Buying a home with a basement apartment
Rental income sounds great but illegal apartments come with risks
Rental income sounds great but illegal apartments come with risks
In the market to buy your first home? Perhaps you’re moving up? Or maybe you’re looking for an investment property? If you’re buying a property right now chances are you’ve come across more than a few homes that advertise income potential.
Truth be told: Any home with a secondary suite represents a valuable source of rental income. Not only do these homes command a premium on their sale price, but mortgage lenders tend to appraise the value of these properties higher, as do potential buyers. But how do you know if the home you’re buying has a legal apartment? And what about all those home-owners who rent out their basement? Are they all just breaking the law?
As early as the 1950s, some municipalities (led by the City of Toronto) started allowing home-owners to construct second suites in their semi-detached and detached homes. (You can also add a secondary suite to a row house, but there are a few more restrictions and regulations that govern authorized suites in this type of house.)
These second suites are subject to bylaws and building codes but the standard is lower than rules regulating legal apartments.
For example, a legal apartment must be it’s own completely contained box—separated from all other rental units using special fire-rated drywall, doors and floor assemblies that provide a 20 to 30 minute burn-time. (So it would take a fire 20 to 30 minutes to penetrate the material and spread to the next unit.) A legal apartment must also have special fire-dampers (gates installed in duct-work to ensure that fire can’t travel from one unit to the next through duct work), as well as two points of unobstructed escape.
Secondary suites, on the other hand, do not need to be constructed using this special fire-rated material. Instead, they must be self-contained (a separate bathroom, kitchen and living space), must have a ceiling clearance of at least 6-feet-5-inches (although this can differ depending on your municipal codes), and have at least two forms of unobstructed escape, one of which must be a door leading directly to the outside.
To be authorized, second suites must adhere to residential zoning requirements, property bylaws, occupancy standards, health & safety requirements as well as fire and electrical codes. Unlike legal apartments, only a 15-minute fire rating is required with secondary suites. Also, these suites cannot be bigger than the main living space—so, you can’t turn a 1,200-square-foot basement into an apartment if your main floor space is only 1,000 square feet.
If you bought a home and you’re considering adding a second suite to your home to help pay for your mortgage, you’ll need to meet your city’s bylaws and regulations.
→ The principal residence must be at least 5 years old
→ The house must be detached or semi-detached (there are some additional rules and exceptions for rowhouses)
→ You cannot significantly alter the exterior facade of the house
→ The second suite must be smaller than the rest of the house and be self-contained with it’s own kitchen, bathroom and entrance
→ The property must meet parking requirements (except in the former city of Toronto, where they recognize that limited parking is available)
→ Bathrooms must have either a window or a fan
→ There must be at least 4 cubic feet of kitchen cupboards per occupant
If you cannot adhere to all these rules, you can apply to the city’s Building Department Committee of Adjustments, but this will take time, money and will probably require you to do more work to bring the unit up to code. Keep in mind, though, that the consequences of renting out an improperly built unit can be devastating, and a penalty for fire code violations is a fine of up to $25,000 or a prison term of up to one year, or both.
If you opt to build a legal apartment you will need to adhere to all the previously mentioned regulations, but be prepared for a stricter set of standards. For instance, instead of simply requiring the landlord to ensure smoke alarms are installed and have good, working batteries, landlords of legal suites may be required to install interconnected smoke alarms as well as fire extinguishers.
If you’re in the market for an income-generating property, you’ll quickly come across the term “retrofit,” often attached to the phrase: “Seller and agent do not warrant retrofit of basement apartment.” But what does this mean? And should you run for the hills?
According to Bob Aaron, Toronto Star’s real estate lawyer columnist, the word retrofit is “toxic” and all it really states is that the apartment does not meet fire code. Aaron suggests that when this word is used in a listing, a home buyer should “find out why the unit doesn’t comply and what would be necessary to legalize it.”
Paying to retrofit a secondary suite would be the simplest way to legalize the apartment. But it can also be expensive. Perhaps that’s why about 80% of all secondary suites in Toronto (and approximately the same in Vancouver) don’t comply to all fire code regulations—making them illegal apartments, but authorized secondary suites.
So where does that leave the would-be buyer? It means you need to be aware of the rewards and the risks that come with owning a home and renting out a secondary suite. The rewards are straightforward, so I’ll concentrate on the risks:
→ Anyone can request an inspection of your secondary suite from the city planning department or the fire department.
→ Getting caught with an illegal apartment could result in you having to transform the home back into a single family dwelling (ie: remove the tenant and the secondary unit) or pay to retrofit the apartment so it’s legal
→ If a floor or fire prompts an accident or death you are liable and can be sued. (It’s one reason why Aaron suggests hiring professionals to make sure your unit meets electrical and fire safety standards, at the very least)
→ If you don’t tell your insurance provider about your tenant, you could void your home insurance and risk losing a claim if a catastrophic accident or event occurs.
For a detailed explanation of what to expect and how to legally construct a secondary suite or legal apartment, read the Homeowners’ Guide to Secondary Suites.
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