How to Leverage Your Home Buying Power with a Basement Apartment

 

 

 

 

JENNIFER FOLEY REALTOR: (00:01)
Hey guys, welcome to the Jenn Foley show. I am here today with my guest Varan Karunanantham, from I Connect Mortgages. So welcome Varan.

VARAN K: (00:12)
Thanks for having me.

JENNIFER FOLEY REALTOR: (00:15)
Yeah, thanks for coming on again. So today we're going to talk about leveraging and purchasing property. How a buyer can do this with a rental income from say a basement apartment or a second unit in a home. If they're looking to get into the, uh, housing market. So, um, you know, more and more buyers, you know, with highly competitive markets, you know, price points, uh, certainly getting higher and higher one is to talk to about how, how a buyer can do this with a basement apartment. So I'm going to let you take the lead on this, provide us with some information with some numbers and some facts and go ahead.

VARAN K: (00:57)
Perfect. Um, the difference is a great, it's a great topic to talk about. It's getting very, very common, uh, first-time buyers and investors. They are looking for these kind of properties. And as a first-time home buyer, you can buy a house that has a legal apartment with the minimum of 5% double payment,

JENNIFER FOLEY REALTOR: (01:18)
As long as you're moving into it,

VARAN K: (01:20)
Moving into. So you need to mitigate to the lenders and the issuers that the purpose of buying this property is for you to be owner occupied. And you are Southern replacing some of the income by renting out one of the unions, as long as can be mitigated for first time, buyers is not an issue. You can purchase these properties with the 5%. So this has become a huge cash flow management for a young professionals or young people who's trying to get into the market. Uh, we are seeing on average in done region basement apartments are bringing anywhere from 1500 to $2,000 on the rental income. In some cases they are young, uh, others, they are living in the basement and they are renting upstairs. That's right. So when you see this, for example, I did some calculations. Uh, if you have a hundred thousand dollars income, you can qualify on your own about a $475,000 property. If you have a rental income about $2,000, you can qualify for a fireman $60,000,

JENNIFER FOLEY REALTOR: (02:25)
Five hundred sixty four hundred and seventy 5,000 to 160,000. So almost a hundred thousand dollars increase in your purchasing power.

VARAN K : (02:36)
Exactly, exactly. If we have a young couple or young professionals want to get into the market, this could be a best way to get into the pocket. Um, so if you are talking to someone about a mortgage pre-approval, you may want to revisit that and say, what happens if I buy a bigger, a more expensive house with the basement apartment or leader. So is something for you to think about it. So the price point may look higher, but you may qualify based on that supplement income from one of the apartments, you can be converted into a rent toast. The other important thing I like to bring in is every hundred thousand dollar mortgage is almost equal to $350,000 or $350 in a month,

JENNIFER FOLEY REALTOR: (03:20)
$350 for every hundred thousand dollars, right?

VARAN K: (03:24)
They're very high level guys. It's very high level and I'm not going, I'm not, I'm talking about a very market interest rate at 1.5% on a variable rate is about $350. If we having a $2,000 rental income coming in from your apartment, that's almost equal to replacing the $600,000 mortgage.

JENNIFER FOLEY REALTOR : (03:48)
So let's, let's take, um, purchase price. So a lot of these, um, two unit homes, and we're only going to talk about ones that are illegal, right? Which legally, um, you know, they're registered with the city. Um, they meet, uh, the requirements by the local municipality. So in our area here in Durham region, so specifically I want to talk about Eastern terms. So Oshawa Curtis, Bowmanville, new castle, the areas that I work mostly in. Um, so let's, let's talk about this permanent because the values on these properties they're selling anywhere from, you know, 650 up to 800, 900,000 on average. Right. Um, so let's just take a, just price of 700,000 for a property. If a buyer was purchasing that as a single family residential, so a one family home, um, even if it's got a second kitchen, but they were just going to move into it themselves, um, purchase price 700,000, what would the down payment on that look like if we were saying 5% down, if they met all the other qualifying criteria, um, and what type of household income would be required for something like that?

VARAN K : (05:00)
So the Hoffman income to purchase something like that with a minimum down payment. So first find a thousand dollars. You need that 5% down, which is 25,000, the rest of the 20 200,000 unique, 10% out. So you need to download the app, put a box 55,000 down to clicks. Doesn't mean you're going down on a high level. You need about $129,000 household income without more debts to be qualified for something similar to the $700,000, but it's just, uh, with the thousand dollars. Okay.

JENNIFER FOLEY REALTOR : (05:33)
So then if somebody was going to move into one unit and write out the second unit, um, and let's say they had income of around a thousand dollars coming in, or I think your example, let's, let's keep it real with, with, uh, current rental rates as of June, 2021. So basement apartment, um, can draw depending on it, square footage, layout, and number of bedrooms and all that. Um, you know, there may be some variations on that, but let's just take out the $2,000 a month, right. Um, or let's even take a 1500 whatever number you think. Okay. So let's do 1500. So, uh, again, down-payment would not change in terms of a purchase price is 700. It would be similar to buying as a stable family. Is that correct? And household income needed now, would that change slightly? Because now there's an element now, and let's be clear here is the difference between buying a two unit home that, um, had already has a vacancy in the basement, and you're going to reside as a buyer on the main floor. But, um, if it's vacant, when you purchase it, does that impact the qualifying as well? Or do they need to already have it rented to qualify at a higher amount?

