When converting their single family properties to contain second suites, unquestionably the goal of my investor clients is to create greater cash flow by having 2 separate units each bringing in revenue.
However, there may be other beneficiaries later on that haven’t been considered yet that can benefit all parties involved.
A second suite renovation can have a greater financial impact compared with another more typical major renovation. The former may appeal to a larger market, whereas the latter may only appeal to a particular segment.
For instance, a beautifully renovated home with a brand new large deck and a home theater will likely only appeal to a rich household who can afford it. On the other hand, a beautifully renovated home with a second suite will appeal to a rich household, as well as other segments of the market.
This broader appeal gives the home much greater flexibility regardless of the market conditions, and will translate to a higher price later on.
As we alluded to earlier, the initial investor is the first beneficiary of a legal conversion. If you're doing the heavy lifting of going through the legal conversion process, you rightly deserve any cash flow that is gained initially through the process.
Even if it’s your own principal residence, as soon as you add a second suite, the property immediately turns from a liability into an asset.
And if the property is strictly an investment, that asset gets amplified.
Let’s use a very rudimentary example. Say you purchased a $400,000 home, and rented out the entire home for $2000 a month. You're probably looking at breaking even on a monthly basis or very little cash flow. Contrast that with the same home renovated with a second suite, you'd probably be able to rent one unit for $1600 and the other for $1200, giving you a total of $2800. This begs the question, is the extra $800 ($9600/yr) worth the additional $50k in renovations? (1)
Some quick "back of the envelope" math says yes. Even at an expensive 5% interest, the cost of the 50k loan for the Reno is $2,500/year. This investment definitely makes sense. The payback period for your renovation is in the neighborhood of 5-10 years, after which you will have the full capital value of your legal second suite. (2)
Now that we know it’s viable for you, you may be asking, “What if I want to sell the house later on? Will my property be in demand? The answer is a resounding YES.
Here are 3 other segments of the market that will have considerable interest in your 2-unit property.
1. Turn-Key Investor
Other investors can do the math too. You can bet that if you put your house up for sale, there will be interested investors who will run the numbers and as long as they can get a positive return, they will be interested.
The only difference between you and them, is that the turnkey investor (as the name suggests) won’t be interested in going through the process of a legal conversion or any renovations for that matter. That’s where you added all the value.
All other things being equal, the price you sell at will likely be much higher that what you paid plus the expense to add the suite.
2. Entrepreneurial owner-occupier
A growing number of homeowners are looking to supplement their incomes with additional “side hustles” in order to make ends meet and keep up with rising housing costs. This means that people are more accepting of renting out a portion of their homes.
Being able to add the additional rental income may also mean the ability to qualify for a higher mortgage, and that will translate to the value of your 2-unit home being much higher.
In addition to conventional renting, some of these homeowners are turning to Airbnb to rent out their suites as fully furnished apartments for tourists and business travelers.(3)
This demand will drive up the value of any house with more than 1 unit – especially if it has been constructed properly and is legal.
3. Multi-generational households
There are many factors driving the demand for households that can accommodate multi-generational households. As the boomer population continues to age, a large percentage are living with their adult children, in response to difficult financial circumstances and the lack of quality retirement residences.(4)
On the opposite side of the same coin, a growing number of young adults are staying at home longer, well into their 20s and 30s, mostly due to the high cost of living in bigger cities and not having established a professional career.(5)
In a place like the GTA, immigration plays a big role in multi-generational households, as it’s customary for many foreign cultures to have multiple generations under one roof. Being able to separate a single home into 2 or even 3 units can be very beneficial for these families, and again will translate to a higher demand and thus higher price for your property. (6)
So it’s clear that converting a home to have a second unit can benefit you immediately, but if you’re uncertain whether its value will hold, the 3 factor we outlined should provide you with a level of comfort know that the value will likely increase or at worst, level off if the overall market dips.
Again, the 3 target markets for your 2-unit home are:
- Turn-key real estate investors
- Owner-occupied homeowners who want extra income, and
- Multi-generational households
As much as there is demand for low-cost housing now, adding on an additional unit is great strategy if there is an economic downtown - if that’s your concern. That’s because there will be an even greater demand for low-cost housing.
What You Should Do
Because the mandate from many cities now is to infill existing neighborhoods (mostly because there isn’t much more land to build on - and also the high cost of infrastructure to the city), you should focus on efforts to make the most of a single property. These permit fees are also a big source of their revenue.
The process is not straightforward, but it can be done – that’s where YOUR value lies!
Current Market Conditions
Up until about 6 months ago, it was extremely difficult to find a decent property that can be easily converted to have a second suite, and still make sense financially.
With new policies towards foreign investors, lenders tightening lending criteria, it seems inventory for properties have opened up in the last little while.
I’ve personally noticed better properties for conversions available in the market. So now may be an opportunity for you to get in while everyone is looking the other way.
Of course, I’m no financial expert (nor do I play one on the internet), so as always talk to your financial adviser first before making any big decisions.
Thanks again for reading. Did I miss anything? Do you see any other markets that may be interested in 2 or 3-unit homes? Please share your comments below!
- These are rough estimates - as they say on TV, results may vary
- On a 50k reno, assuming 5% annual interest on borrowed funds, you'd need approximately $12,500 in additional rental income to pay interest on loan and pay back reno in 5 years, and $7,500 to pay back reno in 10 years.
- Over half of vancouver airbnb hosts use income to pay rent mortgage study
- This is how millennials could end up paying the bills for baby boomers
- Warning for baby boomers your generation x kids are coming back home to live
- Why more of us are living in multigenerational households