Today, we focus on how to maximize the return on your new laneway suite investment. Whether you’re in the planning phase or about to turn the key, let’s talk about lording of this wee patch of land.
Being a top producing realtor, I know residential leasing is a low-yield service often requiring more paperwork and office time than the sale of a home. Nevertheless, I’ve had a passion for laneway suites since 2016 when some forward-thinking friends started making inroads with the City of Toronto. During my own renovation in 2017, I even roughed in services to my garage. My optimism paid off.
Being an expert in the laneway suite space, I’ve been sought out to lease these unique spaces and I just can’t help myself. They provide tenant’s an entirely new product to choose from: new construction, detached, private, and baked into communities.
Laneway suites are versatile. Build it, rent it, offset costs by capturing rebates, pay down some financing. Later you may choose to make room for an aging parent or provide housing for your kids. Many folks plan for a retirement filled with travel and end up wanting to rent out their main house by downsizing to the laneway suite. These are all great options a laneway suite can provide to the owners.
There are pros and cons when comparing laneway suites to investment condos, but we’ll save that for a different conversation. Today, we focus on how to maximize the return on your new laneway suite investment. Whether you’re in the planning phase or about to turn the key, let’s talk about lording of this wee patch of land.
To Rent or Not to Rent
Laneway suites are long-term investments. The costs are too high to realize quick profits from a flip or rapid resale of the host property which means that leasing the laneway suite is a major motivator for most homeowners. Others may envision a personal “Garage Mahal” or need an expansion to their primary home in the form of a studio, office, or guest suite. I argue an addition to the primary residence is a better use of funds as it expands the main house, is cheaper to build, and will generate a better return on residential investment.
Laneway suites do, however, have distinct advantage as a secondary suite on a property. They are detached, private, and typically in a community with single family homes, parks, schools, and other nearby amenities so owners can charge a slight premium if they follow some basic rules.
Owners that reside in the main house also benefit from having tenants without being affixed to them. It is important to note that the development may impact the size of the rear yard and introduce sightline or privacy concerns.
A laneway suite provides investors who own multiplexes with another rentable unit on the site after they’ve maxed out the legal permitted number of main house units. This is only effective if you develop and hold for at least 5 years.
Short term (STA) or Longer Term
The answer to this question could fuel a separate article. Suffice to say, consider HST rebates and tax obligations, capital gains, write offs etc. STAs are a business and require time, experience, and expertise to be managed successfully. Anyone can learn the business, but you must be prepared for the commitment. Speak to your accountant to clarify exposures and potential profit before you get too excited. The management can be outsourced for a fee (usually around 20-25%). Booking portals take their share and often a long-term lease at half the gross revenue will net you the same profit.
Optimizing returns
- Pick the appropriate design and layout for the gross floor area and build common sense proportions. If the square footage means you must cram in two tiny bedrooms, then make it one large bedroom. Tenants prefer volume over ticking off ‘2 bedrooms’ – especially if both are 7’x7’.
- Don’t build to suit personal needs, build to meet common demand. Don’t customize that closet for your wide format printer for example.
- Try to include ample storage and a front hall closet.
- A basement is expensive to add, so if you go to the expense, go all the way, include a bathroom and fully finish the space. It can be great for laundry, a gym, and/or a recreation room.
- Include a washer and dryer (it needn’t be full size) as well as a dishwasher.
- Choose durable and timeless finishes.
- Don’t make the kitchen too big at the expense of the other spaces.
- Make room for dining, or combine the utility of spaces; for example, make a kitchen island you can sit at with dining chairs. Combine an office and eating area.
X-Factor
Capture opportunities for that “x-factor” to generate a premium: integrated cabinetry, custom millwork, remote window coverings, unique tiles, skylights, real wood flooring, and glass rails. Deploy good use of colour and well-conceived design.
Persona Marketing
The quality of finishes, location, safety of access, and parking will all contribute to your pricing strategy. Try to picture the type of person(s) that will afford, use, and enjoy the space you’re building. Size isn’t everything with laneway suites.
- 1-bedroom, smaller units will turn over more. These units may be suitable as fully furnished if you are trying to capture a premium. It is important to consider wear and tear, up front costs, and comparing to the premium in rent. You may find it is a wash and more of a hassle.
- 3-bedroom, large units will attract more commitment and furnishing is not recommended. These tenants will wonder where to store winter tires, bikes, a Christmas tree etc.
