Blessed by the Potato

Rob Carrick posted about a Toronto family frustrated by the high cost of housing and wondering what to do. There were over 100 responses from the community: some suggested renting, some moving away to more affordable cities, others accused them of being spoiled and entitled for thinking that a house in Toronto should be anything other than a crushing financial burden. About 10% of responses said that they should buy a house with a basement suite (“mortgage helper”), and that renting it out would solve all their affordability concerns.

Some quick math for all those who think “just get a place with a mortgage helper” is somehow a magic solution.

Assume they can rent out the basement for about $1000/mo inclusive. There are some added insurance and utilities costs, so say the real gross is $800/mo. Apply some reasonable rate of return — say an 8% gross yield, which might work out to a 4-5% cap rate — and that $800/mo income basically means that they can buy $120,000 more house than they would otherwise. So the $700,000 house they were looking at would effectively “only” cost them $580,000 — yet they’d have to deal with tenants in the basement, lose out on a 2nd or 3rd washroom, all the storage space, a ready play room for the kids, and quite likely share their parking and back yard. In other words, they lose a good portion of the benefits of paying up to get a detached house in the first place, without the lower cost of a true attached property.

Plus, the prevalence of this analysis-free HGTV presents Income Property-type thinking means that the house with a basement apartment roughed in usually costs more than the comparable true SFH in the first place! All those risks and drawbacks, in the end to only be a few hundred dollars per month ahead, if any at all. I don’t know how “mortgage helper is axiomatically good” became such a prevalent meme*, but playing amateur landlord to the basement-dwelling crowd** is not the solution to a young family pressured by high house prices.

* – though we can guess: most people probably think that the suites build and maintain themselves, with no additional cost, that the full $1000 cheque comes every month without default or vacancy, and that it is entirely profit because accounting is hard.
** – no offense intended towards basement-dwellers, who are 96% of my readership.