Untapped Basement Income

Basements are often seen as storage spaces and or the last resort of a living area. However, one of the best ways to increase your ROI is to add a basement suite to your rental or to your own home. Knowing the ins and outs takes sometime to learn, but the rewards can pay off. Here are 5 common questions commons I get asked from people considering it.


1. How much should I spend?
Some investors want to spend as little as possible when acquiring an existing suite like changing the washers in the taps only when they start to leak and running an old furnace for as long it can go. The theory here is to put in as little as possible and just continue the existing rent role.

My preferred strategy is to acquire tired units that can be transformed right away into high-end units. Thereby increasing rent and the overall property value, while lowering operating expenses.

However an extensive quality renovation can only be done in certain markets and certain neighbourhoods that will support higher rents. Not all markets or neighbourhood are good for this.

So, the first thing is to determine what kind of a market you are investing in. For example, some market are considered blue collar. Many smaller towns or centres fit this category. These markets are less likely to pay more for high end finishes such as granite countertops over laminate as this market is generally focused on utilitarian needs, not extras.

If you spend extra on granite in this type of market, you won't get paid anymore than if you installed laminate, regardless of how much you invested. Whereas other markets expect granite countertops and if you don't have them, you might not even rent your unit, or you’ll have to lower your rent significantly.

So the first thing is to consider what kind of market you are investing in and whether it will supports a high end suite or a suite based on utilitarian needs. This will help in understanding how much you should, or need to spend.


2. How much should I budget?
Generally speaking to have a contractor build a new 900 sq ft basement suite including demo, you are looking at around $30K-$45K. This should include demolition, a completely new kitchen, bathroom, bedroom, living area, electrical, plumbing, new windows, bathroom fixtures, appliances, hardware and finishes. This can increase if you start getting into foundation work, water proofing, moving or changing the furnace, duct work, hot water tank and electrical panel.

It can also decrease if the unit has an ideal suite layout already. In that case, just the finishes can to be replaced which can save you a lot of money. It's not so much the cost of the walls that save you the money, it's the fact that the electrical, plumbing and ductwork don't have to be modified. Not changing the layout saves on materials, labour and time.

Unfortunately, many existing basement layouts are convoluted at best and should be torn out and started from scratch. I often prefer a basement that is completely undeveloped as I can see the foundation for structural or water damage. Plus, I can then create any layout I want. Most of the times, I just end up tearing out old basements anyways. Therefore undeveloped ones save demo costs and hidden surprises.

Sometimes you can simply cut a hole or opening in a wall to open up the space as opposed to removing the wall all together. Removing the entire wall can affect the electrical, plumbing, ducting, thermostat, doorbell, floor and ceiling finishes.


3. Where are the best places to spend?
  1. Look for a basement that already has an existing bathroom. That way, you are not breaking the existing concrete floor to run a new drain for the toilet and tub.

2. Look at the electrical panel to ensure that there is enough room in it to add additional power for your suite; otherwise you are looking at upgrading your electrical panel.

3. Make sure that with any new layout all bedrooms will have access to an exterior window and that the window is large enough to meet the building code and fire regulations. Otherwise, you could be cutting a hole in the foundation(often through concrete) to install an appropriate window and or window well.

4. Install safety equipment such as smoke and carbon monoxide detectors. Be safe about designing the suite. Think about how your tenant would get out in an emergency or fire.

5. Invest in a good floor plan, kitchen, bathroom, design and any extra amenities like laundry, dishwasher and exterior safety lighting.


4. What rules and regulations do you need to be aware of?
As every municipality and city is different, you’ll need to make a trip to your city hall before you do anything. Ask them what the process is and how long it takes. Check to ensure that your zoning will allow a suite, and ask what building code, fire code, licensing requirements and anything else you have to comply with.

Generally speaking you are dealing with two main issues. The first is the existing zoning and every house has a zoning code. You want to know if the existing property's zoning code allows for a suite? This is often the biggest hurdle. You can find out from the city’s planning and development department. If you have that, then you are halfway there to having a “legal suite.”

The second is the building code. If your property zoning allows for a suite and you construct it to the current code, then you have the basis for a “legal suite.” If not, then you either have an illegal suite or a non-conforming one.

An illegal suite means that the zoning does not allow for a suite, regardless if it’s constructed to the current building code or not. Non-conforming means that when the suite was originally built, at that time, it conformed to the zoning requirements. However, over the years, there have been changes to the zoning bylaws and therefore it no longer complies with today’s current standards. However, because it was built in accordance with the previous zoning, you are still able to use it as a suite.

These are the very basic generalizations and you must visit your city’s planning and building department as each municipality has it’s own specific rules.


5. How much rent can you get with the new addition?
Your neighbourhood will often tell you how much you can get. You want to maximize your ROI, however you do not want to max out your neighbourhood. Every neighbourhood will have a cap as to how much rent you can charge regardless of how much you spent on the unit.

In other words, just because you spend $50K on a suite does not necessarily mean that you will be able to rent it for more than a $30K suite. Generally speaking, $30K at today's rates will cost $145/mo on a 25 yr mortgage. $40Kwill cost you cost $194/mo. If you can generate $650/mo to $1,500/mo with abasement suite and it costs you $194/mo, I'd say that that is a great investment. For every $10K, it will cost $49/mo.

So the next time you think about all that stuff in the basement, you may want to consider all that money you are losing. You may be better off putting your stuff in storage for a few hundred dollars a month and installing a suite.
 
 

 
 
 
 
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