The Risks Of Renting Out Basement Apartments

BE CAREFUL RENTING OUT UNITS THAT AREN'T ON THE BOOKS

Basement apartments come in all shapes and sizes and quite often basements can be fully furnished and renovated into great places to live and rent…but that is not always the case. In Arizona, where most of the properties we manage are relatively new, many having been built in the last 40 years with the oldest dating back to just the 1950’s, basement tenancy may be more appropriate. However, in New England, properties are significantly older and basements that have been around since the industrial revolution or that have housed heating units for over a century do not typically convert into safe living spaces. In Rhode Island, Massachusetts, and Connecticut, it’s rare that we see basement apartments that are actually legal. Your local government provides zoning certification that will let you know how many legal residential units you have. If you rent out in excess of that approved number, you’re putting yourself, and likely your tenants, at great risk.

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SHORT TERM vs. LONG TERM

If you own rental property, it’s critical that you maintain an investment-based lens in all decisions. Trying to rent a subpar and/or illegal basement unit is a strategy to gain profits in the short term. It’s not a long term strategy because over the life of your ownership, something will go wrong and you will likely get caught. When rents are coming in at record highs, the appeal of maximizing the returns from your property makes a lot of sense at first glance, but there are too many significant risks that make this approach untenable.

LEARN MORE: THINKING SHORT TERM vs. LONG TERM WHEN IT COMES TO RENT

WHAT’S THE WORST THAT COULD HAPPEN?

You could argue about how best to rank these, but there’s no denying that any of these outcomes would be financially crippling at the least and it’s quite possible you could end up with all three in one stroke of bad luck.

1. SOMEONE COULD GET HURT OR KILLED

If the basement unit is not approved and is not on the books, there’s likely a reason more than just the owner saving some time, effort, or taxes. Carbon monoxide or carbon dioxide are far more likely to accumulate in basements where heating or laundry units exist. Tenants’ ability to exit the basement safely in the case of an emergency is also a huge risk. If a bulkhead is your second point of egress, that heavy metal door is not going to cut it in the case of a fire. In the northeast it’s also much more likely that lead paint has not been mitigated or certified as safe in these old basements. Add to that the increased risk of vermin and other infestation and you’re looking at a high probability that in time someone is going to get sick, hurt, or worse.

LEARN MORE: WHAT TO DO WHEN A TENANT DIES IN YOUR PROPERTY

2. PAY OUT MAJOR INSURANCE CLAIM

When something does go wrong, your insurance will not cover it if it is born out of your own negligence. That $1,000,000 policy you pay for to protect you will not cover a wrongful death that resulted from an illegal decision on your part. For the short term rewards of basement rent collection, you’re risking a hefty lawsuit that you will not win.

LEARN MORE: WHAT TO DO WHEN TENANTS’ ENJOYMENT PUTS YOU AT A LEGAL RISK?

3. LOSE YOUR PROPERTY

If you are found in direct violation of state law in a way that puts tenants at risk, you’re going to have a state and a lender to deal with. State and local laws vary, but penalties exist to restrict slumlord tenancy. Your renting out an illegal unit would qualify. Additionally, the financial hardship you’re likely to incur related to insurance and lawsuits, will surely make it more difficult for you to satisfy your mortgage.

LEARN MORE: 4 TYPES OF LANDLORDS: WHICH ONE ARE YOU??? SURELY, NOT A SLUMLORD

FOLLOW THE RULES

This may sound simple…or even insulting, but the best advice is to “follow the rules”. Real estate investment is a winning proposition but it is not without its headaches…so don’t create any additional headaches by trying to beat the system. Rental property investment is a winning game when you play it the right way. Hiring a property manager is the best way to limit risk, increase efficiency, and avoid having to cut corners in the first place. Contact any of our offices to learn more.

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Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.

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