- Does the apartment idea make sense for you?
- Will it pay for itself?
- There are some “hidden” costs.
- Are there building code or permit requirements?
- Is there someone I could talk with who’s built and rented an apartment in their home?
- How the project might proceed.
- Weatherization help
- Financial resources
- Designing the apartment
- Finding and working with a contractor
- What kind of tenant
- Screening applicants
- What rent to charge
- Section 8
- Being a landlord
Does the apartment idea make sense for you?
Putting an apartment in your home is a large project. And being a landlord requires attention. So you shouldn’t decide to go ahead without thinking about what will be involved.
Will it pay for itself?
Construction costs of our projects have ranged from $8,000 to $45,000, depending on the amount of work involved. For rental income to repay that cost can take anywhere from two to five years. Having an apartment is likely to increase the value of the house. But it may not – it depends on what a buyer wants. So you shouldn’t make an apartment in your home if it’s likely that you’ll move in the next few years.
After the cost of creating the apartment has been recovered, net rental income typically pays the majority of the property tax.
To help you think about whether it will be worthwhile to create an apartment we have made a budget worksheet. You can use it to estimate the apartment’s income and operating costs and then see what your net income is likely to be.
There are some ‘hidden’ costs.
Having an apartment may increase your insurance cost. You should check with your insurance agent. (You are not responsible for insuring a tenant or their belongings. But you should encourage them to buy tenant’s insurance, which is quite cheap.)
Because of Vermont’s ‘homestead tax’ law an apartment may be taxed at a lower or higher rate than the rest of your property. It will depend on what the rates are in your town. However, any difference in the total tax bill is likely to be small.
Your property tax will increase some if your town decides that the apartment has increased the property’s value.
And the income you get from the apartment is taxable. However, the apartment’s share of every cost of owning and operating the property is deductible from your income: its share of insurance cost, property tax, fuel, repairs, etc.. So suppose your annual rental income from the apartment is $7,200 and your income tax rate works out to 15%. Then the added tax you will owe is 15% not of $7,200 but of $7,200 minus all costs attributable to the apartment. If those costs — of insurance, taxes, fuel, etc. – totaled $3,200, then the apartment would increase your income tax by 15% of $7,200-minus-$3,200, or $600. [note: Those $3,200 of costs don’t really reduce your net income from the apartment by $3,200 – because what you’re doing is assigning to the apartment, for tax purposes, a share of many of the costs you’d be paying anyway. If the apartment weren’t there, in other words, you’d still be paying much of the $3,200 for fuel, snow removal, insurance, general maintenance, etc..]
Are there building code or permit requirements?
Vermont code requirements for an apartment in your home usually are not a serious obstacle. We’ve outlined a few of the basic requirements you should comply with — about means of escape, smoke alarms, etc..
Construction permit and “accessory apartments”: If the apartment you’re proposing fits the State’s definition of “accessory,”* no State construction permit is required. But it makes sense to call your Town Clerk or fire department, ask if there’s a building or fire inspector and, if there is, get them to look with you at what you plan to do. If the proposed apartment does not qualify as an accessory apartment, you will need to get a construction permit from the State before starting work. That requires submission of an accurate plan of the altered building with an application and fee. In Brattleboro helpful guidance is available from Assistant Fire Chief Peter Lynch (254-4831). If you’re elsewhere in this area, you should talk with the Department of Public Safety’s Springfield office (802 885-8855).
* VT statute defines “accessory dwelling unit” as one that:
- is within or “appurtenant to” an owner-occupied house. (It may be within the existing house, in an addition, in an outbuilding or in a new building);
- is “clearly secondary to the owner-occupied house”;
- is not larger than 30% of the floor area of the house;
- includes a bathroom, bedroom or sleeping area, and kitchen or kitchen area;
- if it’s not connected to a town sewage system, the property has the capacity to handle the additional wastewater.
