Investing In Toronto Laneway Suites & Garden Suites: What Toronto Real Estate Returns To Expect!
With interest rates so high, you probably agree that strong cash flows are important for investors. And when we talk to clients, we sometimes get asked about how the numbers work if we were to build a laneway suite or garden suite in the backyard to boost rental income.
If this is something that’s on your mind too, keep reading!
Laneway Suite and Garden Suites
In Toronto, there are two ways that you can go about building a house in your backyard. If you have a laneway, you can build a laneway suite, and the entrance to that house would face the laneway and this was the first program that was rolled out in Toronto to all neighbourhoods starting 2019.
But there are over 400,000 low-rise homes in Toronto, and only 47,000 homes have access to these public laneways, and not all of these meet size and fire requirements. So as you can see, there’s not that many houses that can actually do this.
We have a housing crisis in Toronto, and this is a great way to build additional housing so our city ended up rolling out a similar program to more houses. So as of July of 2022, as long as you have a big enough backyard and meet fire requirements, you can build a garden suite in your backyard even if you don’t have a laneway. And this opens up a lot more opportunities nowadays.
Rental Income, Cash Flows
Backyard houses make a lot of sense for investors who want cash flow, because you’re creating more livable space which will bump up your rental income.
But the other part of why this makes a lot of sense is that backyard houses can actually help with growth in the future. And to explain this, let’s look into cash flows a bit more.
If you have a main house with two units, you might get a bit of positive cash flows at the end of each month, after you pay for your operating expenses and your mortgage. Now, if you build a two-bedroom house in the backyard, it can rent for at least what a two-bedroom condo is going for and likely even more since renters are likely to be able to pay a premium for their own house and backyard access, just like towns.
But we’ll stay conservative with condo rents at around $3,300 today. This house can be separately metered so your tenants pay for their own utilities. And as of now, we haven’t seen a bump in property taxes yet. So even if we budget $150 extra in operating expenses, we’re still left with $3,150 in extra rental income each month.
Now the reason it’s harder to borrow money these days is because stress test rates are so high. On a main house with two units, even if it was actually cash flowing positive at actual interest rates of 5.5%, you definitely wouldn’t be when stress tests are at 7.5%, which takes you pretty negative according to the bank.
But after you build a house in the backyard, it does improve stress test numbers pretty drastically. You’re definitely cash flowing positive at the purchase price with the stress test rate, still cash flowing positive including build costs, and even cash flowing positive at a price higher than that, which will be a game changer for you if you’re looking to refinance and grow your real estate portfolio quickly.
Costs, Time, Value Add
f you’re looking to build a laneway suite or garden suite, you would need quite a lot of money and time. As of today, it costs around $300 to $400 per square foot to build one of these, and it takes around 1 year from start to finish. So if you were to build a typical 2-bedroom backyard house that’s around 1,000 square feet, it’s probably going to cost you around $350,000.
The bigger unknown is how much these properties with a backyard house will be worth after the build. Honestly, most people build these to hold, and since most projects just finished being built in the past year or two, there are just not enough comps out there for us to give you a concrete answer.
The property should be worth at least how much you put into it, but likely more. And we can try to value it based on cap rates, which is a method that many real estate investors use to value properties. Basically, you can try to extrapolate the value of a rental property if you know the annual NOI and the market cap rate. And the higher the cap rate, the lower the property would be valued.
Toronto multifamily homes have a 5 percent to 5.5 percent cap rate these days. So if we go with the higher 5.5 percent, a house with a monthly NOI would be worth $687,000, which means you got a $337,000 value add. If we use an even higher 6 percent cap rate, that would be $280,000 of value add.
Now if you ask us for the value post-build, you’re also asking us to predict where market prices will be at least one year from now, which nobody really knows, especially in this more volatile market, so all of these factors make it much harder to pinpoint a post build value. What is certain is that your rental income and mortgage ratios will improve, and usually doing your own builds will give you an element of value add, which does help you build your wealth more quickly.
How We Can Help
The final thing to know is that not all properties qualify for a laneway suite or garden suite in Toronto, because it still depends on things like size and fire requirements. If you want to do the research on this yourself, the best thing to do is to check out the City of Toronto’s by-laws and rules, or you can also head to our blog post with more details on what’s required.
And if you’re looking to buy a new property with laneway or garden suite potential, the easiest way is to connect with our sales team to put you on the right track. We’re a real estate sales brokerage that focuses on investing in houses and multifamily homes in Toronto.
When you work with us, we take the time to understand your needs, teach you the ropes, show you these deals, crunch all the numbers, and eventually help you buy the best one for you. But that’s not all. Our team also provides renovation guidance, leasing, and property management if you need it. So, just connect with us if you want to learn more about our services!
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