Real Estate

Rental income question when living at the property

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  • Oct 3rd, 2020 9:38 pm
[OP]
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Jan 26, 2020
350 posts
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Canada

Rental income question when living at the property

Say you buy a house that you will be living in.
Then you rent out a few rooms.
Say your mortgage is $2000/month and your rental income is $1500/month.
Would you be paying tax on rental income of $1500/month if your rental income is less than your mortgage?
If so, is there any way of doing this better? Maybe buy the house as a business or as a corporation?
31 replies
Sr. Member
Feb 19, 2019
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Stouffville ON
You need to separate principal payment and interest payment, only the interest portion is deductible.
Normally you prorate your expenses based on the percentage of the house rented, if you rent 25% of the house than you will be able to expense 25% of the property tax, interest on the mortgage, insurance etc.
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MichaelZZZ wrote: Say you buy a house that you will be living in.
Then you rent out a few rooms.
Say your mortgage is $2000/month and your rental income is $1500/month.
Would you be paying tax on rental income of $1500/month if your rental income is less than your mortgage?
If so, is there any way of doing this better? Maybe buy the house as a business or as a corporation?
Start with this:
https://www.canada.ca/en/revenue-agency ... aring.html

For a single property, I doubt the expense and hassle of incorporating will make sense financially.

C
[OP]
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Jan 26, 2020
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This may seem like a nuub question but here goes....
Can you structure your payments at your bank so almost all of it goes to interest in the beginning? That would give me time to renovate the house and hopefully sell it while I'm paying little in tax on the rental income.
[OP]
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Jan 26, 2020
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Canada
What if I rented a house for $2000 and rented the rooms out for $2500 and lived in one of them? Would $500 be taxable or $2500? I would think the expenses would be taxable minus my percentage of course.
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MichaelZZZ wrote: This may seem like a nuub question but here goes....
Can you structure your payments at your bank so almost all of it goes to interest in the beginning? That would give me time to renovate the house and hopefully sell it while I'm paying little in tax on the rental income.
You can get interest only mortgages, I believe. Or a HELOC would work as well.
https://www.ratespy.com/interest-only-m ... a-05089302

As far as your other question goes, I think you’d have the same breakdown on that. You’d have to calculate your share of all the expenses, and you’d pay tax on the difference between the rent and those expenses. In the example you give, you wouldn’t have $2000 in rent expense, you’d have, say, 75% (if you had 3 roommates) = $1500 in rent expense.

C
Sr. Member
Feb 19, 2019
956 posts
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Stouffville ON
MichaelZZZ wrote: What if I rented a house for $2000 and rented the rooms out for $2500 and lived in one of them? .
Are you renting a house from someone and subleasing it to others for a higher amount? Sorry but your questions are not clear.

If you own a house and renting out a large portion of it you will have an issue with a principal residence exemption and you may be paying capital gains tax on the portion of the house you have rented out when you sell the property of have deemed disposition.
You should be talking to accountant.
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[OP]
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Canada
CNeufeld wrote: You can get interest only mortgages, I believe. Or a HELOC would work as well.
https://www.ratespy.com/interest-only-m ... a-05089302

As far as your other question goes, I think you’d have the same breakdown on that. You’d have to calculate your share of all the expenses, and you’d pay tax on the difference between the rent and those expenses. In the example you give, you wouldn’t have $2000 in rent expense, you’d have, say, 75% (if you had 3 roommates) = $1500 in rent expense.

C
So an "interest only" mortgage means that nothing is deducted from the principle until all the interest has been paid? And if I defaulted I would have zero equity in the house?
As for the re-renting example....yes of course it would be whatever less I was occupying. Forgot about that. Thank you.
So the key to this is occupy almost no space in the house percentage wise.
Hey, what if the owner was not in the house at all, rather in a trailer on the property? As that would not be inside the house then he could write off the entire housing expenses. And I wonder if it would be possible for the owner to have access to the house in the shared areas, like bathroom, laundry, etc. I'm thinking yes as it would be the same if the owner lived far away and dropped in from time to time? It might help if one had a mailing address at a different location.
Last edited by MichaelZZZ on Sep 2nd, 2020 6:51 pm, edited 1 time in total.
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MichaelZZZ wrote: So an "interest only" mortgage means that nothing is deducted from the principle until all the interest has been paid? And if I defaulted I would have zero equity in the house?
As for the re-renting example....yes of course it would be whatever less I was occupying. Forgot about that. Thank you.
So the key to this is occupy almost space in the house.
Hey, what if the owner was not in the house at all, rather in a trailer on the property? As that would not be inside the house then he could write off the entire housing expenses. And I wonder if it would be possible for the owner to have access to the house in the shared areas, like bathroom, laundry, etc. I'm thinking yes as it would be the same if the owner lived far away and dropped in from time to time? It might help if one had a mailing address at a different location.
Sometimes it’s best to start with what you’re trying to accomplish, and people can try to help you achieve your goals. Rather than asking a bunch of meandering questions. No offence intended.

