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Rent out my basement or invest in a property?

R

ramonac

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Hi,

I`m new to REIN and very excited to learn from all of you. I`m trying to decide where my money is best spent: my basement (to create a rental unit) or a different investment property (that I have yet to find). I would appreciate any input.

Here are the details:
We are planning on renovating our basement - either for our own use, or for a rental. If we use it ourselves, we would put approximately 25 - 30K into it to finish it. If we choose to convert it into a rental, we`re looking at around 75 - 80K (lowering the floor, cost of a kitchen, additional soundproofing etc.). I believe we could generate $900 - $1000 per month from a tenant. If I follow the 10% rule, then it seems like this is a good investment (plus, we`re in a popular area for rentals in Toronto, near TTC, centrally located, good schools etc.), and the housing market in our neighbourhoud (Yonge and Lawrence) is doing very well. HOWEVER, I really want to invest in a multi-unit rental property, so how would my money be better spent at this point (of couse, I`d love to do both)? The money in question represents approximately 50K - the difference between what we would put into the basement for ourselves versus what we would spend to make the basement appropriate for a rental.

Any advice? Other considerations?
Also, for a basement unit, is it better to provide a furnished or unfurnished suite?

Thanks a lot.
Ramona
 
QUOTE (ramonac @ Sep 20 2010, 01:32 PM) Hi,

I`m new to REIN and very excited to learn from all of you. I`m trying to decide where my money is best spent: my basement (to create a rental unit) or a different investment property (that I have yet to find). I would appreciate any input.

Here are the details:
We are planning on renovating our basement - either for our own use, or for a rental. If we use it ourselves, we would put approximately 25 - 30K into it to finish it. If we choose to convert it into a rental, we`re looking at around 75 - 80K (lowering the floor, cost of a kitchen, additional soundproofing etc.). I believe we could generate $900 - $1000 per month from a tenant. If I follow the 10% rule, then it seems like this is a good investment (plus, we`re in a popular area for rentals in Toronto, near TTC, centrally located, good schools etc.), and the housing market in our neighbourhoud (Yonge and Lawrence) is doing very well. HOWEVER, I really want to invest in a multi-unit rental property, so how would my money be better spent at this point (of couse, I`d love to do both)? The money in question represents approximately 50K - the difference between what we would put into the basement for ourselves versus what we would spend to make the basement appropriate for a rental.

Any advice? Other considerations?
Also, for a basement unit, is it better to provide a furnished or unfurnished suite?

Thanks a lot.
Ramona

Hi Ramona: Lets assume you decide to rent the basement: by investing 80k and renting the basement out for 1000 per month you are collecting a return of 12000/80000= 15 percent. ( You must however account for higher utility costs,permit fees,potentially higher property taxes(maybe). Plus you will have a tax free capital gain if/when you sell the property in the future.

If you buy a multifamily ( 6 plus units) with 50k down (assuming 30k used to make basement for yourself) you will approx be able to purchase a 150k property as multi-family properties often require higher down payments (say 1/3 down). And...you will need to pay much higher closing costs-broker fees,appraisals,inspections UPFRONT which will reduce the funds available for down payment. It would be difficult/impossible to find a true multi-family in this price range. Also, IF you are a new investor especially with limited resources and things don`t go as planned it may be harder to exit from a multi-family investment than a single family (many more potential buyers).

I think given the funds are limited to 80k max, it would make far greater sense to pursue the basement option IF.... you can handle having a tenant in the basement and you can tread lightly on the floor, keep your voice down and you know that your tenant always knows where to find you and... you plan on living there long term. The return is good and there should be no surprise costs once complete as it will be new construction and you can enjoy the passive income.

I have not entertained the idea of a single family though, as your question was specific to multi-family. You should seriously consider this option as you must acknowledge the leverage potential of the 50-80k. 20% down will buy you a nice 250-400k single family to invest in. It is difficult to buy true multifamily properties with less than 1/3 down.

hope this helps.
 
Maybe you can do both (although 70k seems very high to build a basement suite (and we have built a few). Build the suite in your home and then refinance your home with the vaue added meaning you should be able to finance 70-80% of the cost at least. Then use what is remaining, almost all of the original total, to buy a property with as many units as possible in it to rent out.
 
