Adding a rental unit to your home
By Michelle Warren • Bankrate.com

Hire an expert
Having an expert on board during the planning process is crucial and will make things move far more smoothly. "You have to use a professional -- you can't just do it yourself, or you'll end up with a lot of problems," says Nalliah Thayabharan, owner of Expert Building Inspections, which focuses on the Greater Toronto Area. "Go to a proper architect or someone who knows what they're doing. You want someone who knows the code to design the unit."

Thayabharan says too often people want to reduce their costs by cutting corners, failing to get the right permits or hiring unlicensed labourers. "The end product might look the same, but behind the walls it's different," he warns, pointing out that most laymen don't think about details such as moisture control.

Thayabharan admits that doing things on the up and up -- securing the proper permits, paying for inspections and hiring licensed workers -- can almost double the cost of a project, but such diligence pays off in the long run.

"The most common mistake people make is failing to plan for the future. Often they are doing it short-term with an eye on increasing income, but really they should be looking at durability and ongoing maintenance costs," says Koval. "The quality of work will reflect on the type of tenant and the ease of renting the apartment."

In other words, you get what you pay for. However, the required investment really depends on current infrastructure. If you already have a finished basement with a bathroom, you might be looking at $10,000, but if you require a washroom and kitchen, expect to pay closer to $30,000. Note that if you need to build a separate entrance, that job alone can cost $8,000 to $10,000.

If you plan on moving in a couple of years or will need to reclaim the space to accommodate a growing family, a rental unit might not pay off.

In the long term, however "it's always a good investment," says Koval, pointing out that if you spend $20,000 and rent it for $700 a month, you achieve a 42 per cent return on your investment. In 10 years, you get back more than four times what you initially spent (not accounting for interest payments should you borrow the money for the project). "Where else can you get that kind of return?"

Just don't plan on a unit increasing the sale value of your home, because it doesn't necessarily work that way. While the added income is appealing to some buyers, others don't want the hassles involved with being a landlord. It really comes down to the individual buyer when determining whether an income unit is a plus or a minus at selling time.

Are you ready for the hassles?
Rental units aren't just a source of income -- they come with huge responsibilities and headaches. When you're a landlord, you're accountable to your tenants and sometimes responsible for their actions, such as paying their utility bills or cleaning up their garbage.

Renting out a unit in your home means having another person, often a stranger, living under your roof, so you have to ask yourself if you are ready to deal with noise complaints, rent collection issues, disputes and the work involved with dealing with tenant turnover.

Being a landlord is taxing
You also need to keep in mind that income from a rental unit must be declared and you will pay taxes on it. However, you can also deduct from the income a portion of all your household expenses (heat and electricity, should the renter not pay his or her own costs; maintenance costs; property tax and interest paid on the mortgage to name a few). A good accountant will help you reap all the benefits, and some homeowners may be able to deduct more than they receive in rental income, thereby getting a tax refund.

On the financial front, you'll also want to contact your insurance company and let them know you have a tenant and ensure the proper coverage is in place. Most home insurance allows for an additional unit, although it will likely result in a slight increase in your premium.

Michelle Warren is a freelance writer living in Toronto.