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Market Trends

Laneway Housing – Does It Work For You?

The City of Toronto is getting closer to approving a change to the Planning Act which would allow homeowners to convert garages accessed by lanes into living units. These units would be self-contained, and the government is hoping they will be used as rental stock thereby easing the shortage of rental housing in the city.  Its impact can be significant considering there are 250 kilometres of rear laneways in Toronto.

In the last few weeks, we’ve received many inquiries from our clients who are curious or seriously considering building a laneway house. Most were questioning the impact of this on the value of their property. Could they recoup an investment like this which could run into hundreds of thousands of dollars?

There are two obvious and overriding concerns that should matter:

If the laneway structure takes away all the parking for the main house, or if it significantly shrinks the backyard of a single-family home, it would more than likely lower the value of your property. Given the cost of buying a single-family home in Toronto, most buyers want parking on their own property, as well as a backyard to enjoy. Another issue would be a likely increase in property taxes

On the opposite side of the argument, there are many purposes for, or reasons why home owners would consider building a laneway house. Here’s who could benefit the most:

1. Parents may consider building a laneway house for their grown children who are ready to move out but don’t have the funds required to buy the average priced house or condo in Toronto. This would be a much cheaper alternative per square foot than either a house or a condo.

2. Adult children can choose to build one for their elderly parents, to keep a close eye on them without travelling distances. This would save time and give everyone peace of mind while retaining privacy. In the past we have found that children are reluctant to place their elderly parents in basement apartments, usually because of lack of enough light, so this would be a great alternative.

3. As home owners age, they often find the maintenance of their property too much to handle. Yet they have difficulty parting with their house, their garden and their neighbourhood. A laneway house would allow them to move into it when life is simpler, and they need less space. Essentially, they could “age in place”. An added bonus would be the ability to supplement their income by renting the main house.

What about those who need to draw on the equity of their house to live on? A reasonable possibility could be to sell your house, get your equity out, while retaining an option to rent the laneway house from the new homeowner.

4. Another great use is that it allows you to expand your livable space. Moving is expensive so if you need more space, whether it be to use as a home office, a teenager’s space or for elderly parents, laneway houses can be the solution to your space problem.

5.Homeowners could consider building a laneway house for rental income. In this case you would have to weigh the cost to build versus the rental income generated to determine whether it makes economic sense. For example, a laneway house could cost $300,000 or more to build. Let’s assume you’re passing the utility costs to the tenants, you still have to pay for the mortgage, insurance and increased property tax. Therefore. if your mortgage cost is about $1,500 a month plus insurance and property taxes (estimated at around $250 per month), your rental income would have to exceed $1,750 a month for this to pay off as an investment.

In my opinion, considering that renovated basement apartments are renting for higher than $1,500 per month, a nicely done laneway house could rent for well over $3,000, a month making it an economically smart investment.

Furthermore, because of the many uses for laneway housing, it is entirely possible that buyers looking for more space outside of the main house will pay a higher price for your property.

I am very excited to see this policy come to fruition. I think that in the long term it will:

  • increase the rental supply in established neighbourhoods that have access to transit and key amenities;
  • increase the viability of home ownership making it more affordable just as basement apartments have already done;
  • increase tax revenue for the city; and
  • make our laneways safer by bringing lighting infrastructure and more pedestrians into the laneway.
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