This is for educational purposes only; it does not guarantee future performance or serve as financial or tax advice.
When it comes to multiplex conversions, one of the most common questions investors face is whether to go for a duplex or triplex conversion. Both options can be lucrative, but which one is the best fit for your investment strategy?
Whether you’re looking to maximize cash flow or resale value, understanding the differences between 2-unit and 3-unit conversions will help you make a smarter decision. Let’s break it down!
Ontario Building Code: 2-Unit vs. 3-Unit Conversions
One of the first factors to consider when deciding between a 2-unit (or duplex, or house plus secondary suite) and a 3-unit (or a triplex) conversion is the Ontario Building Code.
For 2-unit conversions, there’s more flexibility when it comes to ceiling height. A lower ceiling height of 6’5” (1.95m, Section 9.5.3) is generally acceptable for 2-unit conversions, which means you can often skip the expensive process of underpinning the basement to meet the 6’11” (2.3m) requirement for a 3-unit basement.
Additionally, egress requirements are simpler for 2 units. Most houses already have two doors, which is usually all that’s required. If you’re adding a basement unit, you can use shared egress, where the second exit can be an escape window. This is more cost-effective than adding a dedicated exit for the basement unit, which is a requirement for 3+ unit conversions.
Egress Window Requirement For Basement Units In 2-Unit Conversions In Ontario
HVAC systems also tend to be easier to modify, as there are fewer units to accommodate, meaning fewer adjustments are needed to meet air flow and fire safety standards.
Faster Permits for 2-Unit Conversions
Time is money in real estate, and 2-unit conversions have the advantage here as well. These conversions qualify for express building permits, which usually takes about two weeks. In contrast, 3-unit conversions can take one to two months to get approved.
Additionally, 2-unit conversions are typically simpler, and you may be able to bypass zoning reviews, which further accelerates the process. If you’re looking to minimize holding costs and get your project moving quickly, a 2-unit conversion is often the better choice.
Projects That Qualify For Toronto Express Building Permits
Source: City of Toronto
Comparing Costs and Cash Flow: 2-Unit vs. 3-Unit Conversions
When it comes to costs, the difference between a 2-unit and 3-unit conversion isn’t massive, but the potential for cash flow is where things get interesting.
Here’s an example:
For a 2-unit conversion costing $140K, you might expect to rent out the units for $3,600 and $1,700, respectively. After accounting for operating expenses, this would give you a 4.5% cap rate on a $1.14M project.
With a 3-unit conversion costing $170K, you could rent the units for $2,500, $2,500, and $1,700. After operating expenses, this would result in a 5.7% cap rate on a $1.17M project.
With a higher cap rate and more cash flow, refinancing becomes easier. This means you’ll be able to qualify for a bigger loan and still maintain positive cash flow, making it easier to carry additional projects like building a backyard house or investing in your next property.
Value-Add Potential: 2-Unit vs. 3-Unit Conversions
Value-add potential is another important factor when choosing between a 2-unit or 3-unit conversion.
A 2-unit conversion tends to attract a broader audience, including both end users and investors. In a hot market and a desirable neighbourhood, 2-unit properties can command a higher resale value, and better value-add returns compared to 3-unit properties, which tend to be more investor-driven.
Investors generally focus on cap rates and returns, so a 3-unit conversion might not fetch as high a price as a 2-unit property in the same location. That said, if you’re targeting investors, a 3-unit conversion could still provide a better risk-adjusted return based with stronger cash flow potential.
Accessory Dwelling Unit: 2-Unit vs. 3-Unit Conversion
If you’re planning to build an Accessory Dwelling Unit (ADU) like a garden or laneway suite on the property, a 2-unit conversion might give you a slight advantage. The setback requirements for an ADU are more forgiving with a 2-unit property.
A 2-unit plus ADU one-storey conversion requires a 4-meter setback, while a 3-unit plus one-storey ADU requires a 5-meter setback.
The smaller setback requirement for a 2-unit main house gives you the flexibility to build a larger ADU at a similar cost—or in some cases, it can determine whether an ADU is even feasible. A larger ADU means higher rental income and better long-term cash flow.
Single Storey ADU Setback Requirements For Up To 3 Units On a Property
ADU Setback Requirements For More Than 3 Units On a Property
So, Which Is Better: 2-Unit or 3-Unit Conversion?
The decision between a 2-unit and 3-unit conversion ultimately depends on your investment goals.
If you’re house hacking or looking to focus on value-add in a neighbourhood where a larger main unit with a basement apartment is in demand, a 2-unit conversion could be the better option. It’s simpler, faster, and in a hot market, you could see a higher resale value.
However, if your goal is to maximize cash flow or build a laneway house, a 3-unit conversion might be the right choice. With a better balance of cash flow and value-add potential, plus the ability to carry the cost of an ADU build with more units, a 3-unit conversion offers stronger long-term returns.
How We Can Help
Both 2-unit and 3-unit conversions offer great opportunities for real estate investors. Understanding the pros and cons of each will help you choose the best option for your investment strategy. If you need help deciding which route to take, let’s chat!
Here’s what it’s like to start as a client with us:
- Initial Consultation: We’ll talk with you to understand your needs and teach you how to invest wisely in Toronto real estate.
- Market Search & Purchase: We’ll search the market to find the perfect property for you.
- Renovation Support: If the property needs renovations, our trusted contractors are ready to help, and we’ll coach you as you manage the project.
- Leasing and Management: If you need help renting out and managing your property, our leasing and management team is here for you.
Ready to get started? Click on the link below, and let’s start working together!
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