C
[OP]
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CNeufeld wrote: Sometimes it’s best to start with what you’re trying to accomplish, and people can try to help you achieve your goals. Rather than asking a bunch of meandering questions. No offense intended.

C
Trying to minimize tax! I thought my questions were quite specific. One leads to another. A person can practice renting out rooms and managing a property by renting an entire house instead of an apartment. As they get better at it their profit improves and their expenses evaporate so they are living free and putting money in their pocket each month. But if that is taxable it just means its a lot harder. Generally its pretty hard to make more than about 15-25% a month. I would think few people manage to exceed that re-renting. And you have to account for the occasional vacancy and other issues with renting. So the tax can easily wipe out your profit. Is it worth it to live without any expenses - just breaking even and having to contend with everyone? I think for many people it would be worth it because of the control you have over the house. Also, if its a large house there is likely to be some rooms that are unrentable (no window usually) and these could be used for other things by the owner. One could perhaps rent out the space for storage but most people that rent a room don't have much stuff. I just find the whole concept rather fascinating. Who doesn't want to erase their accommodation expenses? Most people spend tens of thousands (while being broke through much of this period!) on rent. Its just money down the drain. If I had known these concepts when young my financial picture today would be vastly different than it is. When I talk about these concepts to young people very few get it. If they can't Google it its not real I guess. Well there are people re-renting but it certainly isn't common.
[OP]
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Jan 26, 2020
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And I should have reminded everyone how much more money you typically get per sq ft when you rent out smaller rooms individually instead of the whole house to a family - often 50% more. And if you can rent weekly its usually 50 - 75% more than monthly though obviously its a lot more work and a lot more oversight. Starting off, most everyone would opt for monthly and ease into weekly gradually. Also it helps if you're near a hospital (out of town family usually wants to stay close to where their loved one is getting treatment and hotels are too expensive and impersonal) or other areas people tend to visit.
[OP]
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Jan 26, 2020
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senasena wrote: Are you renting a house from someone and subleasing it to others for a higher amount? Sorry but your questions are not clear.

If you own a house and renting out a large portion of it you will have an issue with a principal residence exemption and you may be paying capital gains tax on the portion of the house you have rented out when you sell the property of have deemed disposition.
You should be talking to accountant.
Yeah I'm aware of the capital gains issue. That's OK. But its good to mention for others. I would imagine our reverenced "no capital gains on your primary residence" definitely wouldn't apply here! I bet many people, once they got their operation running smoothly would elect to just keep the property as a lucrative rental and buy another though to do that they would need someone to keep an eye on it. By that time they would probably have one of the renters they could trust with that.

I asked about re-renting as an afterthought. I was also curious about that tax picture. Its something very few people would consider. I called CRA and it was very difficult trying to get someone who understood the concept. Everybody thinks like a machine there: Rental income means you own a house and rent to one family or an apartment building ......nobody there has much creativity. Probably why they're working there!

Say you rent a 3 bedroom house for $1500. Very possible in many Canadian cities (not Vancouver or Toronto of course). But it has living and dining rooms with windows that you can partition and install doors on. They are larger than the typical bedrooms people are getting $500/month for so now you have $1300 extra. Most people would look at that house as 3 x $500 but in reality it could be $2800. If you can find somewhere to put yourself (basement?) you are now living free and pocketing $1300 minus utilities (which are often shared to encourage everyone to conserve). Another option is to get a trailer solely for sleeping in (if your climate allows it like on the coasts this would work) and use a windowless room for a workspace or office. Why not? You can't rent it to anyone!

$1300 (your profit) x 12 = $15,600 which would have very little tax. (Minus your occupancy percentage.)
Last edited by MichaelZZZ on Sep 2nd, 2020 7:17 pm, edited 1 time in total.
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Jun 6, 2014
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Toronto, ON
I have a feeling you know the answers to the questions you are asking.

What you are proposing is a rooming house. Rooming houses are not allowed in many cities.

