have long been embraced as an acceptable source of affordable housing, I have yet to meet a tenant that questions the legality of the suite, so I have difficulty imagining an Edmontonian paying more for a legal suite.



That being said, I agree with you on other posts that you have made on secondary suites. Legal suites should command a higher sale price for the property because there is a higher demand for them. And suites that are not legal require additional consideration such as:

• the safety of the suite in its current condition
• the possibility and ease of legalizing, and
  the effect on cashflow if the suite must be removed

 

[Thomas Beyer]

[quote user=Sherilynn]Legal suites should command a higher sale price
should .. yes, but do they actually ?



of course, an upgraded downstairs unit, with an extra kitchen, fancy bathroom, high celing and upgraded nice LR is worth more than a dungy one, but how much is the "legal" status worth ? $1000 ? $10,000 ? $20,000 ? $50,000 ?



[quote user=Sherilynn]there is a higher demand for them.
is there ? by whom ?

 

[sbh]

For me legalizing suites is about liability and answering to JV partners.



Why would I offer a suite to someone that does not meet minimum fire and building codes? And how am I a real estate expert after my suite gets shut down by the city because of a bad neighbour or disgruntled tenant? This would be a tough one to explain to a JV partner.



I don't think the code in Alberta is unreasonable compared to suites I had in London Ontario. The biggest expense and challenge is separating the heating systems. Our most recent house we are conducing diligence needs a 2nd furnace, egress windows and linked smoke detectors. 12Kish and I have a suite with a city stamp of approval.



The money invested is not so much about value of the house as it is liability and accountability.



By the way, Brett's guys know what they are doing if anyone is looking for a contractor.

 

[invst4profit]

There is also the question of target market. If the unit is in a area where the market is "affordable housing" (aka cellar dwellers) then legalizing, including upgrading, may actually hurt your chances of finding a tenant. As this requires additional expense and should warrant higher rent. On the other hand cellar dwellers are of the lower end of the tenant spectrum quality wise and are the most likely to report or black mail a landlord when they become difficult tenants.

If the area warrants higher rents I would legalize and upgrade simply to avoid the lower quality tenants.



It is my opinion that it is a call more related to the potential target market in the area the unit is located in as opposed to legal/illegal although I personally would not knowingly purchase a property with a illegal unit simply due to the risks of being shut down.

 

[Dapper]

Looking at insurance, I would at least have the electrical done by permit. If a fire burned down the house (hopefully not) and the electrical in the basement was not certified, the insurance company may not have to comply.

 

[Thomas Beyer]

[quote user=Dapper]I would at least have the electrical done by permit.
You need a permit to change wiring in your house, say adding a new socket and a new light ? Or is this Ontario only ?

 

[housingrental]

In certain areas and property types in Waterloo this premium can be 30%+



This varies from city to city based on:



Supply of two unit properties

Barriers on creating new legal suites

Sale and financing premium potential

Enforcement of by-laws and provincial codes

 

[Sherilynn]

[quote user=ThomasBeyer]

You need a permit to change wiring in your house, say adding a new socket and a new light ? Or is this Ontario only ?




In Edmonton, the homeowner can mess with wiring in his own residence, but all wiring in rentals must be done by licensed electricians. A permit is still required even if the homeowner is doing the work; however I would think that few homeowners actually apply for permits.



The risk of faulty wiring is difficult to avoid since the previous owner could have messed with any of the wiring and the new owner would have no clue. For instance, we have seen wires inside the wall of the main floor suite that had been sliced in two and then put back together with electrical tape. (The wire shorted out but didn't cause a fire.)

 

[andyr]

I have been struggling with this. I want to buy my first investment property and it will be from a distance. I found several places that cash flow with illegal suites, but haven't found a management company that will take it on. What makes them illegal in Edmonton, is not meeting fire safety codes. I want to provide a safe environment for my tenants, so it makes sense to make the suite legal. However I don't see any homes with legal suites in my price range, struggle with the idea of renovating from a distance, and if I could find a management company to take it on I'm not sure how comfortable I'd be with them or the idea. However, I don't see anything that will cash flow as one unit.

I saw the comment that as long as the units are safe there is no need to legalize the suite. Isn't the biggest cost egress windows, 1/2" drywall on the ceiling and connected smoke detectors. Isn't this what makes it safe?

I want to make money, but not lose it in a lawsuit or put people in harms way. Am I being over precautious?

 

[Thomas Beyer]

[quote user=andyr]Am I being over precautious?
yes.



[quote user=andyr] Isn't the biggest cost egress windows, 1/2" drywall on the ceiling and connected smoke detectors. Isn't this what makes it safe?
Exactly.



Buying property, anywhere, in any form, has a degree of risk, due to mortgage debt, unknown future vacancies, unknown future rent levels, unknown future expenses, unknown future values and potential lawsuits.



