Pros and Cons of Buying a Home with a Rental Unit

If you’re considering purchasing a property in Toronto, it’s important to weigh the pros and cons of buying a home with a rental unit. As an agent with experience finding rental units for buyers, I can help you understand the benefits and drawbacks of this type of investment and recommend best practices:

Pros of Buying a Home with a Rental Unit

1. Steady Rental Income

One of the main advantages of buying a home with a rental unit is the potential for steady rental income. In Toronto, where the rental market is competitive and the demand for housing is high, having a rental unit in your home can be a valuable source of income.

2. Tax Benefits

As a landlord, you can take advantage of certain tax benefits, such as deducting expenses related to the rental unit from your income taxes. This can include maintenance and repair costs, property management fees, and even a portion of your mortgage interest.

3. Lower Mortgage Payments

If you’re able to rent out a portion of your property, you can use the rental income to help cover your mortgage payments, making homeownership more affordable.

4. Increased Property Value

Having a rental unit can increase the value of your property. This is because it provides an additional source of income for potential buyers and can be attractive to those who are looking to invest in real estate.

5. Potential for Long-Term Financial Gain

Investing in a home with a rental unit can provide long-term financial gain, especially if the property value increases over time. This can help you build equity and generate additional income in the future.

6. Flexibility for Future Use

If you decide to no longer rent out the unit, you can convert it back into living space or use it for other purposes, such as a home office or an additional bedroom.

7. Additional Space for Family or Guests

Having a rental unit can provide additional living space for family members or guests. This can be a particularly attractive option if you have a large family or frequently host visitors.

8. Improved Neighborhood Appeal

Having a well-maintained rental unit on your property can help improve the overall appeal of your neighborhood. This can be particularly beneficial if you live in an area that is experiencing gentrification or redevelopment.

9. Reduced Living Expenses

By renting out a portion of your property, you can reduce your living expenses. This can be particularly beneficial if you’re looking to save money or pay off debt.

10. Rental Income Can Cover the Mortgage

If you’re able to rent out the unit for a sufficient amount, the rental income can cover the mortgage payments, leaving you with little to no out-of-pocket expenses.

Cons of Buying a Home with a Rental Unit

1. Dealing with Tenants

One of the main drawbacks of owning a rental unit is dealing with tenants. As a landlord, you’ll be responsible for finding and screening tenants, handling complaints, and enforcing rules and regulations.

2. Additional Expenses for Repairs and Maintenance

As a landlord, you’ll be responsible for repairs and maintenance for the rental unit. This can include everything from fixing a leaky faucet to replacing a broken appliance.

3. Rental Vacancy Risks

There is always the risk of the rental unit sitting vacant for extended periods, especially during times of economic downturn. This can result in a loss of income and additional expenses for marketing and repairs.

4. Stricter Financing Requirements

Financing for properties with rental units can be more difficult to obtain and require stricter requirements than those without. Lenders may require a higher down payment or stricter credit score criteria.

5. Increased Property Taxes

Owning a rental unit can increase your property taxes, especially if the rental income generated from the unit is significant. Property taxes are based on the assessed value of the property, which can be increased with the addition of a rental unit.

6. Possible Conflict with Neighbors

Having a rental unit on your property can sometimes cause conflicts with your neighbours, particularly if there are noise or parking issues. It’s important to be aware of the potential for conflict and take steps to minimize any disruptions.

7. Higher Insurance Premiums

Insuring a property with a rental unit can be more expensive than insuring a primary residence. This is because there is an increased risk of damage or liability claims.

8. Legal Responsibilities and Liability

As a landlord, you have legal responsibilities and liability for your rental unit. This includes complying with landlord and tenant laws, providing a safe and habitable living environment, and being responsible for any damages or injuries that may occur on the property.

9. Risk of Rent Control Regulations

In Toronto, the provincial government has implemented rent control regulations to protect tenants from excessive rent increases. As a landlord, you’ll need to be aware of these regulations and ensure that you’re in compliance.

10. Decreased Privacy

Having a rental unit on your property means sharing the space with tenants, which can result in a loss of privacy. You’ll need to be comfortable with having others living in close proximity to you.

Recommendations When Buying a Property With a Rental Unit

1. If you’re considering buying a home with a rental unit in Toronto, there are several best practices you should follow. 

First, make sure you understand the local rental market and have a solid understanding of the potential rental income and expenses associated with owning a rental unit. It’s also important to be prepared to handle the responsibilities of being a landlord, including finding and screening tenants, handling repairs and maintenance, and enforcing rules and regulations.

2. Additionally, it’s important to consult with a real estate attorney and accountant to ensure that you’re in compliance with all legal and tax requirements. They can also help you navigate the complex financing requirements for properties with rental units.

3. Finally, make sure you’re comfortable with the potential risks and drawbacks of owning a rental unit, including dealing with tenants, increased expenses, and potential conflicts with neighbors. However, if you’re willing to put in the effort and do your due diligence, owning a home with a rental unit can be a smart investment that provides long-term financial gain and increased flexibility.

Conclusion

Owning a home with a rental unit can be a great investment, but it’s important to carefully consider the pros and cons before making a purchase. By following best practices and seeking professional advice, you can minimize the risks and maximize the potential benefits of owning a rental property in Toronto.