Basement Suites Are Not Magic: MoneySense Edition
September 21st, 2015 by PotatoI’ve written many times before about how basement suites (BS) are not magical. They are a way to live in less space, in what becomes a non-detached house, with an option to take it over and make a SFH detached again. However, if the rental market in general is crazy, the added costs of a basement suite generally is, too.
Well MoneySense recently featured a very short article touting how a BS could help a Vancouver couple become mortgage-free faster. Unfortunately given the length, they didn’t examine any of the underlying assumptions.
The assumption was that they could renovate their house for $75,000 to create a two-bedroom BS, which would then rent for the princely sum of $1800/mo. There are no additional costs with this rent — which either means they had an even higher gross rent, or neglected the added costs entirely.
So, reality check time, how might this actually play out?
Firstly, $1800 sounds really steep for a basement suite. I know Vancouver is a bit pricier than Toronto, but really. So I did some checking on Craigslist. I found one outlier basement suite at $2495/mo, one at $2150/mo, a small handful at $2000/mo, and then just 10 starting at $1800 — so that might be possible for them, but it’s at the very upper end of the basement suite market (and at that price point I can see they are competing with a number of above-ground units or exceptionally large basement units). Even at $1700 many of the suites were above-ground or fully furnished. $1650 seems to be a more reasonable rent expectation.
And that is not going to come free. In addition to the effort and loss of privacy (which we won’t slap a price tag on), they’ll have increased utilities usage1 and likely a higher insurance premium. Let’s call that $50/mo. So they’re now bringing in $1600/mo.
But they’re going to have some other expenses to account for, like vacancy and maintenance. Let’s be generous and assume the unit turns over every four years, with just a month of vacancy and a quick paint, patch, and appliance tune-up of $3000. Now they’re down to netting an average of $1500/mo. On which they have to pay some tax — sure, they’ll have some interest and property tax to write-off, but even figuring on 4% of the $75k invested, if they’re in the 40% tax bracket their after-tax amount to help pay down the dreaded mortgage is just $9k/yr.
Bring that figure back to the mortgage calculator and their mortgage-free date goes from age 68 to… 68. Yep, taking all that risk, living first in a construction zone and then with lowly basement-dweller renter scum beneath their feet will likely leave them paying off the mortgage on the very same date as if they had done nothing. To be fair, that’s using a 5% mortgage rate as in the article. If their base case is topping up a (today’s) realistic 3% mortgage to the same $3k/mo as used in the article, then they’d be done at 67.7 in the base-case payoff, and 67.5 in the rental suite case — ahead by two months.
Not examined in the article is the other alternative: downsize. If all they need/want is the space in the upper unit, and obviously don’t mind sharing walls, then they could move to a townhouse (or rent or move out of the GVA entirely) and move their mortgage pay-off day to right now.
1. Contrary to stereotypes, basement-dwellers2 do shower, which adds to the water and water heater (whether gas or electric) bill. Plus the other incremental utility usage.
2. Again, 96% of my readership, so no offense intended in tackling these persistent stereotypes head-on.
October 14th, 2015 at 11:23 am
I’ve lived in basement apartments a number of times and was happy with the accommodation for the price.
That being said, I’ve read that I’m unusual and that basement apartment usually attract sub-optimal tenants.
October 15th, 2015 at 7:12 pm
Most basement apartment tenants are fine tenants, because they’re for the most part people, and most people are fine tenants. But that minority of nasty cases make for some great/terrifying stories…
I haven’t myself paid to live in a basement (but did live in my parents’).