And no, I don't believe you're allowed to live in a trailer on your driveway. I'm pretty sure the city doesn't allow that either. Not to say the neighbours won't like it at all.
[OP]
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Jan 26, 2020
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Canada
icedtea365 wrote: I have a feeling you know the answers to the questions you are asking.

What you are proposing is a rooming house. Rooming houses are not allowed in many cities.

And no, I don't believe you're allowed to live in a trailer on your driveway. I'm pretty sure the city doesn't allow that either. Not to say the neighbors won't like it at all.
I definitely do NOT know the areas of tax I'm asking about. I'm trying to be pessimistic when looking into this. It helps. :)
Its shared accommodation, not a rooming house, something that many students use a lot. I know the definitions get blurred at times. Neighbors can definitely make your scenario rife with headaches so I'd talk to them first to see how sensitive they are to unusual situations. Some people are fearful of anything unorthodox.

The main thing you have to screen for is alcohol consumption (which always makes people louder and crass) and respect for others; you generally want a quiet person. That's crucial. Some people are just loud: They talk loud, they bang things, just completely unaware of their own sound generation. Those make horrible tenants. I used to manage an apartment building so I'm familiar with screening people and asking indirect questions to see people's reactions to things to get the real answers. People know what you want to hear when you ask simplistic questions as almost every real estate screener does. It takes longer but its far more effective. For people out there screening: The farther away the reference is the more truthful they are likely to be!
As for trailers of course it depends on the city's rules and guidelines. In my medium sized city I see trailers everywhere but most are respectable and decent and not an eyesore. Also it depends how they are positioned. If they are right up beside the house or in the back and out of sight its much better. And you would make zero noise coming and going to that trailer. The key is to be an asset to your neighbors in other ways so they are more flexible with the people coming and going. It also helps to have the main entrance in the back. People make noise coming and going but don't make much noise walking around to the back!

If you own the house egress doors going to small rooms in the basement are a very smart renovation idea. Then you have a private entrance which ups the rent value by about 10% at least. If you can plumb in water for a small kitchenette its another 10%. The less the renters talk to each other the better. The one thing renters like to talk about are the deficiencies of the place they are renting and those conversations are usually in the kitchen! Egress windows and doors can be costly though as a lot of earth is typically moved not to mention cutting the concrete! The egress capital of the world seems to be London where real land is so pricey and people are wanting to maximize every sq meter of their space. Many videos online showing how creative they are over there.
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MichaelZZZ wrote: Trying to minimize tax! I thought my questions were quite specific. One leads to another. A person can practice renting out rooms and managing a property by renting an entire house instead of an apartment. As they get better at it their profit improves and their expenses evaporate so they are living free and putting money in their pocket each month. But if that is taxable it just means its a lot harder. Generally its pretty hard to make more than about 15-25% a month. I would think few people manage to exceed that re-renting. And you have to account for the occasional vacancy and other issues with renting. So the tax can easily wipe out your profit. Is it worth it to live without any expenses - just breaking even and having to contend with everyone? I think for many people it would be worth it because of the control you have over the house. Also, if its a large house there is likely to be some rooms that are unrentable (no window usually) and these could be used for other things by the owner. One could perhaps rent out the space for storage but most people that rent a room don't have much stuff. I just find the whole concept rather fascinating. Who doesn't want to erase their accommodation expenses? Most people spend tens of thousands (while being broke through much of this period!) on rent. Its just money down the drain. If I had known these concepts when young my financial picture today would be vastly different than it is. When I talk about these concepts to young people very few get it. If they can't Google it its not real I guess. Well there are people re-renting but it certainly isn't common.
You think your questions are specific, but you’re bouncing around like a squirrel in a forest of oak trees. From buying to renting to buying and living in a shed in the back to... And you’re apparently trying to educate people on how to maximize their rental income while still asking fairly rudimentary tax questions. You’re talking about renovating and selling, while not mentioning at all your closing costs which will drastically affect your profitability of flipping a house (and ignoring the fact that most tenants wouldn’t chose to live in an ongoing construction zone).

So I have no idea anymore what you’re trying to accomplish.

Another thing you’re forgetting is that most landlords won’t appreciate you running a rooming house out of their house. They would probably try to evict you as soon as they can. You’ll probably also be dealing with more than usual neighbor complaints to your landlord, as well as having to put up living with strangers. And tenants complaining about each other, leaving you as the adult to deal with the squabbling kids. And how many bathrooms do you think your hypothetical 3 bedroom place will have? I’m going to guess 2 at best, which sounds like not too much fun to me. Parking would be a similar issue.

