10/15/2014 05:27 EDT | Updated 12/15/2014 05:59 EST

What To Consider When Renting Out A Suite In Your Home

One effective way to offset the costs of a mortgage is to create a secondary suite or in-law suite and rent it to a tenant. Many houses in British Columbia already have a secondary suite built by a previous owner, and buying a property that includes a ready-made suite with a separate entrance could allow you to generate rental income more quickly than building it yourself (or contracting someone else to build it).

If you're thinking of going this route, here's what to keep in mind:

Understand how your lender will count rental income

If you're counting on rental income to qualify you for a mortgage, then you may be disappointed. Several real estate television shows give the impression that 100 per cent of rental earnings would be added to income, but this is a huge misconception. Most lenders would actually only include 50 per cent of potential earnings (after all, it's typical for a month or two to remain vacant in a given year) and some lenders are very strict on the home being a "legal suite" based on the specific municipality's definition.

Many older, single-family homes do not contain legal suites, and in that case the lender will not accept any rental income from the property. Also, some lenders will only accept rent as income if that income is declared on your tax returns. Even with a lease agreement, if your income is not reported, it can't be used to qualify you for the mortgage should you decide to refinance.

Research your municipality's requirements for a "legal suite"

Many homeowners rent out suites that don't qualify as legal in their jurisdiction. A "legal suite" may mean higher property taxes, but your lender may not accept rental income if your suite doesn't qualify.

Research the specific requirements in your city or town. In Victoria, for instance, secondary suites must not exceed the lesser of 90 square metres or 40 per cent of the total floor area of a home. Vancouver requires a minimum ceiling height of 6'6" or over 80 per cent of the suite area and all exit routes.

Screen your tenants

Whenever you rent to someone in your own home or in a separate rental property you own, it's a good idea to carefully screen the tenant by checking references, conducting a credit check, and meeting with prospective tenants in person. When a tenant occupies the space below your living areas, it becomes even more important to ensure that you choose a responsible, respectful person.

Having a rental suite does require a few additional steps, but many homeowners find that the extra, recurring income is worth the inspections and paperwork.