Apr 3rd, 2021
Today I’ll be answering a question from Heidi who asks "Can I have some advice on how to rent out a basement for my in-laws' home? We just bought a second house in town here and we are renovating it to turn it into a rental. We will have a legal suite downstairs and the plan is to try and move my husbands parents into the upstairs. My dad rightfully suggested I get in touch with you to see what advice you might have on becoming a landlord and preparing to rent out the basement suite. We are also probably going to rent the upstairs for a 6ish months before his parents get out here from eastern Canada.”
Thanks Heidi. Now I am not a financial advisor, or a licensed realtor or a financial planner, or a lawyer or an accountant so I cannot give out advice to anyone. I do have opinions and ideas that I’ve developed with experience, and am happy to share so after chatting with Heidi for about half an hour I learned her inlaws are on very fixed income so the plan was to purchase this rental property, rent out the upstairs for whatever her in-laws can afford, and rent the basement to a tenant who will pay the mortgage. The hope is that the house will break even or be in a slight cashflow positive situation which is possible because in her market a basement suite could rent for close to $2000/mo. Now, this is not an ideal real estate investment because rent is discounted in the upstairs rental unit from the getgo. But, this scenario fulfils the personal goal of caring for aging parents who are ill prepared for retirement, without the inevitable conflict that will arise from sharing a living space, or the full financial burden of paying outright for their housing costs. In all, without exploring every other possible alternative, I think this a prudent move by Heidi and her husband because they are able to meet the goal of helping his parents with a place to live, and at the same time get into direct real estate investing and take advantage of all the benefits of owning rental property.
This scenario brings to mind the question, should healthy / wealthy people look after thier less wealthy / healthy family members? This situation reminds me of the fable of the grasshopper and the ant. You know the one where the grasshopper lounges all summer while the ant builds up stores for the winter, only to beg the ant to share its stores when bad weather finally hits. I think the grasshopper is left to freeze and starve, and although most of us wouldn’t do that to our parents, it still feels inherently unfair to the ant to share limited resources with the grasshopper who didn't prepare adequately for the future. If the familial relationship is important to you, and presumably it is since you’re considering providing financially for a someone else, it’s important to resolve to yourself as the "ant" in this situation to set aside feelings of resentment if things don’t work out as you envision. For some people this will not be possible to do this, and especially in some cases where the expectation for you to pay for the lifestyle of others is becomes abusive. Giving money to someone who wastes it to the point you are unable to provide for your own family or to effectively plan for your own retirement is unhealthy, and the expectation or pressure to do so is a form of emotional abusive. Like in all cases of abuse, sadly the only solution may be to end the relationship. For the purposes of answering Heidi’s question, I'll put aside this broader question of should this kind of help be provided at all, and focus on how to mitigate the downside risk of proceeding with this plan.
Number 1. Treat your real estate investing like a business. The underlying principal to remember and guide you through every decision you make with a tenant is that you need to treat this as a business. It's prudent to get into business with someone who is creditworthy (you don’t want a tenant spending more than 40% of their income on housing or you will start to have trouble collecting), who respects the rule of law and will abide with the conditions of a contract, someone who is gainfully employed or otherwise has reliable income, and someone who has a history of positive interactions with other human beings. This is why work references and character references are so important when screening.
There are a lot of people who may apply for your place to rent who don't meet these criteria. It's not the responsibility, nor is it within the means of the private landlords to solve social problems, that is why we pay high marginal tax rates. This is not social housing, this is an investment, and your responsibility as a housing provider is to provide a safe place to live, and you have the right to receive fair payment, on time and in full each and every month.
2. Protect your investment. You’ve saved for years and have now invested hundreds of thousands of dollars into a rental home, and since by renting the home you are extending credit to someone with very little at stake, you must ensure your underwriting of that person is at least as stringent as your mortgage lender is for you. Also ensure you have adequate reserves. Having three to six months of expenses on hand in cash at all times is critical because things will go wrong.
3. There is strength in numbers - ask for help! Join local and provincial landlord groups. Social media makes this easier than ever, and your don't have to look far to find support and information from others in the same business as you.
Seek out professionals and advocates in your industry. One I cannot recommend enough is Al Kemp, he like me is a former police officer, and he provides advocacy and information very useful for landlords in BC, you can find him at help4landlords.ca. His monthly subscription costs are minimal, and information learned can help to avoid costly mistakes and is at a fraction of the cost of legal advice.
All this can seem overwhelming as a new landlord, and especially so with all considerations to renting a space when family occupies part of it. Ironically, you will find yourself breaking some of these rules when renting to family members. If your family were credit worthy or had reliable income, you wouldn’t be put in this situation in the first place.
When one of the occupants of the home you are renting is a family , it blurs the line between business considerations and the personal preference of your family member. Personal preference for noise, use of space, pets, cooking smells are all luxuries they can ill afford, but you can be sure that you will be mediating any disputes that arise between your parents and the tenants you choose to have them live with.
But, I just went through a similar situation myself when finding basement tenants for my parents and it seems to be working out so far. It did take a lot longer to find the right tenant who was the right fit, but it did happen. My #1 advice is to be patient, do a lot of research, and only walk into a situation like this after doing a LOT of research.
I’ll close with a quote about tenants I like to bear in mind when going through all the pain and difficulty land-lording can entail.
“Your tenant is a partner in business who will open up shop each
morning and lock it up at night. They will look after security &
inform you of potential problems in the business. They will cut
the grass, rake the leaves, shovel the snow, and pay all the
utilities. They will even pay all of your mortgage payments and
taxes. Then, in the end, they will relinquish all monetary interest
in the business and walk away, leaving you with the profits.”