Is it worth turning our basement into a 1-bedroom apartment?

Question

My wife & I own a small brick bungalow here in Southern Ontario and have been tossing around the idea of converting our basement into a 1-bedroom apartment to help with our tight cash flow situation. We have access to a 55K HELOC that we could utilize for the renovations/converting the basement into a legal apartment. Doing most of the work myself during the upstairs renovations, I would plan to do most of the work on the basement reno as well to save money. The idea is to have the basement apartment completely separate from the upstairs (blocking off the access to the basement from main floor). We feel it would make a great apartment for someone. We are in a great area. Quiet cul-de-sac. The tenant would have their own private entrance (rear of the house), parking (1 spot in driveway + road parking also available for guests and whatnot), their own laundry, as well as their own outdoor patio area in the backyard. The unit would be approx 1000 sq ft and we figure we can get somewhere near 2K (including gas/hydro/water) for rent.

We realize that this involves us sacrificing half of our already small space (forgot to mention we also have a 1 year old son). But the benefits are far worth it from what I can see at this point in the process. Ultimately, our goal would be to purchase another home down the line for ourselves, and keep this house, renting out top & bottom (upstairs would be a 2 bedroom unit) for a constant boost in monthly cash flow.

Does anyone have any words of wisdom they would be willing to offer, recommendations when it comes to the renovations, or any feedback in general when it comes to doing something like this? My wife and I have never been landlords, but are really looking to better our financial situation. At the current moment, we are living month to month with no opportunity for saving/investing. Really just trying to set us up for a better future.

Is there any sort of service out there that anyone offers or is aware of to analyze this kind of thing (repayment plan for HELOC, cash flow analysis with all things considered etc)?

Look forward to hearing any input anyone has to offer!

Thanks in advance.

Paul Sverdlin · Answer

In Ontario you need a permit to ensure that all renovations are legally permitted. It not just about having a second exit, there are lots of nuances at municipal level that you have to explore. Financially this will increase the value of your home and will bring cashflow. There are also risks with bad tenants and all kinds of tenant-owner dynamics to keep in mind. For example they could start cooking with spices you don't like and there won't be anything you could do to completely remove the scent. It is possible they will have guests over and make day-time noise which your wife won't appreciate. Etc-etc. I did it for 10 years in my prior home and was happy with the cashflow, so its definitely doable.

Abel Curiel · Answer

Hello Aaron, If you are OK with the change in lifestyle (smaller living space, tenant on premises), I think this is a great strategy to utilize!I would recommend speaking to someone locally who can speak to the legality of the rental unit, permits, risks involved, etc.Here in NY, most homeowners who have the opportunity to rent out or convert their basement to a rental, take full advantage! That said, I would recommend reading Brandon Turner's book on Rental Property Investing. As a new landlord, you will get some amazing tips + resources to utilize (leases, lease riders, notices, welcome packet for tenants, much more). For renovations: I'd jump on Zillow or other listing sites to see what current rental and recently rented apartments look like. This will give you a good idea of what finishes are standard in your market so that you can decide on countertops, cabinets, flooring, appliances, kitchen/bath hardware, etc.For calculations: Check out BiggerPockets calculators (including the rental property calculator). I also like @Jon Schwartz's Househack calculator.General Feedback: Start with the end in mind. If you're looking to get your family to a better position, you'll want to prepare 1. your next steps and 2. any potential challenges that may arise. To prep for next steps, consult with experienced local investors (via BP, local meetups, etc) and local RE professionals (lenders, Realtors, Attorneys/Title companies) to get some additional helpful advice. To prep for potential challenges, learn about local rental laws so that you can come up with a lease that protects you. Take your time during the tenant screening process... better to have your basement vacant another week or 2 than to jump into things with a tenant who is not qualified or respectful of your space.All the best to you on your journey!Abel