Renting out a portion of your home

Purchasing a home entails a serious financial commitment – the largest of one's life in most cases. Contemplating renting out a portion of one's home as a self-contained apartment is certainly an attractive option since the rental income received can be app lied against the ongoing mortgage payments. However, this is a step that should only be taken after careful and thorough thought and analysis – there are many pitfalls.

While the anticipated rental income to be received appears very attractive, the prudent purchaser should view this strategy as a way to hopefully ease the mortgage burden rather than a way to stretch one's buying power. Following are some of the factors that need to be considered:

Your home life

Having a tenant rent part of your home can have a direct affect on your home life. Here are a few questions to consider:

  • Does the tenant have direct access to their apartment separate from the other inhabitants?
  • Will the tenant(s) have access to and use of the grounds?
  • Will parking be provided?
  • Could there be noise issues?

Finding tenants

In a perfect world, you will be able to find a responsible, respectful tenant who pays his/her rent on a timely basis and is prepared to stay on for an extended period of time. However, in reality, few tenants meet all of these criteria and you may find yourself continually trying to find and evaluate prospective tenants or trying to collect the rent owing. Finding and keeping tenants may take up a substantial amount of time. While renting to a family member might seem attractive, it could result in a change in the relationship and tensions even when the agreement is carefully structured – picture having to evict a family member from your home.

Legal issues

If you become a landlord, you will be subject to various laws and regulations. Each province and territory will have laws governing the rights and obligations of landlords and tenants and you need to become familiar with the laws in your jurisdiction. One of the most important issues is getting rid of an unsatisfactory tenant. There are many reasons why you may want to evict a tenant, such as non-payment of rent, damaging property, etc. However, the laws will provide a formal process on how this is done and it will most certainly take time, sometimes a lot of time. There are numerous examples of protracted proceedings and there are 'professional' defaulters who are aware enough of the legal process and are able to draw out the process for an extended period.

Municipalities will have by-laws that detail how a rental property must be established and maintained.

Any tenant should be required to sign a lease. A lawyer should definitely be engaged to assist in drawing up a lease that meets all legal requirements and any specific details pertaining to the rental situation.

Sample Rental Agreement

The following sample rental agreement allows you to customize your rental agreement by province and may prove helpful. However, it must be stressed that these are 'one size fits all' agreements and it is strongly advised to approach a knowledgeable lawyer to ensure that any details specific to your province and municipality as well as any property specific criteria are being addressed in the document.

Insurance consideration

If you contemplate having a tenant in your home it is crucial that your property insurance company is contacted and informed. The nature of a home insurance contract will definitely be different when you are acting as a landlord and specific coverage will have to be taken out to ensure that you (and the tenant(s)) are properly covered.

Tax consequences

Rental income received is taxable and therefore you will need to factor into your calculations how much you should actually receive after tax. Tax law allows for reasonable rental expenses to be deducted from rental income. The rules are quite specific and it is highly advised to consult with a tax specialist to ensure that all rules are being followed and any tax advantages realized. The ability to subsequently use the Principal Residence Exemption may be compromised by how your rental income and expenses are reported.