First National Financial LP

Residential Market Commentary - The realities of rental

  • First National Financial LP

With high prices and tougher qualifying requirements home buyers continue to explore the viability of renting out part of their home as a way to boost income or subsidize mortgage costs.  It is not uncommon and it is growing in popularity with younger buyers.

A survey conducted by one of Canada’s big banks found that 26% of home owners are, or are planning to rent out space.  Of that group nearly one-third are renting out space in their primary residence.  Among millennials nearly half are, or intend to be, landlords.  Among those who are looking for a home right now, 54% of millennials says they would pick a property with a source of rental income, compared to just 25% of baby boomers.

But is it worth the trouble?  The answer to that depends on attitude and expectations.  The bank survey found that 80% of homeowners agree that renting out space in their home makes financial sense, but they value their time and privacy more. 

Being a landlord is a 24/7 occupation.  It may be called “passive income”, but you have to be willing to respond to tenant concerns on short notice and you have to be prepared for unexpected costs and maintenance.  There can be financial stress.

Even those who have the temperament, though, need to give careful consideration to the financial benefits and legal responsibilities.  The survey found that nearly three-quarters of landlord believe the tax advantages are worth it, even if the rental is losing money.  This can be a misconception.  It is important to know what you can deduct and what your tax obligations will be.  Many fledgling landlords get a nasty surprise come tax time.

Using part of your home to generate income to help qualify for a mortgage can also be a tricky business.  Lenders have varying criteria for how much real, or potential, rental income can be used in the loan application.  By one common calculation, unknown as rental addback, a $1,000 a month suite in your home will net you just $195 a month in income on your mortgage application.