Are secondary suites worth the extra expense?
Michael Dominguez discusses why the answer is a resounding yes
There has never been a better time to consider adding properties with (legal) secondary suites to your portfolio. Many make the mistake of referring to these as duplexes, but a duplex is a purpose-built two-unit building; what we’re talking about here is a structure that was built as a single-family home and converted later into a two-dwelling building.
1. They’re becoming increasingly popular
More than ever before, provinces and municipalities are creating legislation that encourages densification of cities. This makes a lot of sense. Creating additional dwelling units in the same location means communities can satisfy the housing needs of a growing population without adding more streets, sidewalks and sewer systems. Municipal desire for these kinds of investments strips away one layer of difficulty.
2. They’re in good locations
Single-family homes that can be converted to have secondary suites are readily available in desirable neighbourhoods, which increases your options and helps you make smarter decisions. Rather than investing in less expensive properties in secondary neighbourhoods, you can take the time to find a location in a respectable residential area that will strengthen your portfolio.
3. The tenant profile is very good
Many investment gurus put too much focus on making money in the buy. Yes, try to get a fair price, but the book that tells you to buy that under-market property doesn’t tell you that in order to truly win on such a deal, you need to rent it out consistently for the next decade. A well-equipped secondary suite in a desirable property may cost more, but it will have lower vacancy than one that was purchased solely because it was cheap.
People will want to live in it, and you’ll have a better chance of not spending your afternoons at the landlord/tenant board trying to fight for your monthly rent.
4. You can charge higher rents
A well-located single-family home can attract a tenant willing to pay top dollar, but the upper unit of a two-unit dwelling can receive up to 80% of that amount, while often attracting a similar quality tenant. And with a secondary suite, you also get to enjoy that lower dwelling’s rent. In total, secondary suite owners often receive 30% to 40% more rent than those who just rent to one tenant.
You may pay more for your property, but you’ll do well while you own it and can sell it for more when the time comes
But what about the multiplex, you ask?
Well, the rent can be attractive as you multiply your tenants, but the tenant profile in most cities falls quickly in multiunit settings.
5. The property will appreciate handsomely
Yes, you will pay more for your asset, but it is in a sought-after neighbourhood, and you plan to maintain it. If you fly your Delorean into the future 10, maybe 20 years, that neighbourhood will still be desirable. If you are looking to sell your property, you will likely have a line of investors ready to pick it up: a young couple who decide to live in one unit and rent out the other in order to cover their mortgage, or possibly a multi-generational
KEEP IT LEGAL
You can build a lot of wealth in this asset class just by doing things the right way – so do not be tempted to obtain or build illegal second suites. There are likely thousands in every city across the country, but they are dangerous on a number of levels. An illegal second suite can get shut down with one phone call from a nosy neighbour or a disgruntled tenant, instantly killing your rental income. You can’t use the rent received in that illegal suite to qualify for future properties, and they lack the appreciation potential or resale desirability of a legal suite. Finally, in the worst possible scenario, if someone gets hurt or dies in your illegal suite, it is very possible that you will face criminal charges.
family who wants to live close to one another while still maintaining a sense of space. You may pay more for your property, but you’ll do well while you own it and can sell it for more when the time comes.
6. You can cushion your cash flow
By receiving more rent for the same building, you can generate better cash flow, helping provide for any unexpected pitfalls. You want your property, at minimum, to support itself and pay for its monthly expenses, including debt financing. But hopefully it will pay dividends on top of that.
Another thing to keep in mind is that, by having a legal two-unit building, you can use both rents to help qualify you for your next investment property. A good cash-flowgenerating property can actually make it easier to keep growing that portfolio.