Lowering the floor is likely where that high number comes from...
Given the need for that I wouldn`t do it PLUS reduced quality of rest of house
No to basement option, in this case
 
Hi,

Thanks so much for the advice - it`s very helpful. I can borrow more, or go in with a partner for a separate investment property.
All the best,
Ramona

QUOTE (rgill @ Sep 20 2010, 09:42 PM) Hi Ramona: Lets assume you decide to rent the basement: by investing 80k and renting the basement out for 1000 per month you are collecting a return of 12000/80000= 15 percent. ( You must however account for higher utility costs,permit fees,potentially higher property taxes(maybe). Plus you will have a tax free capital gain if/when you sell the property in the future.

If you buy a multifamily ( 6 plus units) with 50k down (assuming 30k used to make basement for yourself) you will approx be able to purchase a 150k property as multi-family properties often require higher down payments (say 1/3 down). And...you will need to pay much higher closing costs-broker fees,appraisals,inspections UPFRONT which will reduce the funds available for down payment. It would be difficult/impossible to find a true multi-family in this price range. Also, IF you are a new investor especially with limited resources and things don`t go as planned it may be harder to exit from a multi-family investment than a single family (many more potential buyers).

I think given the funds are limited to 80k max, it would make far greater sense to pursue the basement option IF.... you can handle having a tenant in the basement and you can tread lightly on the floor, keep your voice down and you know that your tenant always knows where to find you and... you plan on living there long term. The return is good and there should be no surprise costs once complete as it will be new construction and you can enjoy the passive income.

I have not entertained the idea of a single family though, as your question was specific to multi-family. You should seriously consider this option as you must acknowledge the leverage potential of the 50-80k. 20% down will buy you a nice 250-400k single family to invest in. It is difficult to buy true multifamily properties with less than 1/3 down.

hope this helps.
 
Hi Garth,
Thanks so much - I`d like to do that.
Ramona

QUOTE (GarthChapman @ Sep 20 2010, 10:07 PM) Maybe you can do both (although 70k seems very high to build a basement suite (and we have built a few). Build the suite in your home and then refinance your home with the vaue added meaning you should be able to finance 70-80% of the cost at least. Then use what is remaining, almost all of the original total, to buy a property with as many units as possible in it to rent out.
 
Also, would you recommend I provide a furnished or unfurnished basement suite? Thanks!

QUOTE (ramonac @ Sep 21 2010, 12:15 PM) Hi Garth,
Thanks so much - I`d like to do that.
Ramona
 
I would recommend unfurnished simply because there are more people looking for unfurnished rather than furnished.

You might look into CMHC`s RRAP program (you can go to their site) they will provide a grant of up to $24,000 in Toronto, as long as the tenants fit into their parameters. It`s to help create affordable housing

Having said that as one of the other posters mentioned...you will be sharing your space with these people, the space is generally considered less desirable and so attracts a lower quality of tenant. Backyard, parking etc. will all be shared. I rented out my basement for 12 years and I did have some tenants that were good and others that really sucked badly. Probably the most irritating were the last couple I had who fought morning noon and night. I would hear them continually, it was so bad I had to call the police several times. I had a couple roommates who stayed over 2 years they were wonderful and even helped shovel the snow. I had a very nice couple they left after 2 years when they got pregnant.

I am not in a good location for renters, I am in Scarborough which doesn`t attract the best tenants to start with, plus I am far from the subway, you really need a car to live here. You would get better applicants than I do.
 
Wow - I didn`t know about the grant. Thanks a lot, and thanks for the other advice.
Ramona

QUOTE (Berubeland @ Sep 21 2010, 02:12 PM) I would recommend unfurnished simply because there are more people looking for unfurnished rather than furnished.

You might look into CMHC`s RRAP program (you can go to their site) they will provide a grant of up to $24,000 in Toronto, as long as the tenants fit into their parameters. It`s to help create affordable housing

Having said that as one of the other posters mentioned...you will be sharing your space with these people, the space is generally considered less desirable and so attracts a lower quality of tenant. Backyard, parking etc. will all be shared. I rented out my basement for 12 years and I did have some tenants that were good and others that really sucked badly. Probably the most irritating were the last couple I had who fought morning noon and night. I would hear them continually, it was so bad I had to call the police several times. I had a couple roommates who stayed over 2 years they were wonderful and even helped shovel the snow. I had a very nice couple they left after 2 years when they got pregnant.

I am not in a good location for renters, I am in Scarborough which doesn`t attract the best tenants to start with, plus I am far from the subway, you really need a car to live here. You would get better applicants than I do.
 
Thanks for this advice. I`m really torn because we have to spend a fair bit of money regardless on fixing up the basement (waterproof, insulate, finish - I`m estimating 30k), but we wouldn`t see any of that back for a long time. If we invest the extra (another 50k, so approx 80k total) to lower the floor, soundproof, put in kitchen etc., then we get income potential. What`s the cut off for determining if it`s worthwhile? Isn`t it still a good return compared to other investments? Thanks a lot.