$1300/month profit (which will be taxed at your regular tax rate) to live with a bunch of strangers in overcrowded conditions? No thanks. I wouldn’t even want to rent out my basement while I live upstairs, both in self contained suites. But to each their own...

C
[OP]
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I'm replying right below each point because it works better.
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> You think your questions are specific, but you’re bouncing around like a squirrel in a forest of oak trees. From buying to renting to buying and living in a shed in the back to... And you’re apparently trying to educate people on how to maximize their rental income while still asking fairly rudimentary tax questions.

So maybe just stick with the tax questions or whatever else you know? I think out loud when I write. It flows better. Sorry if you find it confusing.

> You’re talking about renovating and selling, while not mentioning at all your closing costs which will drastically affect your profitability of flipping a house (and ignoring the fact that most tenants wouldn’t chose to live in an ongoing construction zone).

Closing costs? If it wasn't right financially I wouldn't buy it. Same with anything. As for a construction zone, this can be done far more quietly if only one part of the house. Or you go all out and bring tenants in when its finished. I would prefer to do it partly or mostly occupied. In most places in Canada rental demand is strong so its easier.

> Another thing you’re forgetting is that most landlords won’t appreciate you running a rooming house out of their house. They would probably try to evict you as soon as they can.

That's why you only rent from someone who is OK with you having roommates. Not a majority, I admit. But in my city I mentioned it to a young guy and he got 2 houses in a space of 2 or 3 months. The owners know what he's doing and are fine with it as long as there's no damage and the rent gets paid. Same with any owner. Its really that simple. All over any city people are sharing their house, usually with just 1 or 2 people while they occupy the majority of the house. Its not a roomming house with drunks sloshing in and out and throwing up on the sidewalk. You sound like this is odd. Its very common. Its just not common for the tenants to be the majority with the owner living in a small part of the house. That, I admit, is decidely unconventional.

> You’ll probably also be dealing with more than usual neighbor complaints to your landlord, as well as having to put up living with strangers.

Like living with strangers in my apartment building?
I've lived in roommate situations and most of the time people are very peaceful. Its really the only way to live with others. If you're a confrontational type of person it doesn't work. If everyone is quiet the neighbors couldn't care less. I lived in a very posh mansion with 4 other people. We were very quiet, there were ever any complaints. I managed it for the owner for 2 years when they were traveling for weeks at a time. Never a complaint. Its all about screening and evicting people as soon as they are a headache.

> And tenants complaining about each other, leaving you as the adult to deal with the squabbling kids. And how many bathrooms do you think your hypothetical 3 bedroom place will have? I’m going to guess 2 at best, which sounds like not too much fun to me. Parking would be a similar issue.

I can see you have no experience living like this and think it would be horribly uncomfortable. Its not. Yes you have to resolve conflicts sometimes but its not a big deal. It helps if you're a people person. Dealing with adults is a lot easier than dealing with kids or especially teenagers! And people don't spend hours in a bathroom. Most of the tenants were male. We're in and out. Women live best with other women I found. We had a few and I vowed never again. Parking? Most people sharing do not drive. They take the bus and bike. They don't have a lot of money. We had space for 3 extra cars. It wasn't an issue. Plus we had street parking. I think the problems a lot of you are bringing up are because you are envisioning this in the center of your known universe in Canada: Toronto. Well surprise surprise. There is life outside of that city. Sensible life. Profitable life. A life where a young person can get a house and get it paid for in a few years if they treat it intelligently. Then cash out with a wad of cash to invest in something else. For most its more than a 500% return, plus the huge advantage of having no accommodation costs. No stock market can come close to that at their averaged 7% annual return. Of course for this to work a reasonable interest rate for the mortgage is required. Thankfully that's easy now.

> $1300/month profit (which will be taxed at your regular tax rate) to live with a bunch of strangers in overcrowded conditions?

Our place wasn't overcrowded at all. If you were really ambitious it could be I guess. But most houses just don't have the layout for it to be overcrowded because you can't rent out a room unless it has an opening window which are usually bedrooms and there are bathrooms allotted to so many bedrooms. Its called house design. And we know full well that $1300 a month doesn't incur much tax. But I'd wager that most people won't be making anywhere near that after expenses. The point of this adventure is to simply live free and have your tenants pay your mortgage. If you get any profit that's great but it certainly wouldn't be much. In my city where 3-4 br houses in decent areas that are 50 years old go for $200k many people could get into them. In Vancouver or Toronto, of course not. But this is not about them. This is about reasonably priced areas of the country. Basically the Maritimes, many areas of Quebec, the Prairies (except parts of Edmonton and Calgary) and some parts of BC. That's quite a bit to choose from. And most of them have much better air quality and much less noise than Vancouver and Toronto!