Approval of water and septic systems: If the property is on Brattleboro town water and sewer, this part is easy. But because the added apartment may change their metering, you should inform the Department of Public Works at 254-4255. If the property is not on town water and sewer and the proposed apartment would increase demand on your water supply or septic system, then approval of the State Agency of Natural Resources will be required. You should call their Springfield office at 802 885-8883.
Zoning permit: In Brattleboro and Bellows Falls, a zoning permit is required. It is not a difficult process. You have to fill out a form and submit a small plan of the property along with an application fee. Provided you’re not enlarging a building, there should be no problem. And we can help you with the application.
Is there someone I could talk with who’s built and rented an apartment in their home?
Yes. Several of the people we have worked with would be glad to talk with you about their experience. (Just be sure to call at a reasonable hour and ask if they’d rather you called back.)
- Caleb & Laura Clark 917-703-5580
- Maureen Hart 579-8572
- Tammie McDonald 257-4729
- Margie Serkin 257-1515
- Eva Shelby & Lawrence Williams 802-558-5688
- Noreen Shippee 251-7272
How the project might proceed
In Windham and Windsor counties excellent weatherization help is available to eligible homeowners from Southeastern Vermont Community Action (SEVCA). Eligibility depends on family income.
SEVCA will first do an energy audit of your home to decide what work is needed. The work their trained crew will then do may include insulating walls and attic, and caulking and weatherstripping doors and windows. The program has saved many homeowners thousands of dollars in heating costs.
For more information call SEVCA at 800 464-9951.
The weatherization program is funded in part by the US Department of Energy. Similar programs are available in other parts of Vermont and the US.
Usually, homeowners have needed to borrow part of the money needed for the work.
If you are in Brattleboro, the Town’s Rental Housing Improvement Program may help with a low-interest loan. Loans may be from $3,000 to $25,000 and for five to ten years. The interest rate is half whatever the Prime rate is at the time the loan is approved but not less than 3%. There are some requirements. And the application process is a bit complicated. But we can help you with it. For information, call 251-8122.
Designing the apartment
We have worked with homeowners doing all kinds of apartments: on second floors, parts of two floors, in hillside basements, garages, a barn and a new building. They’ve ranged from amazingly compact ‘micro-apartments’ to spacious one-bedrooms.
Sometimes an owner is able to sketch a good plan for the apartment, and we’re able then to get a builder we work with to give a rough preliminary estimate of cost. And the owner is then able to modify the plan, if necessary. In a more complicated project it is impossible to estimate cost until a more detailed plan is done.
If design help is needed and the house is in Brattleboro, we sometimes are able to arrange for help from the Architectural Drafting and Design program of the Windham Regional Career Center. See box at Steps and Requirements.
Finding and working with a contractor
Sometimes, especially if they have experience with such projects, an owner will act as general contractor. They will hire a carpenter, plumber, electrician and others and coordinate and supervise the work. But, if you’re not experienced with such projects, it is wiser to contract with a general contractor and leave it to them to hire and supervise other trades as sub-contractors.
Reputation is the best guide in choosing a general contractor. And availability – good ones often are booked well into the next year. So you should start looking early – as soon as you have even a rough idea of the project. Talk with other people in the area who’ve had similar work done. Was the contractor competent, did they have useful ideas, did they hire good sub-contractors, did the work keep moving and get done roughly when they’d said, was the cost close to or less than their estimate, and were they nice to work with?
If you’re in the Brattleboro area and want suggestions, we can provide a list of some general contractors, electricians and plumbers, septic engineers, painters and others whom we believe to be competent and reliable. But the list isn’t guaranteed, and there are lots of good builders and tradespeople who didn’t happen to get on the list.
When you’ve decided who might be good, call them. Explain what your project is. If you don’t already know, ask if they have experience with this kind of job. And ask when they’d be able to start.
As soon as you have a clear idea or preliminary plan of the apartment, ask the contractor to come and look at the project with you. If they’re interested and seem good, ask them to put you on their calendar.
