The vast majority of Toronto’s homes were built between the early 1900s and post-World War II. The design of these houses had, for the most part, a basement level. That being said, the basement area was not designed for living. These were intended for foundational stability and then used for storage and canning (yes, this was very common in the past). For the most part, these spaces had low ceilings, poor air circulation, damp, uneven floors (and even dirt floors in many cases of century homes) and were completely unfinished. Basements were a bonus storage space, and very few considered the investment to improve livability.
Over time, and particularly in the last 25 years, as Torontonians became wealthier and city neighbourhoods became gentrified, there was an increase in basement investments. Improvements started with drywalling the walls and ceilings and adding lights. This led to greater investment in underpinning and digging down two to four feet, turning basements into an entirely new floor of livability, much like the main floor of the house. In time, a room in the basement may have been used as a teenager’s bedroom.
A Shifting Real Estate Landscape
As the City, Provincial, and Federal governments struggle with density issues to support our urban population, housing affordability for homeowners getting into the market and the necessity of rental suites for Toronto’s residents have become areas of focus.
In response, homeowners are considering investing more in basement apartments and suites to serve as mortgage helpers. The leverage that a tenant can add to the homeowner’s debt savings on a monthly basis can be a huge lift for many. That being said, there is a cost that can be daunting when looking at the funds necessary to convert the space into a separate dwelling unit.
Want more insights on renovating your home? Check out these blog posts next!
- Renovating Your Home: Things to Consider Before Starting
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What Does it Cost to Build a Basement Apartment?
It’s one thing to be open-minded to having a basement suite that acts as a mortgage helper; it’s another thing to wrap your head around the associated costs. Thankfully, the city is allowing suites (in fact, as of right now, each residential home in the City of Toronto can be up to four suites) and, to some degree, making permits and permissions easier and less costly. Putting aside the bureaucratic costs and timelines, let’s look at the actual costs associated with building a basement apartment.
Assuming that the basement needs two new means of egress (access and exit), ceilings are roughly six feet high, no layout is in place to support a kitchen, washroom, living room and bedroom, and there is a need for underpinning and the removal of 2 feet of depth (dirt and debris), that cost alone will be somewhere in the range of $75-100,000.
Also, the little touches here and there will attract a better tenant and some level of longer-term commitment. For instance, drywalling, kitchen, washroom, doors, lights, appliances, etc.; costs will end up in the range of $50-75,000. Combining the two capital costs listed above, expecting to pay $150,000 + HST for the space is reasonable.
We are talking about having it done the right way, not cutting corners and having a General contractor and respectable trades on the job who get the work done in a reasonable amount of time. Once the structure is in place, the build-out begins, keeping in mind the usability of the space is essential for maximum rents.
Debt Vs. Cost – The Mortgage Helper
Hold the $150,000 of capital costs associated with the building of a basement apartment loosely. The reason is that the size, location, foundation, and finishings can impact the price point up or down. But, it’s fair to assume this cost and more. The question becomes, is this worth it?
The fact is the answer is, “it depends”. That may not have been what you were expecting. But let us explain.
There is a cost, a debt servicing and a reality of having a basement suite. The cost is overviewed above. That’s a fact. The debt servicing is worth considering. Not only as interest rates adjust but it’s important to think of this as a small business.
Carrying debt that pays itself down and adds value to your home for the long term is noteworthy. Let’s say rates are at 4.5%. The cost to carry an additional $150K in mortgage (or HELOC) may cost about $800/month in debt. Allowing for a 25-year amortization, this is a relatively nominal cost. The average basement is $2000/month and in some cases, much more (for a nice space in a nice area). Note that rents will increase over time as the city of Toronto grows in population. The net difference is $1200/month in this loose example. That’s $14,000 a year in your pocket to help cover the costs of your own mortgage and lifestyle.
Does It Suit Your Lifestyle?
The next component of the “it depends” answer is whether you want to be a landlord. Also, if you reside in the house with the basement rental suite, are you comfortable having someone on your property and within your walls? There is obviously a pragmatic element of the financial upside, but it’s worth weighing whether you want to handle the ins and outs of seeing the tenant and hearing the tenant regularly.
Thinking about adding a rental suite to your Toronto home? Explore these related blogs for more advice.
- Rental Income To Debt Service Your Mortgage
- Should You Buy a Home in Toronto with a Basement Apartment?
- Toronto Real Estate Investing FAQs
Other Options
Something that we didn’t go into detail in this blog post is a basement suite for a family member to move in. In this case, there is a chance that no rents (or market rents) would be applied, it can be a situation of a granny suite or a suite for a live-in nanny. Since the granny/nanny suite without rent is less common, we focused on the rental unit in today’s housing shortage and mortgage helper.
So, Is It Worth Building A Basement Apartment?
Accepting and understanding the pros and cons of running a small apartment rental business in your house is essential in order to move forward. The upside can be great, in many cases it can be smooth and seamless, with no tenant issues and no rental loss. But knowing the downside is key.
The reason is that your home is ultimately a lifestyle choice, and adding a business component and insurance liability adds a complexity that is important to comprehend fully. So, only you can decide whether, after reviewing all of the above (and more), it’s truly worth building a basement apartment.
Looking to optimize the value of your Toronto home? I can help. Reach me by email at ryan@ryanroberts.ca or call 416-925-9191.
