The True Value Of Basement Income

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…

32 Comments

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  1. Carla Fellers says:

    I need a window in my basement which is a finished room. It is under ground. How can I do this?

  2. Soph says:

    So how much of this income will go to Revenue Canada? It’s not much help I would think, if 30-50% of it goes to Revenue Canada instead of paying down the mortgage.

  3. Duke says:

    The point many of you are all missing is when the owner actually wants to be a landlord and to have an investment property of their own.

    I have a rental basement apartment and I tell you it’s a lot easier to maintain the tenant than having a separate condo which I also had before. At least with the basement apartment it’s much easier to keep things in check and the good thing about dt Toronto is that tenants don’t stay long and renting out is easy. In the last 9 years I have rented to 6 tenants and all have been great. Just make sure you have an exhaust fan that works in the kitchen and the bathroom and all’s good with any smells. When I bought my place I added the Ikea kitchen myself in 1 month and had the place rented immediately. With a single bedroom basement in Toronto I have gotten $1,400 for a couple and now getting $1,250 for a single occupant including utilities.

    I’m sorry but no matter how you do the math it works in my favour and I wouldn’t have it any other way. I think the rest of you spend too much time playing with the numbers instead of getting off your hands and investing in a fantastic Toronto realty market.

    I can see this article is now 2 years old. So those that didn’t buy that $750,000 house because it had an basement apartment just threw away $200k at least in appreciation. So how do your numbers look now as the rest of us that bought years before with the basement apartment are now sitting on over $1M homes and making 20%+ profit on our original investment each year.

    Like they say…no chance no dance. 🙂

  4. DennisMarshall says:

    It is a huge waste of space if you will not let other people to rent. Turn that space into something to make money off of instead of letting it go to waste. Why not try finishing the basement into a separate apartment? It it will be profitable if you will not spend to much in renovation just put desirable or useful feature like heater BaseBoardRadiatorCover .com that is part of necessity part of the house.

  5. Mitch says:

    Jesus, I’ve never seen so many realty dummies in one thread. Including the author. Considering most houses in Toronto are over 70 years old and have dungeons as basements, if you can find one with a finished basement that acts as a rental, you’re going to pay much more for it. Its simple math. So the idea of converting a single family dwelling into a house with income suite is smart if you actually plan to be a landlord and re-coup the investment. And keep in mind, even if you let the house go for a shit, your property value is still through the roof. A house in Toronto would literally need to be condemned for it to lose value. If its just ruined carpets, holes in drywall and scratches on doors from tenants, its stil going to increase in value year over year making you more and more equity.

  6. Helen_in_Toronto says:

    We need solid information about what needs to be done to create a legal basement apartment; bylaws, building code, fire code, etc.

  7. Andrew D says:

    One more thing that one should also take in account is taxable capital gains.
    Income property such as your rented basement will be taxed as investment property. So if your home is bungalow and lets say the rental is 40% of your home, capital gains may be taxed at 50% as its an income property.

    1. isabel says:

      Wrong (for late readers such as myself) unlike rental condos, basement apartments are not subject to capital gains as long as the main house was the principal residence of the seller as well. It makes the basement apartments all the more attractive IMO compared to an investment condo that you intend to hold for a long time. The initial investment is not nearly as expensive (although the appreciation isn’t as substantial either) but the return over the length of the investment is way more substantial on a NOI comparison. Given the current condo prices you would be hard pressed to find a condo that will carry itself and especially now with the new rental rules – any investment condo you buy now would most likely be a return on the appreciation only and still you will be hit with that massive capital gains tax at the end of everything.

  8. Devore says:

    “I mean, who doesn’t like basement income?

    “Free money? Eewwwwwww! Get that away from me!””

    Hardly free, in any sense of the word. Nor is it “passive income” (I cringe every time I hear that).

  9. LJ says:

    We purchased our first home with a pre-existing basement apartment. It happened almost by chance, since our budget was pretty low and the perfect house for us just happened to come around, and it just happened to have the basement rental unit, which was something we hadn’t planned on.

    For us, the benefit wasn’t the fact that it allowed us to afford more house, but rather that it allowed us to pay down our existing mortgage much more quickly and therefore move on to a bigger, nicer next house that much faster.

    And I can’t tell you how much I miss that $800/mo now!

  10. Frances says:

    And the rent is taxable income at your marginal rate, minus expenses and you have to be careful what you claim as an expense. I think some of you need to reconsider your calculations.

