Over the past several months I have been contacted by several people looking for advice on income properties. Some of these people had a property they wanted to add an income suite into, had a previously existing unit in the property, or wanted to buy something and generate income from it.
For those of you who know me, I am always happy to help and give whatever advice I can whether you’re a client of mine or not. As a matter of fact, a number of the calls I get on a regular basis aren’t people I have worked with and are represented by another professional in the industry.
It is for this reason I’ve decided to talk about income suites in single-family homes because many people, and even many of my own colleagues, simply don’t understand the nuances around income suites. As a result, they are providing incomplete information to buyers, who are making many life-changing decisions bases on that flawed information. Although the intentions were pure, it’s often said the road to hell was paved with good intentions…and real estate investing is no different.
In an effort to help explain these issues I am going to provide an example of the many calls and stories I’ve received over the past several months. In order to protect the people and the agents, I will not disclose names or addresses.
This example had a profound impact on me due to the fact it involved multiple purchases and utilized the buyer’s entire life savings.
I received a call from a lady who purchased multiple properties from an agent over the past several months. She had refinanced her house and wanted to invest in real estate in an effort to retire sooner. She had done some research but felt she needed to use an agent who had experience in investments. She was referred to an agent who seemed exceptionally savvy and knowledgeable. Within several months they have found and successfully purchased two properties.
The property was a bungalow built in the 50s. It had been well taken care of but needed some TLC to update the property. The property already had an income suite in the basement that was built by the previous owner for an aging family member. The agent’s advice was to update both units and upon completion refinance the property, pull out the investment, and reinvest it into another property. The property is in an A zone, bylaw 8499.
All well and good…it might have even been something I would recommended. However, the plan was flawed.
The agent told her client that because the apartment in the basement was pre-existing she didn’t need to apply for a permit to make the unit legal because it already was. All she needed to do was prove the unit was there before she bought it.
The agent failed to take into account a few things:
- When was the unit built?
- Did the owner have the fire department inspect and approve the unit?
- Does the unit meet the criteria for a second suite?
- What is the zoning on the property?
- What is the lot size?
These aren’t all the questions that need to be asked but it’s a good start. Successfully answering them will tell you whether or not the property you own or want to buy can legally have multiple dwelling units.
Why are they important? Let’s go through the questions and find out.
Bylaw No. 8499 was passed July 28, 1975. For a specific reference, the house example given in this case study is in an A zone that allows one and two-family dwellings.
The property is in a lawful zone and appears to be in compliance. So, there are now other issues we need to answer.
What is the lot size? Unfortunately, the house the property sits on is only 400 square meters and the bylaw clearly indicates 740 square meters is needs for the property to legally comply. Hence why the age of the property is vitally important and why the date of the initial conversion to two units is so important.
The owner now needs to produce sufficient evidence that the property existed AND WAS USED as a two-family dwelling prior to and continuously since July 28, 1975. Or, they would need to produce a variance reducing the required lot size from 740 square meters to 400 square meters.
Unfortunately for this particular buyer, the conversion to a seconnd unit was done in 1999 when the owner’s mother moved in after her husband passed away. The owner converted the basement to a one-bedroom suite with a full kitchen and bathroom and separate entrance.
Although the property was built before 1975, the in-law suite wasn’t constructed until 1999 and the lot size was too small to conform to the bylaw.
THIS IS WHY DATES AND ZONING CHECKS ARE CRITICAL BEFORE A PURCHASE.
The new owners ONLY saving grace was to refer to The Resident’s Rights Act 1994, also known as the “Granny Flat” law. This came into effect on July 14, 1994
Without going into the case law and subsections of the Act, the leymans translation is as follows:
From a zoning perspective, the use of any property in Ontario as a two-family dwelling is a legal use IF the property was used as a two-family dwelling on November 15, 1995 and has been continuously used since that time for the same purpose.
Unfortunately for this buyer, the conversion of the basement unit took place AFTER this date in 1999.
Our only option now would be to try The Ontario Fire Code under the Fire Ontario Marshals Act which discusses the retrofit requirements for two-unit residential occupancies. This section states that, regardless of whether the house is constructed before or after July 14, 1994, it may still comply with a few caveats. These take into account fire separation, egress, smoke alarms, and electrical safety. This however, was repealed in July 1998 and replaced with the new Fire Code we have today.
For this buyer, she struck out multiple times and wasn’t able to take advantage of any exceptions to the by-laws. Although the agent thought they were giving their client sound advice, it was misplaced by a lack of proper knowledge.
The sad part of this was that she had already renovated the upper and lower unit and spent over $100,000 in the process. At the time of refinancing, she provided the lender her realtor’s opinion, which was not sufficient. Her lawyer then went through the steps to help provide her case – however, the above issues were discovered.
Her only option was to pull a permit to convert the unit LEGALLY to a second suite. This required insections by both the building department and fire department. A number of deficiencies were discovered and the remediation cost was over $25,000 in additional spending to bring the unit up to standard.
The other unfortunate part of this was that not only did the agent provide the referral to the contractor who ultimately undertook the renovations, but they also advised against pulling permits to save money. Should permits have been taken out at the onset her additional spending to bring the unit up to code would have been very minimal.
If the realtor had asked the following questions, the answer to any of them our have help to guide the buyer into making the correct decisions:
1) When was the unit built?
1954 – this pre-dates by-law 8499 (1974)
2) Did the owner have the fire department inspect and approve the unit?
No – a simple condition in the offer giving the buyer a chance to make inquiries with the governing agencies would have discovered this.
3) Does the unit meet the criteria for a second suite?
Yes and no. Although the property had sufficient parking, a separate entrance with good height in the basement ceilings, and was located in an area that allows secondary suites, it still required a permit to install.
4) What is the zoning on the property?
A zone – one and two family dwelling units
5) What is the lot size?
400 square meters – 340 square meters short of legally meeting the second unit requirements.
The story for this buyer gets worse. Without going into elaborate detail, the Coles Notes are as follows:
The other property that was purchased fell OUTSIDE the secondary suite area in the City of Kingston. Not only did the buyer operate under the same advice provided by the mistaken realtor, but she also ended up having to undertake a Zoning Bylaw Amendment to make her unit legal.
Because it did not fall within the designated areas for a secondary suite, she spent an additional $65,000 in fees, permits, applications, and planning costs to convert her unit to a legal duplex.
She was NOT able to successfully pull out equity from the refinance of her properties because she spent it on the cost associated with fixing her legal issues. Additionally, she was forced to leave her newly built units vacant until she could obtain her legal designation. This lead to increased carrying costs and chewed up more of her savings.
The experience was meant to be a happy time in this buyer’s life and set her up for retirement but turned out to be a worst-case scenario for her.
This particular buyer paid a high price for this lesson. It’s something nobody in this industry wants but it does happen when you don’t fully understand the rules, regulations, and bylaws. Partnering with a realtor who has a firm and complete understanding of the process can make the difference between success and failure.
Do you have questions about real estate investing in Kingston? Get in touch anytime.