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Discovering the Hidden Value In Your Home

What would you say if I told you that you could become a real estate investor without buying a second property, for approximately 10% of what it would normally cost you to invest in real estate and that you would be investing your money at approximately a 30% return on investment year after year?

You’d tell me I’m crazy, right!?

Most people that currently own a home don’t really consider themselves an investor, however, I would have to strongly disagree.

If you’ve owned your home for at least a few years and you’ve built up some decent equity, or even if you just have some spare cash that you are looking to use towards an investment somehow but don’t know where to invest it, I have just the plan for you.

I’m talking, of course, about creating a legal accessory apartment.

There are so many advantages to creating a secondary legal dwelling unit in your personal home that I really don’t even know where to begin.

First and foremost, you are instantly increasing the resale value of your home by having a letter from your municipality confirming the secondary living space has been inspected and built with the proper permits (i.e. the space is “legal”). If you should decide at any time to list your home for sale or even go to refinance your home and need an appraisal, you are automatically adding tens of thousands of dollars to your homes value, possibly, even more, depending on your area and the price point.

Secondly, from a cash flow perspective, the numbers are so shockingly lucrative for the homeowner that there’s really no good financial excuse for people that would like to get ahead in life not to be doing this.

Let’s say you have usable space inside your home that you would like to use to create a separate and legal living space. This could be a basement, space on the main floor, or even a second or third story as you see in a lot of century homes. The location in the home doesn’t usually matter, but for most people, you’d be looking at creating some sort of a basement apartment.

So, you take this space and hire a qualified contractor to turn it into a secondary dwelling unit going through the proper permit process, following the Ontario Building Code, etc. and it costs you a grand total of $50,000 when all is said and done. With a newly renovated space, you can then select the tenant you want to ensure as little hassles as possible for you as the homeowner and landlord.

Let’s also say you decide to give them a very conservative rental rate of $1200 all-inclusive per month because you want it rented to a good tenant who might decide to stay a while. With your newly renovated apartment rented at $1200 per month, you would be getting an additional annual income of $14,400 in rent (markets rents in Guelph, Kitchener/Waterloo, and Cambridge would likely be closer to $1400/month or $16,800 per year).

At $14,400 per year, the payback period on your initial $50,000 investment is approximately 3.5 years!

The approximate annual ROI (return on investment) is nearly 30%!

After the initial cost of the construction is paid off, all of the additional rental income is more or less pure profit and you just increased your household income by nearly $15,000 per year for as long as you keep the apartment rented!

What other type of investment costs you $50,000 and gives you a (pretty much guaranteed) return on investment of nearly 30% each and every year!?

Compared to the amount of risk involved the rewards are staggering and, to be honest, I really wish more people would decide to do it simply because it makes so much financial sense.

Some of the main advantages are:

  • You can invest in real estate without having to buy another property.
  • You can generate a residual secondary income immediately after construction.
  • You are immediately adding resale value to your home.
  • You can write off a portion of your operating expenses like mortgage/loan interest, property taxes, utilities, insurance, etc. (typically 40%, depending on the property) once the space is rented.
  • The buy-in price is low enough that most people can borrow against their home equity or dip into their savings to come up with the construction costs. If anything ever went disastrously wrong (which I really can’t see how it could if you are following the right steps) losing $50,000 isn’t likely going to bankrupt you whereas purchasing a full second property carries 6-10+ times the monetary risk along with it.
  • Since it is your primary residence, the Residential Tenancies Act allows you to take back the living space at any time with 60 days written notice once your tenant’s fixed lease term is up (after 1 year, for instance) and they are on a month-to-month term. This means you don’t have to commit the space in your home to a tenant indefinitely.
  • You are helping reduce your city’s housing shortage and providing a safe and clean place for someone else to live.

As the real estate markets continue to grow in the Guelph, Kitchener/Waterloo, Cambridge and surrounding areas I’m predicting this is going to become more and more the norm, and in some cases outright necessary as property values increase and mortgage qualification becomes tougher and tougher.

This also makes fantastic sense with merging families, such as parents and their kids. If each couple owns a $500,000 property and they both sell them and collectively purchase a $750,000 to $800,000 property with two separate living units, each couple can sock away approximately $100,000+ from the sale of their respective homes and enjoy the benefits of two families living under 1 roof!

I guess my point is, why not turn a part of your current living space into an income generating cash-cow and enjoy the benefits that entrepreneurialism has to offer you year after year?

For such little monetary risk, and such ridiculously high financial rewards, to me it seems like a plain old no-brainer.

Until next time, Happy Investing!

Kyle