QUOTE (housingrental @ Sep 21 2010, 10:13 AM) Lowering the floor is likely where that high number comes from...
Given the need for that I wouldn`t do it PLUS reduced quality of rest of house
No to basement option, in this case
 
QUOTE (ramonac @ Sep 28 2010, 08:12 AM) Thanks for this advice. I`m really torn because we have to spend a fair bit of money regardless on fixing up the basement (waterproof, insulate, finish - I`m estimating 30k)

Why do you HAVE to do that work if you`re not going to put in a basement suite? If you put in a basement suite, you won`t be able to use the basement for anything. If you leave it the way it is, you won`t be able to use it for anything except maybe storage. It seems to me you actually have 3 choices.

1) Finish basement suite - 80k
2) Finish basement for self, 30k, + 50k investment
3) Leave basement as is, 80k investment

If the 30k option still doesn`t give you great space (low ceiling) I`m not sure I would bother with it. Based on what you`re saying, I`d probably pick option 3.

Michael
 
Thanks so much Michael,

I should clarify, and repick your brain... the basement is around 900 sq ft. We would keep around 300 sq ft for us, and the rest for a tenant. As it is, the ceiling height is great for our purposes, and to code (between 6`8" - 7`2"). However, under the beams, where we have doorways, it is 6`1". As far as I can understand, this is not to code), so I don`t know if we could get a permit to convert it to a rental suite unless we lower the floor. I`m doing everything I can to find out. If I don`t have to lower the floor, I should be able to do the reno (creating a rental unit) for around 40k.
The reason we `HAVE` to do a bit of work if we want it for our purposes other than storage, is that it`s cold and uninviting, and a shame to have so much wasted space.

Thanks again - your comments are very helpful. Please tell me what you think given the above situation.
Ramona

QUOTE (bizaro86 @ Sep 28 2010, 10:23 AM) Why do you HAVE to do that work if you`re not going to put in a basement suite? If you put in a basement suite, you won`t be able to use the basement for anything. If you leave it the way it is, you won`t be able to use it for anything except maybe storage. It seems to me you actually have 3 choices.

1) Finish basement suite - 80k
2) Finish basement for self, 30k, + 50k investment
3) Leave basement as is, 80k investment

If the 30k option still doesn`t give you great space (low ceiling) I`m not sure I would bother with it. Based on what you`re saying, I`d probably pick option 3.

Michael
 
QUOTE (ramonac @ Sep 28 2010, 06:51 PM) Thanks so much Michael,

I should clarify, and repick your brain... the basement is around 900 sq ft. We would keep around 300 sq ft for us, and the rest for a tenant. As it is, the ceiling height is great for our purposes, and to code (between 6`8" - 7`2"). However, under the beams, where we have doorways, it is 6`1". As far as I can understand, this is not to code), so I don`t know if we could get a permit to convert it to a rental suite unless we lower the floor. I`m doing everything I can to find out. If I don`t have to lower the floor, I should be able to do the reno (creating a rental unit) for around 40k.
The reason we `HAVE` to do a bit of work if we want it for our purposes other than storage, is that it`s cold and uninviting, and a shame to have so much wasted space.

Thanks again - your comments are very helpful. Please tell me what you think given the above situation.
Ramona

hi Ramona,

toronto city hall has a package that you can pick up on secondary suite requirements. Now, I don`t know if you are technically in North York and therefore fall under a different jurasdiction, but it`s worth looking into. As well, make sure that your area is zoned for secondary suites. The code for adding a secondary suite is more relaxed than the actual building code if you were going to create a new structure, so it is possible that you can make changes that don`t require lowering the floor. Is it possible to move walls or reframe so that your doorway is not located underneath a beam or duct? Underpinning is very expensive, it would be a lot cheaper if you could move the doorway or redesign the space differently.

Personally, I would find a way to create a legal basement apt without underpinning. Have the house re-appraised after the work is done, get a secured line of credit or line of credit mortgage and use that to invest in the next property.


If you are going to invest in a multi family building in toronto, make sure that it is legal or at least legal non conforming.

