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.
Taking action sounds easier than it is. You can do the research, build your team, find a property, but the act of preparing an offer and actually getting a property under contract can be frightening. The “What ifs” start to bounce around in your head. There is an expression in the industry known as paralysis by analysis.
My advice to any investor is to first set forth to choose a market or two to invest. This market may or may not be close to where you live. The most important thing I look for in determining a select market to invest is, does that property contain the proper fundamentals making it a good property going forward.
I apologize in advance for this 80’s movie reference, but when I consider buying a property, I imagine taking my Delorean 10 or even 20 years in the future. What will that property and that market look like. If the property is in a thriving market, with a strong economy, I am interested. I also have learned to bypass the questionable locations within that market. I don’t really care how good of a deal I get on the “buy”, but if I need to be in a subpar location and deal with mediocre tenants who likely won’t respect my property, I will take a pass.
I want to help you get over this paralysis.
The exciting thing about Canadian real estate is one can purchase an asset that can generate enough income to support all of the property’s debts, including financing. That is known as a cash flow generating property. What is really cool is that the banks will loan you 80% of the value of that investment at remarkably low interest rates, if you decide to move forward on that purchase. Try to get that loan to value ratio when starting a business, or purchasing stocks or mutual funds. Even better, in order to obtain that 20% down payment, one can use a line of credit secured by another real estate asset. This may not seem like a shock to you. In fact, it may seem like common knowledge. But I can assure you that sophisticated lenders like banks simply don’t loan out funds like that for any other asset class. Even among real estate, good luck getting those kind of terms investing in the Caribbean real estate or most other countries. Banks aren’t offering these terms because they are being nice guys. They are doing it because of the safety of this investment.
I look for markets where the demand for real estate is strong. Areas of good job growth, population increases, strong transit & infrastructure, and has had real estate values rising. I love the Greater Toronto Area because I don’t know of a scenario where Toronto will not be a select place to live going forward. Because I look for properties with some cash flow opportunities, I look at the suburbs. I personally invest in the Durham Region (including Oshawa and Whitby).
No one can guarantee a return on investment, but if the market you have chosen has the right fundamentals, there is no reason to think that values will rise as population increases, as will housing demands. Let’s say you experience a 5% average growth over the time you own your asset. Not bad you state, but my mutual fund got an 8% return last year. But let me share with you the power of leveraging. Because you only used 20% of your own money, this means the real estate asset was worth 5 TIMES your investment (20% down represents 1/5 of the total investment). However, that 5% growth was on the entire value of the asset. Let’s use an example. Let’s say you bought a house for $400K. That meant you needed an $80K down payment. If the value appreciated by 5% over the past year, the property is now worth $420K. That $20K rise in value came from value came from just an $80K investment. That, my friends is a 25% return in the first year. Now, as they say in the game shows, BUT THAT’S NOT ALL. Add in the mortgage pay down and any cash flow the property experienced, and you are looking at a return north of 30% annually.
I tell my investors if you can get your hands on THREE cash flow generating investment assets in a market like the Durham Region, and just manage to hold them for TEN years. As long as they average an appreciation of FIVE percent, you, my friend, are a millionaire, as just those three properties alone will generate a net worth of more than that.
But, will there be a correction at some point, I am sure you are thinking. My answer is ABSOLUTELY. In my adult lifetime, there have been two corrections. But we are buy and hold investors. We are buying properties that support itself and can withstand a down turn. If we bought smart, I am confident that demand will remain or return through a tough time. But we aren’t as concerned about those two years where real estate values dropped 10-15%. Over the next 10 years, don’t expect every year to be exactly a 5% increase. One year it could be a 10% decrease. One year it could be like the past twelve months in Durham (Oct ’15 – Oct ’16) and the values are up 27% year over year.
The other “what ifs” are mostly useless noise.
What if the demand drops?
Unlikely as the population is rising and we Canadians need a place to live – especially in the winter.
What if interest rates rise?
Nearly all top economists are predicting no significant rise in rates over the next few years, but even if the rates are larger than expected, our extra cash flow can cover that short fall.
What if I can’t rent out my place?
If you are in an area of low vacancy (do your research) and your place looks nice and is in a good area, I am confident with some reasonable advertising, you will find a good tenant.
What if something bad happens to my place and expenses will exceed my budget?
Don’t stress out. That WILL happen one year, hopefully not the first one, but even if it does, think of it as short term pain for your ultimate goals.
What if the tenants don’t pay the rent?
Tenant selection can reduce the odds, but it will happen at some point. Again, deal with it.
What if there is a complete market collapse or even a zombie apocalypse?
I think any other investment would also be suffering at this point, and your priority likely isn’t real estate but in fact avoiding the zombies.
I will leave you with this. Build a team in the market you select. See some properties and determine if you can find properties to support the monthly expenses. Speak to other investors who are taking action and having success in that market. I actually conduct investor tours in my market, allowing multiple investors to meet and learn from my team and each other. Then take action. Figure out a way to get it done. I have been the poster child for making mistakes with my properties, and despite that, I have built net wealth I really didn’t think was possible just a few years ago. What separates the most successful people from the others, is simply ACTION! Those who took action, won the day, the week and the year. If you get success, remember to repeat that action and more success will follow.
I would wish you good luck in your journey, but instead I will just say, take action and make your own luck.
Michael is an investor and award winning realtor specializing in cash flow generating properties in the Durham Region. Michael and his team work with new and veteran investors and assist them to learn more about real estate investing and eventually taking action on their real estate journey. You check out the team on their website www.durhamhome.ca or email them directly at email@example.com
The upcoming tour of Oshawa area properties is: Saturday October 22nd 1PM Saturday November 12th 1PM Buying properties the Michael Dominguez way.
The upcoming tour of Oshawa area properties is: Saturday September 24 1-4PM Saturday October 8 1-4PM Saturday October 22 1-4PM The upcoming tour of Northumberland area properties is: Saturday October 1 12-5PM Are you interested in seeing another market? Let me know and I will arrange for a tour out in the Cobourg…