With affordability on the decline in a number of cities in Canada, house hunters are looking at ways in which to help them afford home ownership. Similarly, current homeowners are seeking out ways to give their cash flow a boost, especially if the costs of home ownership are stretching their budgets to the max. A recent survey shows that the idea of renting your home to tenants is gaining popularity as an option, especially among first-time homebuyers.
The Mortgage Professionals Canada Fall 2016 survey shows that:
- Thirty-four per cent of recent first-time buyers identify income potential in their home as a priority
- Forty per cent of homeowners that rent out part of their home as part of a plan to help with housing costs
- First-time buyers are more likely than repeat buyers to rent out part of their home
- Twenty per cent of young home buyers (18-34) plan to rent out part of their home
“Renting your home can be a great way to increase cash flow and help with the costs of homeownership. However, renting out part of your home is about way more than giving up part of your living space,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
“There are liability, taxation and financial risk considerations when you become a landlord. You should consider all of the scenarios before you commit to becoming a landlord. You should especially stop and think twice if you are thinking of using rental income as a means to ‘buy more house,” says Schwartz.
Rent income will be taxed
Yes you generate income from tenants, but don’t forget that a decent chunk of that will go towards your income tax. That’s not to deter you from renting out space, but make sure the revenue that you will actually get in your pocket makes financial sense.
How will you attract your tenants?
Even though you have the available space and a plan to rent it out, there are no guarantees that you will always have your room or unit rented, which means that you are on the hook for your mortgage payment in its entirety.
In order to mitigate this risk, plan on shouldering the mortgage payment with your income alone. Rental income should help build up your savings (either through equity or other savings).
On the hook for expenses
It’s one thing to put off home repairs and maintenance until you have the money saved to cover the costs. If you are a landlord however, your timeline is decidedly shorter. Make sure that you have extra cash set aside for property repair expenses, above and beyond what you might need within your own area of residence.
Do you know the rules?
When you enter into a landlord/tenant relationship, you open yourself up to new kinds of liability (which is why you need to really understand your insurance coverage). You can also open yourself up to fines and extra charges if you’re contravening rules and regulations set out by your province or territory around property rental.
Being informed can save you significant cost. Check with your provincial landlord association to make sure that you are operating properly.
Take out less mortgage to get equity and help cover costs
If you are considering renting out part of your home in order to reduce your mortgage and help you build equity, another way to accomplish that with much less risk is to take out less mortgage in the first place. Defer home ownership until you have a bigger down payment saved.
Is home ownership a goal that seems like it may be out of reach? If you work at paying down your debts and accumulating savings, you can reach that goal more quickly than you might think. Call us at 1-888-294-3130 or check out our free online debt analysis.