Selling a home with an income-generating rental suite has many advantages to potential purchasers, thus giving you, the seller, an edge on the competition in today's evolving real estate market. In general, a rental suite is qualified when the secondary accommodation has its own separate entrance, a kitchen, living area and a bathroom with either a shower or bathtub.
But what type of suite does your property contain? Is it a legal authorized suite, an authorized illegal suite or an illegal unauthorized suite? Let's explore the differences.
A legal, authorized suite is a suite that meets the conditions of your local municipalities zoning by-laws and building code, has the necessary building, plumbing and electrical permits and pays the secondary suite utility and service fees.
On February 7, 2011, the City of Surrey adopted a bylaw acknowledging that illegal suites do exist and instead of exhausting manpower to attempt to fight a losing battle, they authorized a secondary suite service fee. The service fee covers the cost of city services including infrastructure such as water use and garbage pickup and is paid annually. Most other municipalities do not authorize without legalizing and licensing.
A seller with an unauthorized, illegal suite is at risk and should be aware that at any time their municipality can demand that they legitimize their suite or remove it. The alterations needed to legalize or remove an illegal suite can be pricey; the process frustrating and time consuming.
Now that we have categorized the type of rental suite your property contains, your sale is inevitably affected by whether buyers can qualify for a mortgage to purchase your home.
Here’s what mortgage broker Sarah Bess Miller of DLC Canadian Mortgage Experts has to say:
“Rental income can be helpful to buyers qualifying to purchase your home by giving them a bit of a financial buffer every month. This type of additional income and how it applies to mortgage financing varies from lender to lender. Qualification and approval is dependent on a number of factors and whether your income-generating suite is legal, illegal, authorized or unauthorized can be a factor.
“When it comes to illegal vs. legal suites, most mainstream lenders will allow rental income from either type of suite. From my own experience there are very few who will require your suite to be legal or authorized in order to use this type of income to qualify for a mortgage.
“As a general rule of thumb, all three mortgage insurers and most lenders will allow your potential purchaser to add 50 per cent of their annual rental income to their employment income for qualifying purposes. For example: if the buyer makes $60,000 per year as an office manager and the suite will generate $12,000 in income annually, we can submit the deal with $66,000 annual income. Some will even allow 100 per cent of the rental income to be added to annual income depending on the situation.”
Although the differences in the type of suite your property contains can affect how buyers qualify to purchase your home, it is imperative to be aware that your tenant’s rights apply regardless. Stay tuned for part two of this article, which will outline the rights and responsibilities of the seller (landlord) and tenant when it comes to selling the suite.