As cities across Canada face housing shortages and affordability issues, additional dwelling units (ADUs) present a practical solution and a lucrative opportunity for homeowners. You can earn additional income while boosting your property’s value by renting out your ADU!
However, there are several factors to consider when transitioning from homeowner to landlord.
In this blog, we explore crucial details about renting out your ADU—from understanding local regulations and preparing your unit for tenants to setting rental prices and managing the property.
Legal and Administrative Steps to Renting Out Your ADU
Renting out your ADU involves several legal and administrative steps to ensure compliance with local regulations and to protect both you and your tenants. If you’re not familiar with local laws, sorting out all this paperwork can seem quite daunting.
But we have some good news—at Resimate, we are happy to provide tips and direction about which professionals you can connect with to help make this process as seamless as possible.
Here’s an overview of the legal and administrative requirements for renting ADUs:
1. Understanding local zoning laws
Generally, each municipality in Canada has its specific zoning bylaws that guide the construction of ADUs, including specifications of lot sizes, placement, and building parameters. These bylaws also determine the regulations on the permits you’ll need to obtain before you can rent out your ADU. Such permits may include building permits, occupancy permits, and rental licenses.
Here are the steps you’ll typically need to take here:
- Visit your local zoning office or website to review zoning laws;
- Apply for necessary building and occupancy permits;
- Schedule inspections as required to ensure compliance with building codes.
Resimate offers turnkey service to help homeowners with all of these steps, so please book a call if this seems daunting and you need assistance!
2. Drafting lease agreements
Lease agreements are also legal obligations you need to sort out before renting out your ADU. We recommend securing the services of real estate lawyers or downloading Ontario’s Rental Tenancy Agreement to ensure you create comprehensive lease agreements that protect you and your tenant(s).
That said, here are some key elements of a lease agreement:
- Rent amount and due date
- Security deposit terms
- Maintenance responsibilities
- Lease duration and renewal terms
- Eviction policies
Also, if you plan to have communal areas that you and your ADU tenant can share, the lease agreement is a great place to include that information. For instance, you can create a courtyard or sitting area between both homes.
3. Property management
You’ll need to decide whether to manage the property yourself or hire a property management company. Managing your ADU will involve tasks such as tenant screening and acceptance, handling maintenance requests, collecting rent, and addressing tenant issues.
Many homeowners prefer to hire a property management company so they don’t have to deal with the nitty-gritty of managing tenants. These companies also have a blend of expertise and experience that can help make the rental process more seamless for both you as the landlord and your tenants.
Setting Up Utilities for Your ADU
Before renting out your ADU, you’ll need to ensure its utility system is up and running to ensure it offers a comfortable living environment for your tenants. This process involves connecting utilities—such as water, sewage, gas, and electricity—between your main home and the ADU.
After connecting the ADU to the main house’s existing utility systems, you’ll need to make an important decision. Do you separate meter utilities such as electricity, water, and gas?
Here are some benefits of springing for separate metering for you and your ADU tenant:
- Fair Billing: With separate meters, tenants pay for their exact usage, which can reduce disputes and ensure fair billing practices.
- Energy efficiency: When tenants know that they pay for what they use, it encourages them to be more conscious of their utility consumption, potentially lowering overall usage.
- Convenience: Separate meters simplify the process of splitting bills and managing utilities for landlords.
However, you should note that the possibility of separately metering utilities depends on local regulations in your municipality and the policies of your utility providers. Some areas may have restrictions or specific requirements for installing separate meters.
You also need to provide a separate mailbox for your ADU. Having separate mailboxes for the main home and the ADU helps to avoid mix-ups in mail and package deliveries, ensuring that each resident receives their correspondence and deliveries smoothly. It also maintains privacy for you and your tenant (if you live in the main dwelling)!
In addition, depending on where the ADU is on the property (especially if it’s located behind or to the side of the main house), you may need to create visible directions to guide visitors. This way, delivery personnel and guests can easily find it without any trespassing or privacy issues.
Next, we’ll discuss the financial considerations you need to make when building and renting out an ADU.
The Financial Implications of Renting Out Your ADU
Understanding the financial impact of renting out your ADU can help you make informed decisions and maximize its benefits. Here are some essential considerations you need to make:
Estimating rental earnings
While rental income from an ADU can significantly boost your overall financial situation, the exact amount you earn will depend on several factors. These include location, the size of the ADU, market demand, and more.
However, you can generally expect to earn between $1,200 and $2,500 monthly on rent, especially if your property is in an urban area.
Securing insurance
Your primary home will typically already have insurance coverage. However, building an additional dwelling unit on your property means you have to update your insurance agreement. However, updating your homeowner’s insurance policy to include rental coverage is essential as it protects you against potential liabilities and property damages related to your rental unit.
Here’s what you need to do:
- Contact your insurance provider to discuss rental coverage options
- Ensure your policy covers liabilities, damages, and loss of rental income
- Inform your tenants about their responsibility to obtain renter’s insurance
Managing tax implications
Another financial impact of renting out your ADU is tax. According to governmental regulations, income from renting out your ADU is subject to taxation. Therefore, you’ll need to create detailed records of your rental income and expenses to ensure accurate tax reporting.
However, you may also be eligible for certain tax deductions, such as property management fees, maintenance costs, and depreciation. We recommend consulting with a tax professional to understand the potential impact of the ADU on your property tax.
The Bottomline
Renting out your backyard home or ADU can be a highly rewarding venture. However, you’ll need to tick off all the necessary legal and administrative boxes to ensure that you can enjoy your investment.
Not to worry, we can help you get started.
Resimate provides comprehensive, all-around service when it comes to helping our clients achieve their dream ADU. We boast a team of legal and technical experts who will walk you through the legal and construction aspects of bringing your ADU to life.
Book a call with us today and let’s take that first step together.
