BRRRR Illegal basement Suite Refinance

Member since 2022 · 19 posts · 1 vote

If I BRRRR a property with an illegal basement suite will I get screwed on the refinance? I don't think I can make it legal because there is a requirement for multiple parking spaces which would be impossible to do. So I wouldn't be able to count the gross rent from the basement … :/

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Anthony Therrien-Bernard

Realtor · Calgary, Alberta · Member since 2018 · 291 posts · 132 votes

Quote from @Lorie Alexandria:

Indeed lenders can't count the income from the illegal suites, what they would usually do is use the rent that you would get if renting the whole place as 1 unit. Are you sure you have no parking or garage options to meet the requirement?

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Anthony Therrien-Bernard
Realtor · Calgary, Alberta · Member since 2018 · 291 posts · 132 votes
4y
Quote from @Lorie Alexandria:

If I BRRRR a property with an illegal basement suite will I get screwed on the refinance? I don't think I can make it legal because there is a requirement for multiple parking spaces which would be impossible to do. So I wouldn't be able to count the gross rent from the basement … :/

Indeed lenders can't count the income from the illegal suites, what they would usually do is use the rent that you would get if renting the whole place as 1 unit. Are you sure you have no parking or garage options to meet the requirement?
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Lorie Alexandria
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Member since 2022 · 19 posts · 1 vote
4y
The realtor told me 2 rooms downstairs and 3 upstairs would require 4 parking spaces! There’s street parking, but I guess that doesn’t count. It’s 275,000 in a 400-500+ town plus I could pocket the money from the suite while I Reno the upstairs. UGH! I think I have to double check this parking space crap.
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Lorie Alexandria
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Member since 2022 · 19 posts · 1 vote
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At least I’ll have house hacked my way into a cash flowing rental property ..
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Anthony Therrien-Bernard
Realtor · Calgary, Alberta · Member since 2018 · 291 posts · 132 votes
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Which city is this in?
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Lorie Alexandria
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Member since 2022 · 19 posts · 1 vote
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Fort Mac
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Anthony Therrien-Bernard
Realtor · Calgary, Alberta · Member since 2018 · 291 posts · 132 votes
4y
Humm I'm not sure about the rules there but in Calgary usually you can get away with 1 stall per unit (not based on the # of bedrooms)
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Lorie Alexandria
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Member since 2022 · 19 posts · 1 vote
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Where can I find the actual rules? Is it based on municipalities?
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Anthony Therrien-Bernard
Realtor · Calgary, Alberta · Member since 2018 · 291 posts · 132 votes
4y
Yes, look up the Fort McMurray website or give them a call
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Lorie Alexandria
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Member since 2022 · 19 posts · 1 vote
4y
I only need 3!! I have room for 3 - wow! Haha now what else do I need smh
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Natalie Schanne
Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
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@Lorie Alexandria - are you sure the appraiser will consider parking if you just identify the income coming in from all the units and show the signed leases? In my town the township “requires” off street parking for every tenant on the lease however if you present a lease for $3500 to the appraiser / mortgage company and there are only 3 off street parking spots, at least with me they didn’t say hey, this doesn’t match. They just appraised my house based on comps and I refi’ed it.
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Tyler Stiller
London, Ontario · Member since 2018 · 104 posts · 38 votes
4y
Quote from @Lorie Alexandria:

If I BRRRR a property with an illegal basement suite will I get screwed on the refinance? I don't think I can make it legal because there is a requirement for multiple parking spaces which would be impossible to do. So I wouldn't be able to count the gross rent from the basement … :/

Hi Lorie, it depends on the lender there are some lenders that can look at different properties. Is there a separate entrance? I’m a mortgage broker and We can usually get away with using rent in non legal units, as long as there is a separate entrance
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Lorie Alexandria
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Member since 2022 · 19 posts · 1 vote
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There is one main door into a foyer - then one set of stairs leads up to a door for the upper unit and another stairs leads down to the basement suite door. So you don’t enter the upstairs to go downstairs. I can figure out the parking but I need to split the heat controls so I might need to add a furnace. I actually think it’s possible to have it deemed legal… I just don’t know if it will break the bank to do so.
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Lorie Alexandria
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Member since 2022 · 19 posts · 1 vote
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Hmmmm I would have two leases ….
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Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
4y
You won't get screwed on the refi, you will quite properly not be able to use revenue from an illegal unit to justify refinancing. What bank is going to go on record counting money from illegal activity? Cmon.
You could buy it then seek a variance for the parking, sometimes attainable if you can show it wouldn't impact neighbors. I certainly wouldn't pay based on that premise though.
Other issues with basement apartments usually revolve around codes like ceiling heights and sufficient egress. If the apartment would be conforming in those areas, you could at least justify a higher proposed rent because of the legal extra space, even if it was being rented as a single house. We have legally used and financed in-law space/extra rooms twice in this manner, though it was owner occ both times.
In fact, this is kind of an ideal situation for house hacking. In boston, as long as there is access to the whole house, used or otherwise( there can be a door)
This is market dependent but one tip: remove the stove when the appraiser comes. Its often the difference between a Kitchen and a Kitchenette which seems a big deal to inspectors here
By the way, roommates are perfectly legal, nothing to stop you from renting a single house and the roommates having an understanding of who occupies where.
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Russell BrazilBusiness Member
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
4y
just remove the stove and you will be good.
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Lorie Alexandria
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Member since 2022 · 19 posts · 1 vote
4y
I’d actually make more money if I rented by room lol genius! Much appreciated
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Lorie Alexandria
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Member since 2022 · 19 posts · 1 vote
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Converting the kitchen to a kitchenette will also save me money lol I love this forum.
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Anthony Therrien-Bernard
Realtor · Calgary, Alberta · Member since 2018 · 291 posts · 132 votes
4y
Quote from @Natalie Schanne:

@Lorie Alexandria - are you sure the appraiser will consider parking if you just identify the income coming in from all the units and show the signed leases? In my town the township “requires” off street parking for every tenant on the lease however if you present a lease for $3500 to the appraiser / mortgage company and there are only 3 off street parking spots, at least with me they didn’t say hey, this doesn’t match. They just appraised my house based on comps and I refi’ed it.

