With affordability being as tough as it is in today’s market, basement income means more than ever before.
$600 per month? Think about how much mortgage that carries…
I wrote an article for The Grid last year where I said I wasn’t a huge fan of basement rental units.
I explained my position as best as I could, but it was still misconstrued by some.
What I mean, to put it as simply as possible, was that I didn’t like idea of CONVERTING a basement into an income suite; I wasn’t saying that I didn’t like basement rental units altogether!
There’s a difference!
I mean, who doesn’t like basement income?
“Free money? Eewwwwwww! Get that away from me!”
Um, no. That’s not what I meant.
In today’s market, single-family homes are the hottest property, and they are most likely to sell in a frenzied, emotional bidding war than any other type of property. For that exact reason, I don’t think it makes sense to take a 3-bedroom, 3-bathroom house with a finished basement in, say, Trinity Bellwoods area, and convert it to a 3-bed, 2-bath house with a 1-bed/1-bath income suite in the basement.
With all due respect to the TV show Income Property, I don’t like the idea at all.
Take a $700,000 house and spend $25,000 turning the basement into an income suite.
Then rent out the basement for $1,000 per month, and BOOM – it only takes two years to “break even.”
The problem, in my opinion, is that the house is worth far more as a single-family dwelling than as a house with a basement rental unit.
Out of prime locations, sure, you can go after that basement income.
But the true single-family homes are the ones buyers get the most emotional about, and in this market those $699,000 houses that sell for $805,000 aren’t usually the ones with an exchange student cooking on a hot-plate in the basement.
So once again, let me clear this up: I don’t like the idea of converting a single-family house to a duplex or income suite, but I DO like the idea of buying an existing house with basement income.
Does that make sense? I sure hope so…
Because purchasing a house with a turnkey basement apartment in today’s market is a way of completely changing the price spectrum, and often a way to get into an area that you wouldn’t otherwise be able to afford.
Two weeks ago, I took clients to see a west-end house that was completely renovated, and literally sparkled (the kitchen had sparkly granite…)
The house was priced at $575,000, but there was a basement apartment that brought in $950 per month in income.
I asked my clients, “Do you like this house at $575,000?”
Of course they did! Who wouldn’t, given that it ended up selling for about $100k over asking?
Then I asked them, “Would you like this house at, say, $375,000?”
The question seemed stupid, but it wasn’t.
Consider that $950 carries about $200,000 in mortgage costs, and suddenly you see another way of looking at the price of this house.
Yes, I’m aware that the numbers aren’t that simple, and the principal/interest portions change, but you get the basic idea.
Income from a basement apartment completely changes the way you look at a house, and it turns affordability on its head.
Let’s say, for argument’s sake, that this house sold for $650,000.
A 20% down payment would give you a monthly mortgage payment of $2,458 per month. So that $950 per month in basement income reduces your mortgage cost to a mere $1,508! Or another way of putting it: the basement income covers a whopping 39% of the mortgage! And that’s just for the basement! In this case, you’ve got 3-bedrooms, 2-bathrooms, a gorgeous new kitchen, a massive living/dining room with high ceilings, and a wicked 2nd floor fenced-in deck that’s about 400 square feet. All for just $1,508 per month.
Another way of looking at it: how much would your down payment have to be in order to result in that $1,508 per month mortgage payment? About 51%. So the basement income takes you from a 20% down payment to the equivalent of a 51% down payment.
How can you go wrong?
Well, I suppose you have two issues:
1) You don’t get the use of the basement
2) You’re now a landlord
But perhaps the improved affordability, investment opportunity, and ability to live in a house/area that you couldn’t otherwise afford are worth the trade-off?
Last week, an even bigger, better house came out in the Queen West area for $875,000 (likely worth closer to $1 Million, as there is a set offer date) that has an unbelievable basement apartment that brings in $1,350 per month.
How amazing must a basement apartment be in order to bring in $1,350 per month? Pretty darned amazing.
Let’s work through the exact same example as the previous house, and in this case, we’ll assume a sale value of $950,000.
A 20% down payment results in a monthly mortgage payment of $3,593.
The $1,350 per month basement income reduces your mortgage to a mere $2,243, or rather, the basement income covers 38% of the mortgage; slightly less than in the example above, but for a much bigger, better house!
And your down payment would have to be about 50% in order to result in the $2,243 per month mortgage payment; once again, very similar to the example above with the $650,000 house.
The value proposition is unbelievable.
Basement income enables you to make a move that you wouldn’t otherwise be able to make!
Of course, you could take this a step further and say, “Why not purchase a four-plex, live in one unit for free, while the other three units pay 100% of your mortgage?”
Okay, well those are two totally different animals. I’m looking for the single-family dwelling that happens to have a young, single, 20-something who is just starting his/her career, living in your basement while keeping damn quiet!
I still believe that a single-family dwelling with a finished basement that has a family room, 4th bedroom, and bathroom will always out-appreciate a single-family home with a basement apartment, but that’s long-term thinking. If you’re going to be in the house for 15-years, then it might be worthwhile to pay substantially less in mortgage costs each month, and just not make as much money when you sell the property in 2028.
It’s like buying a stock and collecting a steady dividend each and every month, but not getting quite as much for your shares when you sell them down the line.
With exact numbers, you can decide which is the better return.
But houses aren’t like shares of stock, and you don’t hope and dream about living in the stock across from the park; the stock near all your friends; the stock in the better school district; the stock near all the shops and restaurants, the stock in the safer neighbourhood….etc…
With the rental market as hot as it is right now, I don’t think there’s a single basement unit in central Toronto that’s unrentable…