I have legal non conforming triplexes downtown (queen west) with basement apts, please feel free to PM me if you have questions.

cheers,
Terri
 
QUOTE (ramonac @ Sep 28 2010, 06:51 PM) Thanks so much Michael,

I should clarify, and repick your brain... the basement is around 900 sq ft. We would keep around 300 sq ft for us, and the rest for a tenant. As it is, the ceiling height is great for our purposes, and to code (between 6`8" - 7`2"). However, under the beams, where we have doorways, it is 6`1". As far as I can understand, this is not to code), so I don`t know if we could get a permit to convert it to a rental suite unless we lower the floor. I`m doing everything I can to find out. If I don`t have to lower the floor, I should be able to do the reno (creating a rental unit) for around 40k.
The reason we `HAVE` to do a bit of work if we want it for our purposes other than storage, is that it`s cold and uninviting, and a shame to have so much wasted space.

Thanks again - your comments are very helpful. Please tell me what you think given the above situation.
Ramona

I can`t really say which would be a better investment in Toronto, since I`m totally unfamiliar with the market there. I suspect for 40k, however, a basement suite would be a good investment. My main point was to make sure you`re comparing apples to apples. Whatever money you`re going to spend on the suite, see what that could buy you elsewhere (as a downpayment) and decide whether you`d have that or not.

If you decide not to develop the basement suite, is the 30k the cost of only renovating the part (~300 sq ft) that you would be using yourself? Because you really do need to compare situations that have you using the same amount of space in either situation. Otherwise you`re just deciding between consumption (finishing the space and using it yourself) and investment (finishing the space and renting out.)

Regards,

Michael
 
Thanks so much,
I will definitely get in touch when I get back from my vacation. I look forward to speaking with you.
Ramona
ps the pics on your website look beautiful.

QUOTE (terri @ Sep 28 2010, 11:58 PM) hi Ramona,

toronto city hall has a package that you can pick up on secondary suite requirements. Now, I don`t know if you are technically in North York and therefore fall under a different jurasdiction, but it`s worth looking into. As well, make sure that your area is zoned for secondary suites. The code for adding a secondary suite is more relaxed than the actual building code if you were going to create a new structure, so it is possible that you can make changes that don`t require lowering the floor. Is it possible to move walls or reframe so that your doorway is not located underneath a beam or duct? Underpinning is very expensive, it would be a lot cheaper if you could move the doorway or redesign the space differently.

Personally, I would find a way to create a legal basement apt without underpinning. Have the house re-appraised after the work is done, get a secured line of credit or line of credit mortgage and use that to invest in the next property.


If you are going to invest in a multi family building in toronto, make sure that it is legal or at least legal non conforming.

I have legal non conforming triplexes downtown (queen west) with basement apts, please feel free to PM me if you have questions.

cheers,
Terri
 
Great points - thanks.

The 30k was an estimate of what I`d need to put in to finish the whole space. If we decide to not rent it out (I`m worried about a bylaw issue), then I`d like to reduce the amount I put into our basement, and put more towards an investment proptery.

All the best,
Ramona

QUOTE (bizaro86 @ Sep 29 2010, 10:35 AM) I can`t really say which would be a better investment in Toronto, since I`m totally unfamiliar with the market there. I suspect for 40k, however, a basement suite would be a good investment. My main point was to make sure you`re comparing apples to apples. Whatever money you`re going to spend on the suite, see what that could buy you elsewhere (as a downpayment) and decide whether you`d have that or not.

If you decide not to develop the basement suite, is the 30k the cost of only renovating the part (~300 sq ft) that you would be using yourself? Because you really do need to compare situations that have you using the same amount of space in either situation. Otherwise you`re just deciding between consumption (finishing the space and using it yourself) and investment (finishing the space and renting out.)

Regards,

Michael
 
Hi Terri,

I just sent you a message through your website - what`s the best way to contact you? Thanks, Ramona

QUOTE (terri @ Sep 28 2010, 11:58 PM) hi Ramona,

toronto city hall has a package that you can pick up on secondary suite requirements. Now, I don`t know if you are technically in North York and therefore fall under a different jurasdiction, but it`s worth looking into. As well, make sure that your area is zoned for secondary suites. The code for adding a secondary suite is more relaxed than the actual building code if you were going to create a new structure, so it is possible that you can make changes that don`t require lowering the floor. Is it possible to move walls or reframe so that your doorway is not located underneath a beam or duct? Underpinning is very expensive, it would be a lot cheaper if you could move the doorway or redesign the space differently.

Personally, I would find a way to create a legal basement apt without underpinning. Have the house re-appraised after the work is done, get a secured line of credit or line of credit mortgage and use that to invest in the next property.


If you are going to invest in a multi family building in toronto, make sure that it is legal or at least legal non conforming.

I have legal non conforming triplexes downtown (queen west) with basement apts, please feel free to PM me if you have questions.

cheers,
Terri
 
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