Rental Suites Increase Real Estate Purchasing Power
Some Canadians like rental suites more than others.
Not surprisingly, those who embrace the rental suite tend to live in the locations with the highest cost of real estate.
CMHC will allow the use of rental income in mortgage applications to boost the buyer’s income.
This boost can increase the buyer’s purchasing power by at least $50,000 meaning the difference between condo or townhouse and single family detached.
In BC, 25% of homes have a rental suite. In Vancouver that number jumps to 40%.
Compared that to 5% in the prairies!
What are the Benefits of having a rental suite?
• Buyers can purchase a more expensive home because they can add the projected rental income to their total income when qualifying for their mortgage. A home with a suite renting for $1400 allows the buyer to spend at least $50,000 more on their house purchase.
• Having a rental suite provides a consistent monthly cash flow making owning a home financially easier and providing potential additional funds for savings, investment or increasing your monthly mortgage payments.
• Increasing your monthly mortgage payment by 20% using your income suite revenue will pay off your mortgage 5 years faster AND save you thousands in interest costs. See example at end of article.
• Including rental income in your mortgage application can sometimes mean the difference between being able to purchase a single family home vs. a condo or townhome.
Personally, having a rental suite in my home provided monthly funds that allowed me to travel more frequently, save more money into my TFSA and drink better beer. Most of the tenants who lived with me were clean, respectful and paid their rent on time. All positives.
I used Canadian educational sources like the Real Estate Investment Network to learn how to choose the best neighbourhood, the best property, the best tenants and how to do the calculations to ensure my purchase would be cashflow positive if fully rented. This education also taught me that the rental property game is not all fun.
The Downsides of the Rental Suite
Owning a property with a rental suite, selecting tenants and collecting rent is not all fun and games. There are best practices regarding how to attract ideal tenants who pay on time every month.
Also, before renting out your suite for the first time it is very important to visit the Residential Tenancy Branch of your provincial government to collect required legal documentation and understand your rights and obligations should you and your tenant have a dispute.
If you understand your rights and obligations, communicate clearly and ethically with tenants and follow best practices, your rental suite can provide you with a great long term source of income to help you make mortgage payments, pay bills, establish savings, etc.
To provide a couple of real life examples of bad tenant situations, I’ll start with Peter. Peter came with great references, drove a BMW and was a nice guy. However, during the course of his tenancy, he was constantly late with rent, the unit was a disgusting mess when he moved out and he even once kicked in the door when he was drunk and lost his keys.
Peter eventually paid all his rent up, didn’t get a dime of his damage deposit back and paid to get the door replace. What a pain in the ass though.
Another example was a couple that moved out and left the unit in a real mess. Carpets filthy, food stuck in every corner, tape from Christmas decoration adhered to all the windows, animal hair, gross bathroom, etc, etc. There were new tenants moving in two days later so I hired a professional cleaning service to get things ship shape.
Getting the place cleaned on short notice cost me $455.
Obviously I took this out of their damage deposit. The tenants then took me to Rental Tenancy court. This organization tends to side with tenants so you have to be prepared to do battle (and understand your rights and obligations before your first tenant moves in).
Luckily I had kept accurate documentation of warnings when I had previously had to ask them to clean up the home. This had occurred a number of times. This combined with me arriving in a suit to the arbitration and arranging for the cleaning company manager to testify over the phone helped me keep the $455 charge.
The tenant, on the other hand, arrived to the hearing looking like George Costanza in a leisure suit.
Knowing your rights keeps you out of trouble. Not knowing your obligations to the tenant regarding notice times, proper documentation and provincial rent increase laws will get you in much trouble.
Did you know that if you illegally increase your tenant’s rent by over the provincial annual percentage, your tenant can take you to Rentalsman arbitration and have you pay back rent for every overcharged month? This can add up to serious dineros over time.
Be on the right side of the Tenancy Laws!
Financial Reality Shift – How to spend your rental income?
Using the example of a $450,000 mortgage, 2.79% interest rate and 25 year amortization, I can provide you an estimated example of how to maximize the use of your $1,400 monthly rent income.
• Establish a home expense account $350.00/month
• Increase your monthly mortgage payment by 20% $416.20/month
• Invest the remainder $633.80/month
This strategy will build you a home expense account for inevitable house maintenance costs, pay off your mortgage 5 years faster and save you thousands in mortgage related interest costs AND, if the remaining $633.80 is invested each month at a measly 2% rate of return over the 20 year life of the mortgage, you will have an investment totaling approximately $187,000!
Want to learn more? Check out my Ebook Home Buyers Guide HERE
Are you ready to become a homeowner, but unsure of where to start? Getting lots of advice but no concrete answers? Overwhelmed by the mortgage process?
I put together a Home Buyers Ebook for you. So you can get excited about house shopping with clarity on your budget and confidence in your investment.
For the past 8 years, I have been active in the mortgage and lending industries, engaging with clients and helping them fulfill their dreams of home ownership.
This Ebook addresses the main information you “need to know” before you head out to find your perfect hom.
You will learn vital finance tips, ideas to improve your mortgage application, ideal realtor relationships and more to ensure you purchase a property thatwill serve your housing needs as well as your long term financial goals.