Toronto Triplex Face-Off: Turnkey, Top-Up, or Single Family Conversion – Which Offers The Best ROI?
Now that our City of Toronto is permitting every house to be turned into a multiplex of up to 4 units, it opens up a lot more investment options for us to consider.
Should you buy a ready-to-go triplex, or opt for a smaller and cheaper house that you can renovate yourself? Or perhaps, maybe you can consider going with a big enough single family home that can be more easily converted into a triplex without making the house bigger.
Making significant changes requires more money and time, but there’s also potential for value add returns. But what option actually makes the most sense in terms of return on investment?
In this video, we’ll do some high level comparisons to find out the answer. So if you’re curious about this, stick around and let’s start weighing our options.
Bungalow + Top-Up
Let’s dive right in with the first option. Let’s say you buy a smaller bungalow for $900,000. It’s not enough to be a triplex so we’ll need to top up. Let’s say it costs around $500,000 to do all the top up work needed and so the total cost of the new triplex is $1.4 million. Market comps tell us this home is worth $1.8 million. Great! We’ve just added $400,000 of value by doing the top up.
But let’s look at how much money is needed do so something like this. To buy the house with a 20% downpayment plus closing costs, that comes out to around $210,000. Then we’ll also have to fund the build which is another $500,000. So all in all, we’re looking at $710,000 of investment capital to get all this up and running.
From the returns standpoint, a multiplex might generate better than market cap rates at 6% plus a conservative 3% annual appreciation. So if we take everything including value add returns into account, the 5 year total returns are an impressive $976,000 and that’s 100% ROI based on our $710,000 of investment capital.
This is great, but it’s realistically is very tough to come by.
A turnkey triplex ends up being more expensive to buy, but because you can fund more of it with a mortgage, it actually turns out to need less capital upfront.
Based on a 20% downpayment plus closing costs, you’re looking at $420,000 of investment capital. It’s almost $300,000 less than the top up.
You might get similar cap rates and appreciation so in 5 years with rough math, that’s $432,000 of total returns on $420,000 of capital. In other words, that’s 101% in ROI.
So it’s actually pretty interesting here. The absolute returns are obviously better with the top up, but a ready-to-go triplex ends up being a very good use of capital as well. You don’t get the value add, but you need much less capital and so this is actually a great option with a much lower barrier to entry if you’re looking to get a triplex rental.
Converting A Bigger Single Family Home
Now let’s look at the third option: something in between. The reality is that builds like top ups are very expensive and might not actually be the best use of money.
What if you manage to find a single family house with a big enough from that’s already suitable to be a triplex. You’d still have to go through the process of converting and renovate it into three units, but a bulk of the heavy lifting with the construction is already done and financeable.
Let’s say something like this is on the market for $1.3 million. You’d still have to put in $200,000 in upgrades, which makes your total triplex cost total $1.5 million. The value is $1.8 million so you make $300,000 in value add returns, which is actually really good still.
With cap rate and appreciation over 5 years, the total return is very attractive at $812,000, and you ended up putting less capital than the top up at $500,000. So from an ROI standpoint, this option ends up giving the best results with a 5 year ROI at 160%!
So running through this example, there are a couple of key lessons learned.
1. Not all sweat equity is created equal. Just because you’re putting more capital upfront doesn’t automatically translate to better ROI. The key is to find the best balance of capital and value add, and in this case, taking on interior alternations instead of increasing build form ends up being a much better use of money.
2. On the other hand, turnkey investments are actually great investments too. There’s less money, work and risk involved and you end up with a very stable, high cash flowing investment with much better returns compared to many other investments.
How We Can Help
With the new multiplex changes, you might be looking into homes that can do what we described but don’t know where to start. Well… that’s where our team comes in.
We’re a real estate sales brokerage focused on low-rise real estate investing opportunities in Toronto, and we’d be happy to help you out with the search and also give you advice on how to get it down. Just contact us to book a time to chat privately!
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