  11. Pen says:

    Ralph, David’s post wasn’t about renting out the basement because it was the only way to afford the house or advocating for anyone to buy when they can’t afford to buy.

    Even if it was the only way to afford ‘the’ house a buyer wanted, it’s a viable option as long as they are amenable to taking on a tenant and would be in the same or a better monthly expense position relative to buying a house they could carry on their own.

    It has nothing to do with the alternative of investing that same money elsewhere that’s a whole different comparison that few calculate correctly.

    1. Ralph Cramdown says:

      Were we reading the same article? David uses the word ‘affordability’ in the very first sentence, and later calls a rental suite “a way to get into an area that you wouldn’t otherwise be able to afford.” On the other hand, I didn’t read anything about using one to pay off the mortgage faster.

  12. JC says:

    Perhaps its just the experience I’ve had (my brother as well) with regards to landlording but:
    “1) You don’t get the use of the basement
    2) You’re now a landlord”

    combined are a real deal killer for me. Top it off with a 3.1% cap rate that someone mentioned here and I personally would not be interested.

    Having a bad Tenant at a location you don’t live in is bad enough, having one where you live is a different kettle of fish. Couple that with laws in Ontario that favor the Tenant over the landlord and I’d have to make much more than 3.1% to be remotely interested.

    I’ve always been careful with Tenant selection and even some AAA prospects have been B at best.

    Yes, the benefits as to portion of the mortgage being paid are attractive, but so is my sanity.

    1. Joe Q. says:

      This is the point I was trying to make in my comment earlier, but you’ve said it much more clearly than me.

    2. jeff316 says:

      A friend of mine has a basement they’ve rented out successfully to a number of decent tenants. No landlord horror stories – they are lucky and they know it. Overall it has really worked out for them.

      But what they found most surprising is that some of their worst tenants were the most reliable. They pay on time. They don’t trash the place. They stay for a decent length of time. They’re not loud, noisy, or smelly.

      But they know they’re decent tenants, and they’re not afraid to leverage it. High maintenance to the extreme. For a while, she was getting two or three emails a week with requests, tips, ideas, favours, etc. Never-ever-ending. Ugh.

  13. After a person lives in a home for 15 years, the home is in need of a bit of an update before you put it on the market anyways. One could just convert the suite back into family basement space for a minimal cost.

    1. jeff316 says:

      Yeah but that’s the problem – you paid a premium to have an income-generating suite, only to remove that apartment and subsequently reduce the value of the home.

      1. marlene says:

        @jeff316, according to David’s article “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” You think differently?

        1. Ralph Cramdown says:

          Since the conversion back and forth doesn’t cost much, the appreciation will be about the same, as long as nobody does anything stupid like putting the downstairs bathroom where the staircase used to be.

        2. jeff316 says:

          Like Ralph mentioned, the appreciation is relatively moot. The issue here is this: what did you pay for?

          If you bought the house with a legal, ready-to-rent (or already rented) basement apartment, then the revenue-generating ability of the basement was factored into the purchase price by the seller.

          Whether it is a fourth bedroom, a garage, a second parking spot, a first-floor washroom, an income suite or a really awesome cantina (if you’re Italian), no special selling feature in any house is a free perk. Especially an income suite. You’ve paid for it.

          If, later on, you’re going to remove one of the things that first attracted you to the house (this happens all the time with basement apartments) you have to be sure that whatever you replace it with is of equal or greater value to the next round of buyers, many of whom may be first-timers like you were.

          So if you convert that apartment back to a normal basement, you’re faced with two challenges:

          1) It is possible that you never made back the extra you paid for the income suite in the first place (depending on how long you had it rented, and how much it added to the price you paid for the home).

          2) You’re going to have create one hell of an awesome finished basement to make up for the premium that a new buyer would have paid for the ability to generate 600$/800$/950$ per month.

  14. Joe Q. says:

    David writes: “Well, I suppose you have two issues: 1) You don’t get the use of the basement, 2) You’re now a landlord”

    Yep — you’re now a landlord to a tenant who lives in your own house. IMO the sum of these two issues is greater than the individual parts. But yes, the $ can make it worthwhile.

  15. tzv says:

    I am not even sure that the average buyer of a 3 bedroom semi in riverdale prefers to have a family room/bedroom in the basement rather than a basement apt. I think most people prefer to have an apt that could be used as a family space or rented out. Peace of mind of being able to pay for 200-300k of your mortgage if your financial situation changes is a great option. You use the space in the good times as a home theater/guest bedroom. On the other hand if the interest rates go crazy or your spouse quits their job to find themselves you put a 2k kitchen and rent it out.