You should also ask them for references: two or three homeowners or others they’ve recently done work for. You then should call those people and ask about their experience with the contractor, including whether, if they had more such work, they’d hire her/him again. If possible, arrange to look at the work they did.
As soon as a final plan is available from you or the Career Center, or you’ve developed a plan with the contractor, ask them for a bid stating costs of main components of the job and the costs of any optional, extra features. (Up to this point the contractor is working without charge. They expect to spend unpaid time preparing bids on possible jobs in the hope that they will materialize.)
(You may have decided to go through the process to this point with two contractors, so that you can compare them and their bids and choose the one you prefer. In our experience, though, it has seemed best to be very careful in choosing a contractor and then stick with them. The person you’ve chosen will do a better job of working with you and preparing a bid if they feel you have confidence in them and are likely to give them the job.)
Have a detailed discussion with the contractor about the bid and ask if there are any ‘hidden’ costs that might arise. Be clear about the schedule and the materials to be used. (Often good recycled materials can be found: lumber, doors, windows, hardware, etc.. An excellent source in our area is RENEW (246-2400). Be clear about what things you will buy on your own: appliances, light fixtures, or etc..
You probably should ask for evidence that the general contractor has insurance for workers compensation and liability. Make sure it’s clear what kind of warranty they’re providing for their work and materials – commonly for one year after completion. Be clear about clean-up at the work site – during construction and at the end. Be sure there’s agreement on howpayments to the contractor will be scheduled. (Most contractors expect to be paid a small part of the agreed-on price for the job before beginning work. That is to enable them to buy materials — and to ensure that you’re committed to the project. The balance of the price is commonly paid in installments: when the contractor certifies that perhaps a quarter, half and three-quarters of the work is complete. It is common to withhold something like 10% of the price until after the contractor certifies completion, to ensure that “punch list” work gets done.)
All these understandings should be written in a careful contract, signed by both you and the Contractor. (See “sample contract”) It also makes sense for you both to sign the final plans for the apartment, so that there’s no confusion later about the work that was agreed on.
Once the work is under way, you should monitor it – without being a nuisance! – to be sure it’s being done right and turning out as you expected. If you want something changed or added to what was agreed on, be sure you and the contractor are clear on how that will affect costs.
After the contractor says the work is done, go through the apartment and work site very carefully by yourself to make sure that everything is as it should be. Is there a scratch on a window pane, is a switch-plate missing, were closet shelves built in the way that was planned, is there debris outside that should be removed, etc.. Write down carefully on a “punch list” everything that needs to be completed or corrected. Then arrange to go through the job with the contractor, making sure there’s agreement on what remains to be done. The final installment of your payment for the job – commonly 10% – should not be paid until all punch list work has been done.
What kind of tenant?
People who have an apartment in the home they live in are free to rent, or not rent, to whomever they choose.
Before accepting inquiries you should consider what you are looking for in a tenant. Being clear about what you want may influence how you go about looking for the right person. If the apartment is on your second floor, for example, noise may be more of a concern than if it’s over a detached garage.
There are many ways to go about finding a good tenant: word of mouth, fliers or bulletin boards, newspaper ads, etc. Whatever method you choose, be sure to screen applicants carefully before you offer a lease.
When you first talk with a prospect (usually on the phone) be sure they understand what you’re offering — is there parking, are there laundry facilities, will you allow pets, etc. – as well as what the rent will be and whether it includes utilities. (Homeowners we’ve worked with have found it simplest to include all utilities in the rent rather than get into separate metering. But it is wise to include in the lease a provision allowing you to impose a surcharge if the tenant installs equipment that is an unusual drain on utilities (for example, an air conditioner.)
If a person seems like a good prospect, ask them to complete an application. Then:
- Call the people they list as references and press them politely for information about your applicant. Ask whether, if they had an apartment, they would rent it to this person.
- Check the applicant’s history with previous landlords. Especially ask if they would rent to this person again.