- Furnished vs unfurnished: If it is difficult to visualize the space with typical furnishings, then furnish it with just the right size pieces in just the right places and make it shine. Stock it and lease it furnished. There are plenty of transient professionals, divorcees, educators on sabbatical or younger professionals that need all that on a silver platter. For them, committing to an apartment and furnishing it can be costly. Consequently, many are willing to pay a premium for an interim solution.
Representation
Select the right representation. You can expect to pay one month’s rent plus HST for a realtor to list your property. Half of that goes to the cooperating realtor representing the lessee. The longer your tenant stays, the more value you get for this service. However, some units are just prone to attract short term (1 year min) tenants. Any experienced and knowledgeable realtor can properly market a laneway suite. Ensure your realtor has a proper vetting process or service – this is critical to mitigate fraud and protect your investment and income.
Property management is recommended for landlords that travel or aren’t nearby and available. You may have a friend or family member take charge. Property management firms can also represent you in a transaction and attract the tenant as part of their services. There are lots of options, but always have an emergency back up plan.
No Time Like the Present
Typically, 2-months notice is required for established tenants to leave their current situation so if you are installing final trim and see the end in sight, you may want to consider marketing your unit. This is where a well-planned design stage is helpful, complete with renderings. You can use these and the floor plans to list the home before it is ready for occupancy. In this case, consider converting the builder’s list of outstanding items to a schedule of Lessor undertakings to provide assurances to your prospective tenant.
Key Take-Aways
- Familiarize yourself with the Residential Tenants Act (RTA). Notice and documentation is the name of the game. Tenants are weaponizing the RTA, so watch for those types of personalities. If they start asking informed questions out of context, that’s a tell.
- Always increase rent annually with notice.
- The RTA asks you to do snow removal and property maintenance. You need a separate agreement with compensation ($1 a year is acceptable) to offload these responsibilities to your tenant.
- Remember, a 1-year lease is important to collect HST rebates. A minimum of 28 days is required to conform to some City of Toronto bylaws on short term accommodations.
- Short term accommodations (STAs) require permitting. Be sure you familiarize yourself with all the costs, rules, and responsibilities before you forge ahead with this business.
- Price it right. The latest stats have the GTA at around $3.14PPSF. The last small and fully fitted out 500SF unit I leased went for $4.75PPSF. The last large 3BR with parking went for under $3.80PPSF. Both were part furnished. Like housing, there are no hard and fast pricing rules. The “x-factor” plays a large role in pricing, so too does location, proximity to transit, and parking. Don’t dismiss the advice of professionals, this may further devalue your position.
- Vetting is paramount. Picking a tenant that pays will mitigate future losses and frustration. You may choose to interview your applicants as a condition to the sale. Be careful to adhere to the Charter of Rights and Freedoms but an interview may give you a gut feeling. My job is to get that gut feeling through the tenant’s representative. If I can’t draw a bead on them, then I recommend an interview.
- Clarify access and inclusions like utilities, chattels, garbage collection, and services. It is advantageous and easy to add WIFI or cable from the house if you have unlimited service (speak to an IT pro to ensure your privacy is protected).
- Remember all lease agreements need to be duplicated as schedules for the RTA’s Standard Lease Form.
- Include clauses for future marketing, showings, and photography of the unit for securing the next tenant when they give notice.
- Maintain your investment and keep the site clean.
- Prepare yourself for some red tape. If you are an impatient person, hire a property manager and let them do the work.
- Manage your tenant. Have a great lease agreement with clear rules and expectations. Communicate everything in writing. Be nice. Make sure they are happy.
The last point is essential to everyone’s happiness. Wash your tenant’s windows now and again, sweep, bring them cookies. Your tenants are your clients and sooner or later they will leave and having their cooperation and a testimonial will add value to the next time you lease. The flip side of that coin speaks to all the horror stories you hear and how difficult it can be to extricate a tenant from your lovely, innocent laneway home. It’s a reality and risk. But the odds of facing that worst case scenario are increased for those who feel entitled and ignore the rights of their tenants.
Be good landlords and enjoy the benefits!
Trevor Bond is a Realtor ® working with Bosley Real Estate. He has been buying, selling, and renovating commercial and residential properties for three decades, bringing them to life with his keen eye for value, design, construction, and materials. A media-savvy marketer with deep neighborhood ties, Trevor creates buzz for the homes he sells and great opportunities for the buyers he represents.
Trevor Bond
Realtor ® at Bosley Real Estate
www.trevorbond.ca
416-465-7527
If you or someone you know is interested in building a laneway or garden suite, please follow this link to receive your complimentary report. Our team will respond with a complete review within a single business day.