A lot of things could happen in theory. Hence, some people get paralyzed into inaction.



Use some common sense assumptions about the world, after thorough research, and go forth boldly, and in most cases you will come out ahead.

 

[andyr]

Any recommendation on a property management that manages Illegal suites in Edmonton or Calgary then?

I also wonder if everyone else feels the same. I'm not seeing any other option though.

 

[sbh]

[quote user=andyr] Isn't the biggest cost egress windows, 1/2" drywall on the ceiling and connected smoke detectors. Isn't this what makes it safe?
I want to make money, but not lose it in a lawsuit or put people in harms way. Am I being over precautious?





Depending on how many windows you have to dig out, I would say the biggest cost is the second heating system. It involves separating the duct work with forced air and installing the new furnace. If your electrical panel is not in a common area, to make it legal, you will have to move it or split the panel so upstairs can have control of their stuff.



I don't think you are being over cautious. If you want to provide a safe environment for the tenants and sleep good at night why not legalize the suite? Why worry about a tenant or neighbour complaining and getting shut down? Being safe, in my opinion, is meeting the minimum fire and building code. We can find houses in Calgary that cash flow great with the extra cost of legalizing the basement suite. Edmonton, in theory, should be easier because it doesn't have zoning restrictions and they city will give you free money! (with some restrictions). I am not sure what the red tape is around the process but it has to be better than Calgary because we just had a flood and the city is fairly busy with permits.



I have a checklist I use that has almost all of the items to make a suite legal with measurements, if you want I can email a copy to you.



If property management companies do not want to deal with illegal suites, shouldn't they be cheaper to buy? Wouldn't legalizing then put a premium on the property?



I recently had one of my houses appraised after a renovation to make it legal and it appraised higher than anything has sold in the neighbourhood and I am confident we would have got more if we listed it.

 

[Thomas Beyer]

Making a secondary suite "legal" is different than making it safe. Many cities do not recognize "legal" suites as the area the house is located in is single family homes, not dual family homes. As such, be first concerned with safety, and if legality is possible at reasonably low extra cost, do that, too, but in many cases it is neither possible nor necessary.

 

[Sherilynn]

[quote user=sbh] I would say the biggest cost is the second heating system. It involves separating the duct work with forced air and installing the new furnace.


There is only a requirement for a secondary heating system for new suites. If the suite is existing, there is no requirement for a secondary heating system. And in existing suites that I have legalized in Edmonton, we were not required to relocate the electrical panel.



There are very different rules between existing and new suites. Be sure to follow the appropriate guidelines, and you will likely find that the cost of legalizing an existing suite is quite reasonable.



Plus, the secondary suites department in Edmonton is very easy to work with. They genuinely want to help landlords create safe, affordable housing.

 

[sbh]

[quote user=Sherilynn]

There is only a requirement for a secondary heating system for new suites.






In Calgary it is a bit different. For suites built prior to 2006 it is up to the landlord to prove that they were built legally with permits, otherwise they must be brought up to proper building code. The city keeps record on the 3rd floor at city hall, calling in they can only go back 10 years.



Speaking with my contractor, this is easier said than done. I haven't attempted it yet but I am looking into trying it with one of my properties. I can post some more information once I try and do it myself.



[quote user=Sherilynn]Plus, the secondary suites department in Edmonton is very easy to work with. They genuinely want to help landlords create safe, affordable housing.


That's awesome Edmonton is easy to work with. Secondary suites will be a hot topic this election in Calgary, I hope they relax the zoning.

 

[johninottawa]

AndyR,



Are you being over cautious, maybe but only depending on the units you have looked at. It is quite possible to find "illegal" suites that still have some or most of the necessary safety requirements. At the end of it all you have to ask yourself what lets you sleep at night. When I know I have someone living in something that belongs to me, I need to know that the fire egress is adequate.



I have legalized 3 of my four suites. 2 because I wanted work done to improve them anyway and it was part of the overall plan to improve the value of the property. On the 3rd it was because the city decided on it for me and that is the other consideration. Do you have the ability to carry the house if, down the road you have to legalize it. Do you want taht to come at an unexpected moment or do you want to plan for it up front and factor it into the purchase and maybe even roll the costs into the mortgage.



As always, Sherilyn's comments are right on the mark about the heating and the ability to work with the city in Edmonton.

 

[kir]

I suppose if you go though basement legalization, then the ceiling would have to be drywalled...this would be an ideal time to add sound deadening materials to the ceiling as well.



Kir.

 

[kfort]

Unless my math is wrong, it's a heck of a lot more expensive to add a second furnace and mess with ducting than it is to add the appropriate baseboard heaters to the basement.

 

[kir]

If you have baseboard heating, then you still need a HRV system. It brings fresh air into the house, and takes moist air out. There is duct-work involved.



kir