In Canada most lenders (if not all) require that the suite be legal in order for the rent to be considered
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Anthony Therrien-Bernard
Realtor · Calgary, Alberta · Member since 2018 · 291 posts · 132 votes
4y
Quote from @Lorie Alexandria:

I’d actually make more money if I rented by room lol genius! Much appreciated

Actually, be careful with that I used to have a rooming house and a lot of A lenders won't consider any rent at all if rented by the room, some credit unions will consider the rent but be careful as this is one that can hurt more than help.
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Tyler Stiller
London, Ontario · Member since 2018 · 104 posts · 38 votes
4y
Quote from @Anthony Therrien-Bernard:

Quote from @Natalie Schanne:

@Lorie Alexandria - are you sure the appraiser will consider parking if you just identify the income coming in from all the units and show the signed leases? In my town the township “requires” off street parking for every tenant on the lease however if you present a lease for $3500 to the appraiser / mortgage company and there are only 3 off street parking spots, at least with me they didn’t say hey, this doesn’t match. They just appraised my house based on comps and I refi’ed it.

In Canada most lenders (if not all) require that the suite be legal in order for the rent to be considered

If it is a separate unit entirely and non-conforming aka not legal. We can usually use the rent.
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Jonathan BombaciBusiness Member
Real Estate Agent · Lowell, MA · Member since 2019 · 1k+ posts · 1k+ votes
4y
It sounds like you figured it out but normally the path of least resistance is just to call the city’s building department and talk to them, then ask them transfer you to the zoning department and have a conversation with them. Ideally you’d do this during due diligence before you buy the property so you know what you’re up against. Even if it’s non-conforming there is always an appeal processes to get a variance and if you talk the them in the right way they can give you a good sense of what your chances are of winning the appeal.
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Anthony Therrien-Bernard
Realtor · Calgary, Alberta · Member since 2018 · 291 posts · 132 votes
4y
Quote from @Tyler Stiller:

Quote from @Anthony Therrien-Bernard:

Quote from @Natalie Schanne:

@Lorie Alexandria - are you sure the appraiser will consider parking if you just identify the income coming in from all the units and show the signed leases? In my town the township “requires” off street parking for every tenant on the lease however if you present a lease for $3500 to the appraiser / mortgage company and there are only 3 off street parking spots, at least with me they didn’t say hey, this doesn’t match. They just appraised my house based on comps and I refi’ed it.

In Canada most lenders (if not all) require that the suite be legal in order for the rent to be considered

If it is a separate unit entirely and non-conforming aka not legal. We can usually use the rent.
Non-comfirming and illegal suites are 2 different things though, for a suite to be non-conforming it needs to have been legal at some point, then the code changed but the city accepts it as a non-conforming suite. If a suite was never legal I don't know if any A lenders that will consider the income (there probably is some B lenders that do but I'm not sure)
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Lorie Alexandria
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Member since 2022 · 19 posts · 1 vote
4y
The purchase price of the property is 275,000 and if I renovate the upstairs it will rent for 3000+ so that's more than 1% of the purchase price regardless of the basement suite. I do plan on reaching out to the city tomorrow, but if I house hacked and rented the basement while renovating the upstairs, I think I'm still winning. I can reno and have my mortgage paid by someone else while saving to buy another property ... I'm really leaning towards buying it. As a first time purchase it also allows me to get my feet wet as a landlord and house hack my way into owning a property that would be, if nothing else, cash flowing ... I could even rent to a family of 4 and they could just use a 4th bedroom in the basement instead of calling it a basement suite per se. I feel I have options. I think the age of the house limits my ability to legalize the suite without spending a **** ton of money ... it doesn't mean I couldn't legalize it down the road when I have more capital to put into it. Is that a fair assumption or do I have this all wrong lol
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Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
You haven't mentioned WHY it is deemed illegal.....? I would not worry only about making money, I would be concerned about renting out an illegal unit and having an accident/fire happen. When it goes to court (and it will) and the judge finds out that you knew you were renting an illegal unit, you will have more to worry about than making a few bucks.
Just my .02.
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Lorie Alexandria
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Member since 2022 · 19 posts · 1 vote
4y
Yes, I did. I mentioned parking in my first post. The other big issue is splitting utilities, I need a second furnace installed ... it's not a concrete room with no windows lol It's a fully functional two bedroom apartment with high ceilings, a full kitchen, laundry, 3 piece bathroom etc .. I've looked into the requirements but I think a second furnace installation would be a big job. I also live in an area that has more illegal suites than legal. I imagine I'm one of very few people who give two ***** to make it legal. It's the norm here so the judge won't fall out of his chair in utter shock that someone lives in an illegal suite. Like I said though, I could always rent it as a whole house not a separate unit.
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