VARAN K : (06:54)
No. What happens is the lenders will send an appraiser to go and assess it and say how much the basement tender rented for. Okay. So you don't, you do not need to have a tenant when buying the property. Uh, but the band was in that place, a place to property. I just want to have one more thing is not necessarily for all the lenders to have a retrofit basement. Some lenders are okay with the self-contained basement. What the definition of the self-contain is you need to have a separate entrance room and a kitchen.

JENNIFER FOLEY REALTOR: (07:26)
Okay. So it doesn't necessarily have to have a registration for the municipality as a two year

VARAN K: Melendez to Linda. So it's better to check with your mortgage broker or the bands you are talking to. You'll make sure that if they are okay with a self-contained basement or they need to have a retrofit.

JENNIFER FOLEY REALTOR : (07:42)
Okay. Okay. So, so I'm going to let you tell us, um, you know, household income, does that vary then in terms of amounts that you qualify for,

VARAN K: (07:50)
It wouldn't be, you will need a less of the higher, the rental income. You will need the less of the household income.

JENNIFER FOLEY REALTOR: (07:56)
Okay. Okay. Um, so then let's quickly talk about, um, you know, if you have $1,500 in a month, how much would that equate to? So if your monthly payment on 700,000 is X with 5% down or whatever amount we need to put down, um, let's do 5%. If that's accurate,

VARAN K : (08:19)
You need to be mindful someone over the 5% down, your movement will be about 6 45 on a 6 45 mortgage on a really elevated 1.4%. Um, your monthly payment is 25, 50, 25 50.

JENNIFER FOLEY REALTOR: (08:39)
Okay. So if we were getting $1,500 from a basement apartment that reduces our monthly mortgage payment down to a thousand,

VARAN K : (08:46)
$1,000 is cheaper than a new rent somewhere.

JENNIFER FOLEY REALTOR: (08:50)
Now we should add on this for people that are interested in doing like this in terms of qualifying, uh, for, uh, something like this with two units that am I correct in saying that they need to qualify still as if they were buying it as a single family, residential, that they could carry that one

VARAN K : (09:12)
That is [inaudible] using the revenue income. So bank still use our internet income to qualify. So, um, so someone may think one example, they may not able to buy something at a high price point, but using the additional source of income will elevate them to buy, uh, anywhere from 50 to a hundred thousand dollars a month price point because of using the additional income. So it's not also helping you to qualify for a higher loan amount, but it's also helping you with the cash flow. So I'm seeing a lot of these happening. And like I have had clients, the two brothers, they both are moving out of the house. They're going to live in the basement and they're going to rent the upstairs. Okay. I'm seeing some young professionals, couples living upstairs and renting the basement. So it is getting very common. Even in Don Regan is housing is expensive. Someone who's coming out of the bed. This is like, they're saving almost $1,500 a month paying the mortgage.

JENNIFER FOLEY REALTOR: (10:21)
And, and I think too, this is a good opportunity and, and listen up guys, like if you're a first time buyer, or if you're looking to get into the market, um, buy another investment property. And you know, you maybe already have one that you're looking to get into another property. I think this is a great opportunity, um, for you to look at and, um, because you can leverage the power of having a second unit

VARAN K : (10:47)
And also down the road in five, 10 years from now, the values of these properties are going to be going up. You have a good cash flow coming in. You can convert this properties into an investment property and you can purchase all that whole way to move on. Once you establish a lifestyle, you have a high income. So this is a great product for someone who is starting to get into real estate also for investors as well.

JENNIFER FOLEY REALTOR : (11:11)
Yeah. So they could add this to their portfolio, move out in a couple of years and re-read it for whatever market rates are and refinance it and leverage to buy their next property as well.

VARAN K: (11:26)
Yeah.

JENNIFER FOLEY REALTOR: (11:26)
All right. Well, I thank you so much. This has been really great information. And if anybody has made it this far in, um, in the video or those of you that are watching right now lie, um, shoot me a DM at Jennifer Foley realtor. And, uh, you can just put in the, uh, direct message, uh, basement apartments, and then I'll know that you've been this video and found it useful and helpful. And certainly as always, if you have any questions, feel free to reach out to us again at Jennifer folded realtor, that's my Instagram handle, a YouTube handle and a Facebook handle. And, and if you want to give them some information on how they can reach you as well.

VARAN K: (12:12)
Yeah. You guys can always call my cell at (905) 999-7193 or you can reach out to I connect mortgages for myself.

JENNIFER FOLEY REALTOR: (12:21)
Great.

VARAN K: (12:22)
Perfect. Thank you.