- Check for a criminal record or civil violations. It’s much better to do this before renting to someone than to learn about their history later. Information is available from court clerks’ offices. Where to look in Windham County and questions you should ask.
You may decide to rent to a person despite a not-so-good reference, a past credit problem or even a criminal record. But, if you’re doing that, you at least should know it.
What rent to charge?
We do not set rent limits. But a purpose of the program is to create apartments affordable to people with low or moderate income. So the projects we will assist are those that produce apartments modest in size, design and finishes.
What rent you should charge is hard to say. It depends so much on an apartment’s location, size, lay-out, access and the nature of the property. And whether there’s on-site parking and separately controlled heat. And the quality of the kitchen and bath. And how nicely it’s finished: floors, walls, lighting, windows. One 1-bedroom apartment might reasonably rent for $1,000, another for much less.
It is easier to say what a prospective tenant is likely to be able to afford. An accepted ground-rule is that a household should not pay more than 30% of their total income for an apartment (utilities included). So here are some maximums based on a tenant’s household income:
Affordable Rent Based On Tenant’s Income
You may have an applicant who comes with a Section 8 voucher.
Section 8 is a federal program that helps low-income individuals and families afford apartments. If their income qualifies them for a Section 8 voucher, they may take it to any landlord who has an approved apartment. If the landlord accepts them as a tenant, they will pay 30% of their income for rent and the government will pay the landlord the balance.
This is an important program for helping people deal with the shortage of affordable housing. And it can also help a landlord by guaranteeing a large part of the rent.
Section 8 can be used only in approved apartments. So, if you might be interested in participating, you should talk with your local or state housing authority (in Brattleboro 254-6071). They will send someone to inspect your apartment to be sure it meets basic standards of safety and habitability. If it does, and you want to participate, the housing authority will sign a contract with you that assures you of the rent subsidy payments.
Having your apartment approved for Section 8 doesn’t mean you have to accept a Section 8 applicant. You still are free to rent to whomever you wish. And accepting a Section 8 applicant could limit the rent you could charge. The government sets rent limits (“Fair Market Rents”) for every county every year. Limits differ depending on the number of bedrooms. The government normally won’t subsidize rents higher than the ‘FMR’s. So, if the current FMR for your apartment is $692/month including utilities, and the tenant, based on their income, pays $300, the government won’t pay you more than $392. (However, you may charge more than $692 if the tenant is able and willing to make up the difference.)
For your protection and your tenant’s, there should be a written lease. For a possible model, see Sample Lease form.
For tax purposes and so that you’ll know how your investment in the apartment is working out, you should keep careful track of rental income and expenses.
Expenses you need to keep track of are all those that are attributable partly or entirely to the apartment. Usually they will be the expenses listed on our budget worksheet.
That information and documentation for it are essential for completing the required IRS form: Schedule E (see below).
All landlords are required to file Schedule E with their tax return. Part I is probably the only part you’ll need to complete. If you’ve kept good track of all the expenses that are on our budget worksheet, you’ll have no trouble with Schedule E.
Vermont landlords are also required to complete State form LC-142, ‘Landlord’s Certificate’, and give it to the tenant by January 31. It enables the tenant to get credit for the portion of the landlord’s property tax that probably was paid by the tenant in their rent. If the form is not included in the State’s tax booklet, call 866 828-2865 and they will mail you a copy.
Being a landlord
If things go well – and they generally do – you’ll have a problem-free, hopefully enjoyable, relationship with your tenant. And the clearer you both are about your rights and responsibilities, the happier things will be.
In Vermont there is an excellent booklet called Renting in Vermont, published by Vermont Tenants Inc.. We will give you a copy. It gives clear and fair explanations of pretty much everything you and your tenant need to know about landlord-tenant law and relations. (It’s a good idea to give your tenant a copy. We sometimes have extras available.)
In case you’re unclear about the law or a problem develops during your first year as a landlord, we provide a hotline to a professional property manager. They can be reached by calling Byron at 257-4691.