Is Investing in Rooming Houses a Smart Move in Toronto Real Estate?
Introduction
It’s clear that Toronto continues to prioritize “missing middle” projects to create more affordable housing options in our city.
Priority number one was multiplexes in all houses in Toronto, and next up are rooming houses, which are already approved and will be in force in all residential zones in Toronto starting next spring.
So what exactly is changing and are they worth investing in? Let’s jump right in!
What is a Rooming House?
By definition, there are two types:
- A dwelling room means that someone is renting a room that isn’t self-contained but might have a private washroom or kitchen – just not both.
- A multi-tenant house is a building with four or more rooms, with shared bathrooms and a kitchen.
Current Rules and Upcoming Changes
Currently, rooming houses are only permitted in specific zones within Toronto.
But on March 31, 2024, a new set of rules will come into effect will permit rooming houses in all residential zones in Toronto. The number of rooms permitted depends on your location and zoning.
From this map, it looks like the majority of Toronto will allow up to six rooms per house, with some areas closer to downtown permitting up to 12 rooms, and houses on main streets might allow as many as 25.
Now, let’s fast forward to March 31, 2024, and see what’s required to create a rooming house.
- You’ll need a license, and there will be strict building, fire, and health and safety requirements.
- Expect annual inspections from the City to ensure compliance.
- There’ll also be a separate multi-tenant housing tribunal that will enforce these rules, with potentially higher fines.
- Parking requirements have been removed from houses and multiplexes but there could be parking requirements for rooming houses. This depends on your location within the city.
It’s still pretty high level at the moment without actual specifics, but you can get more information here on this new framework from the City if you’re interested.
Rents & Expenses
Currently, multiplex rentals in Toronto offer the best rent yields probably in all of Ontario. You’ve probably heard this before: the more units you divide a house into, the higher the rent yields and because Toronto allows up to 5 units in a house, the rent yields end up outperforming the rest of Ontario which typically allows up to 3.
But the difference here is that rooms aren’t self contained and so they actually have a discount compared to multiplexes. So how do the numbers actually compare?
Let’s take a look at a house with 6 rooms, 2 on each floor.
If we make this into a multiplex, you’d have 3 units, with 2 bedrooms each. At current market rents, you can get around $2,800 for the top two units and $2,200 for the basement.
If you make the same house into a rooming house, you’d need $1,400 per room on the top two floors to break even and $1,100 per room in the basement and you’re probably not going to get that.
So just from the rent side, there’s already minimal benefit to making it into rooming house.
Costs will also go up for rooming houses:
- Not many insurance companies will insure rooming houses, and the few that do charge a lot more.
- Managing 6 separate leases is a lot more work. And if you don’t want to do it, it will cost you a lot more for property management too.
- Getting a mortgage might also be a problem. Banks don’t like rooming houses, so you might have to resort to other lenders and that’s going to bump up your borrowing costs.
Other Considerations
Let’s also touch on values. When you convert a house into a multiplex, it’s possible to see a bump in values based on cap rates. But there’s generally a smaller pool of investors who would choose to invest in rooming houses and you end up getting lower cap rates than a multiplex, I’d say that values are probably also lower than multiplex conversions.
At the end of the day, it seems like a like more work and money to create one but there’s probably less value add compared to a multiplex conversion.
The last thing are rent controls and I don’t have a concrete answer here. However, the city’s new framework does highlight the desire to maintain affordability for rooming houses.
Even though current rent controls only apply to units created before November 2018, I wouldn’t be surprised to see stricter rent control rules for rooming houses since they are intended to be the most affordable housing option for Toronto residents.
The bottom line from us is that this is definitely opens up another real estate investment option for Toronto and reinforces the better growth potential for the Toronto freehold space. But if you’re looking for fewer headaches and potentially better returns, we’re recommend sticking to multiplex conversions.
How We Can Help
You’re watching this probably because you want to really understand your options to make better investing decisions. And if you need help to weigh your Toronto real estate investment options, you reached the right team.
We’re a real estate sales brokerage that focuses on investing in freeholds in Toronto, and we’d be happy to chat. Just head over to the link below to book a Zoom discovery tour with us!
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