MoneySense recently featured a very short article<\/a> 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. <\/p>\nThe 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. <\/p>\n
So, reality check time, how might this actually play out?<\/p>\n
Firstly, $1800 sounds really steep for a basement <\/em>suite. I know Vancouver is a bit pricier than Toronto, but really<\/em>. 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 <\/em>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.<\/p>\nAnd 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<\/sup> and likely a higher insurance premium. Let’s call that $50\/mo. So they’re now bringing in $1600\/mo. <\/p>\nBut 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. <\/p>\n
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<\/em>. <\/p>\nNot examined in the article is the other <\/em>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<\/em>. <\/p>\n1. Contrary to stereotypes, basement-dwellers2<\/sup> do shower, which adds to the water and water heater (whether gas or electric) bill. Plus the other incremental utility usage.
\n2. Again, 96% of my readership, so no offense intended in tackling these persistent stereotypes head-on.<\/small><\/p>\n","protected":false},"excerpt":{"rendered":"I’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 […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[20],"tags":[],"_links":{"self":[{"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/posts\/1336"}],"collection":[{"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1336"}],"version-history":[{"count":0,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/posts\/1336\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.holypotato.net\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1336"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1336"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1336"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}