Tour One Of Toronto's Newest Laneway Houses In 2023! (Plus Investment Costs, Cash Flows & Returns)
Introduction
We’re going to walk you through a brand new two-bedroom laneway suite that we just finished building here in Toronto. This property was bought in the summer of 2021, and despite prices coming down since then, it’s managed to hold its value pretty well because of upgrades to the main house and the laneway suite build. We’ll take you on a tour first and then walk through the numbers and details back here after.
Size & Exterior
This is the laneway suite! First off, you’ll notice that the building spans the entire width of the lot, and that’s a pretty big benefit of laneway suites. Even though you can build a house in the backyard without a laneway nowadays with garden suites, you can only build around 80% of the frontage, so you might not get as big of a build with that.
Next, let’s talk about the exterior. Here we went with a fibre cement panel cladding and a composite wood accent. There are various choices for exteriors, and metal cladding can be just as durable and cost-effective, but aesthetically, we like the look of this, especially with the wood-looking accents, and honestly, going with one exterior trade simplifies the build process as opposed to coordinating with different exterior guys that each only handle brick, wood, metal, or composites. Now let’s head inside.
Main Floor
It’s not a huge house at just under 950 square feet, and so we needed to maximise usable space for rental purposes. We knew we wanted 2 bedrooms and at least 1.5 baths, and we managed to squeeze it all in. According to our HVAC tech, this is the smallest HVAC room he’s ever worked on, but they all fit. On the main floor, we also installed a full-sized washer and dryer as well as a powder room.
Because the space is small, we wanted to go with a light colour palette and an open concept to make the space feel bigger. We went with lighter-toned vinyl flooring and a minimalistic modern kitchen complete with a kitchen island so that we could maximise living space on the main floor. We chose glass instead of wood rails for the stairs. You can’t have windows on the sides, so we added huge windows on the front and back of the house, plus 2 skylights, which definitely helped to bring lots of natural light into the space.
Second Floor
Backyard
It’s winter, and it’s a bit too cold to finish up the backyard right now, but closer to the spring, we’ll be working on the backyard, and it will be a shared space between the main house tenants and the laneway suite tenants, and that’s it. I’ll head back to my desk and run through the numbers with you.
Cost & Cash Flows
The property closed in the fall of 2021 and then we did a $60,000 renovation to the main unit in the house so it can be rented out for $3,400.
We kept the basement vacant because we needed access to connect the plumbing and utilities. At the time, interest rates were low, so even with the main house, it managed to pretty much carry itself, which made it much easier to work on the build in the laneway.
Next, we started the laneway project at the beginning of 2022. From start to finish, it took around 1 year to get done and cost close to $400,000 in soft and hard costs combined. Once the basement is done, which costs another $35,000, the total capital costs for this entire property come to around $720,000.
The laneway suite will rent for $3,000 per month and the basement 2-bed unit will rent for $1,800 per month. All in all, the property will be a huge cash cow with cash flows of $3,100 per month.
Post-Build Value & Refinancing
Now as real estate investors, I’m sure you’re also interested in return on investment, how much the property is worth now, and how much equity you can pull out so it’s not stuck in the property. Because the construction period is at least a year long, how much the property can be refinanced for post-build can swing one way or another simply based on big swings in market price.
Let’s take the base case first, where the market stays pretty stable. In this case, the new value should be worth at least the purchase price plus build costs, which would bring the value to $1.45M.
The thing is, this property was bought in the summer of 2021, and prices have fallen around 10% since then. And because of the downward adjustment to market prices, the market price plus build cost ends up being closer to $1.35M.
On the other hand, doing the build yourself usually means you also gain an extra bump in value, and that’s sweat equity put into action, and the refinanced value can be pretty much in the hands of the individual appraiser that you get assigned to.
Right now, we’re getting appraisals that come in close to $1.45M, and so the difference would be the value-add gain from doing the build. We’ve also seen banks appraise properties based on market cap rates. In this current market, I’d go more conservative at a 6% cap rate (market cap is closer to 5% right now), and that would be a value of $1.44M, which is just slightly higher than what the actual appraisals are coming in at.
If we go back to the bank to refinance the property at $1.45 million, we’d be able to free up $400,000 of equity, and the property would still be cash flow positive at $1,000 per month.
How We Can Help
As you can see, putting in major value-added work helps to cushion the effects of the downturn in the short term. At the end of the day, value-added work usually gives you better rent yields and better appreciation in the long run.
But of course, this type of active return on investment does require a lot more capital and experience, so it’s not for everyone.
If you’ve done some renovations before and you’re ready to look into a project like this, let’s chat. We’d be happy to share more about these projects and help you figure out if they’re right for you.
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