> No thanks. I wouldn’t even want to rent out my basement while I live upstairs, both in self contained suites. But to each their own...

So then just stick to the taxes, OK? We all have our mental blocks. But I guarantee you if you were short of funds (as in you didn't have several years of living expenses in savings) and got a quiet tenant that paid on time and was respectful as a neighbor, as most are if you screen them intelligently, you'd ask yourself, "Why didn't I do this sooner? I could have thousands more in the bank if I had!"
[OP]
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Jan 26, 2020
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Canada
Forgot to mention that one key to the renovation aspect is to look for tenants that work construction. Less traveling time for them so they work cheaper. Many construction workers are swimming in debt. So they live free at your place and work for you for the rent and you pay them when the rent has been paid. Just another option.
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Jul 3, 2011
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Thornhill
This is one of the zaniest topics I've seen.

Your logic OP totally ignores all laws relating to occupancy:

municipal zoning - overcrowding and by-law compliance for mutli-units'multi-family dwellings and according to the below

building code - overcrowding, safety, building compliance

fire code - overcrowding, safety non-compliance

It doesn't matter how you try to support the business side of it - that's irrelevant.

What you want to do is not allowed unless you meet zoning, municipal by-law, building code and fire code.
[OP]
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350 posts
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Canada
> municipal zoning - overcrowding and by-law compliance for mutli-units'multi-family dwellings and according to the below

Not sure why you're thinking this would involve overcrowding. How many people rent out their basement? Is that now overcrowded? Do you think municipal inspectors are peering in your windows counting the occupants? Where do you live? Do you realize how many houses have rented out the living room as a bedroom? Is that really that unorthodox? (OK, maybe a little.) Realize for this to work you have to have a layout that cooperates. At least half of house layouts don't. You need to use the living room to access some other room. That doesn't work obviously. You need a layout where things splay out from a hallway so each room is unto itself. Hopefully that makes sense. Like a spider I guess. Maybe only 1/3 of house designs are like that. And if the LR cooperates the DR probably won't. So if you can get 1 or 2 more bedrooms you're doing great. Adding 2 people to a 3 or 4 bedroom house hardly means you're packing them in like sardines. Especially because each room is rented to 1 person only, never a couple. I should have made that clear as well though I thought it was obvious. Maybe not. Couple's talk and argue and bicker. Can't have that! No chit chat! :)

> building code - overcrowding, safety, building compliance

I've mentioned over and over the importance of an opening window for fire compliance. There is no other concerns. Where do you live???

> fire code - overcrowding, safety non-compliance

Yeah, you mentioned that and I answered above.

> It doesn't matter how you try to support the business side of it - that's irrelevant.

Huh?

> What you want to do is not allowed unless you meet zoning, municipal by-law, building code and fire code.

You live in a strange world sir. In my world what I have mentioned is done all the time. A friend of mine knows someone in Vancouver who rents houses from owners and re-rents the rooms to individuals. That's WAY harder than living in them. She has several houses and doesn't live in any of them. How this can be done in overpriced Vancouver is bewildering but she does it. If you can do it in Vancouver you can to it anywhere. I would never attempt this in Vancouver or Toronto or any area that is really high demand. That's obvious. Thankfully the vast majority of the country is fine for this. Reasonably strong rental demand coupled with reasonable land cost.

And a friend of mine here in my city of about a million does it with two houses and he knows nothing about real estate or renting. He does live in one house, the one in the lousier area with the lousier tenants. Was it hard to find an owner that was OK with re-renting? Yeah it made it quite a bit harder to find a good deal. But he did. And it didn't take him long. He's an immigrant and used to hard work. Most Canadians would have given up and thrown their hands in the air in a tiff if they didn't get what they wanted in a week. He persevered.

Anyway, we're meandering from the point of this topic which is taxes. Right?
[OP]
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Jan 26, 2020
350 posts
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Canada
One of the great things of encouraging people to do this is that it increases rental units for the public. Everywhere people complain about a lack of selection and the high cost of it. This would help both. Also a lot more homeowners would find their mortgage much easier to pay if they had tenants. Most people do this by occupying one floor for themselves so they get good privacy. If you're in a relationship this is rather important I would think. If you have kids its far more important. But even this can still work out well financially if its say 3 floors and the basement is decent and rentable. (Think egress doors and kitchenttes!!!)

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