  16. jeff316 says:

    The problem is that in this market of high house prices and competitive rentals, any house with a rentable suite has that potential revenue generation already factored into its sale price.

    So most of those 575 000$ houses with a basement rental are really 375 000$ houses in disguise.

    1. Ralph Cramdown says:

      Don’t be so negative, Jeff. Interest rates will always be low, basement apartments always in demand, and dependable, quiet, odour-free tenants easy to come by. If you want to live across from that park in the safer neighbourhood with the good school, sacrifices will have to be made, even for the move-up buyer. It’s all part of a conservative diversified retirement plan.

      1. Appraiser says:

        Yeah Jeff, don’t be so neagtive. Listen to Ralphy – ’cause he knows. Hey, maybe interest rates won’t be low forever, but you can get a 10-year for 3.69%. Oh forget about it – just listen to Ralphy and his other fellow smelly tenants.

      2. Geoff says:

        Umm.. what does interest rates have to do with Jeff’s comment? Which I agree with – that it likely does include the price of the basement rental – which is probably illegal and not done to code – in the price. On the actual subject of basement rentals, moneysense did a nice article on how out of whack that show ‘income property’ is when it lists the costs. Often the labour costs are donated / not included in the totals shown, which for the average renovation makes up at least half of the total cost, if not more. This makes it very easy to flub the numbers to make them work for you, and very misleading in my opinion.

        1. Ralph Cramdown says:

          Jeff’s comment references the $200,000 differential that David talks about when he says that the tenant’s $900/month covers $200,000 of mortgage (assuming the tenant pays all utilities plus her share of property taxes and insurance and there’s zero maintenance and vacancy allowance…)

          If interest rates go to 5%, $900/month only covers $155,000 of mortgage, so that’s all a naive new buyer would mark up the price of the house by. But maybe you can up the rent by 2 or 3% a year.

          Thinking like this (“$900/month covers $200,000 worth of mortgage”) is basically saying that it’s an OK deal to invest in a basement apartment income property at a cap rate of less than 3.1%. No sane investor would do this.

          1. Pen says:

            It beats the homeowner having to personally cover the $155,000 and a 3.1% cap rate is better than zero.

            Many homeowners have no need for the basement as personal use and so it can be a wise decision to utilize it for income or to offset the mortgage payments.

            You rent Ralph, correct? Imagine what your rent would be if no one had basement apartments.

          2. Ralph Cramdown says:

            If no one had basement apartments, I might very well own. House price isn’t the independent variable; it rises as people subdivide their houses and rent parts out. I’m renting because I believe I’ll get a better return investing my money elsewhere.

            Renting an otherwise unused basement can be a great thing if you’re up for it. But looking at a house and saying you can only afford it by renting out the basement, even with money at 3%, is entirely different. In that case, zero isn’t the alternative you compare it with. 5 year Canada bonds pay 1.4%, BCE common pays 5.1%. Landlords (especially of basement units) should look for a better return than that. They get it by using leverage (and by not overpaying for the property in the first place). For leverage to work, the cap rate (NET of costs such as those enumerated above) has to be higher than the rate you borrow money at.

        2. jeff316 says:

          Ralph’s comment re: interest rates is definitely relevant because people often think of the rental income as a proportion of the mortgage payment. As for the cap rates, he’s not incorrect, although expecting the average buyer to consider investment return rates when purchasing a home is akin to expecting everyday people to grill waiters on the caloric content of their meals when they are out for supper. Unrealistic, and not the point of buying a house.

          In my opinion, the issue that is most overlooked by average buyers, particularly younger couples, is that eventually that basement apartment gets re-converted back to a basement and subsequently, the value of the house drops. And the minute that happens, they’ve just flushed a whole whack of money down the toilet. What a waste.

    2. SweetDoug says:




      Dead. Nuts. On. Jeff316!

      And now, all the schlubs are rushing to make the basement into a rental, which drives down the rental prices, which puts pressure on the downward price of the homes, but with the cheap money, the prices keep getting bid up, necessitating everyone to have the basement apartment.

      (Please read previous sentence over and over…)

      It’s a big vicious circle that’s gonna end like ’89. But worse.

      Everybody’s got a basement apartment, and most are just $#1++y little holes, and when mortgage rates go up 1-2% and the payments go up $3-400 a month? You think they can raise the rent? Not with rent control!

      Boom.

      •∆•
      V-V

TWEETS