Chopping a house into as many units as possible -- opinions?

Question

Hey everyone,

I'm posting partially on behalf of myself and partially on behalf of my parents. They've been doing REI for the past ten years by themselves while balancing multiple day jobs, and they're not getting any younger. They crunched some numbers before they started and decided on a magic number of properties that would either (a) provide them with cashflow into retirement or (b) build equity that they could begin to relinquish during retirement. They're finally on the verge of buying their last property, but they're having difficulty securing a mortgage at this point. That's where I come in, except we're having a fundamental difference of opinion in strategy.

I'm trying to insist on a few things, since I'll be both owning a part of it:

• 1. It needs to be fairly nice, as I'll be moving in to one of the units.
• 2. It needs to be within or extremely accessible by transit to downtown Toronto.
• 3. Finally, quality over quantity of units.

The last one is where we're having the biggest difference of opinion. I have this gut feeling that a bright, spacious one-bedroom would be worth more than chopping it in half to two self-contained units, or even as a roomy one-bedroom vs. a squashed two-bedroom -- downtown houses are usually only like 13~20 ft frontage to begin with. And then there's the additional wear and tear when it comes to the partitioning renos or utilities.

All of my folks' previous properties are multi-family 4-plex properties in the suburban parts of the city. Rent is set at a relatively affordable level, since they buy "fixer-uppers" that weren't very large to begin with and chop it up further. Sometimes we have good tenants, often we have bad ones. We've had tenants who refused to pay and forced our hand for eviction, but we've also had tenants with us almost from the very beginning who make virtually no peep aside from a Christmas card every year.

Essentially I'm trying to learn more about whether my inexperienced gut feeling is pulling me in the wrong direction, after seeing a couple of horror stories from some tenants at properties with less, ah, TLC. Is my theory that a 3-plex where each unit goes for $2000+ is a better investment than a 4-plex where each unit goes for $1500+? Where am I guessing these numbers from, anyway? Would a tenant paying top dollar be more of a headache than one trying to skate by and happy to find a "deal" in this intense market? Do I just want to live in a really nice place when it truly would be better to live in a shoebox? We've run some numbers but I'm taking them with a grain of salt so far because they're based on mostly anecdotal data points, and I'd like to learn if I could be more precise in these calculations.

Interested in hearing in anyone's experience who can help compare the pros and cons to "high" vs. "low" volume residential properties.

Jess

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Hai Loc · Answer

There is a rental crisis in Toronto as a 1 bedroom condo rents for $2300 and escalating monthly. So the city has allowed qualified homes to have a laneway home built. There is about I think 50,000 laneway homes in Toronto downtown where you allowed to build a 2-3 story 2 bedroom suite in your back yard that backs into a laneway behind your house.

The city is giving investors/developers whatever you want to call them a $50,000 grant incentive if you allow a tenant who is making X amount annually to rent your space at market rents

You don't have to and go about it yourself and build something fancy and demand whatever rent you want

At this current time you cannot sever the lot. Both houses are on one lot. But I see this changing and people will be selling their backyards..

When that legislation was approve those laneway homes jumped 10% and even more. Multiple offers on those properties will last for years.

Hai Loc · Answer

In Toronto there are not many purpose built residential multifamily. Most of them are converted from residential single family. I am sure Jess has some familiarity with that. Condo convert is not common in Toronto especially for a lot that is sitting on 13-20 ft wide frontage..

She is suggesting a house hack transforming a home into multiple rooms aka rooming house. This should be done in a way it can be converted back to a single family upon disposition. There are more strategies including laneway housing but this conversation if for locals who know the market..

I am sure she asking this because she ran the numbers and realize there is no plethora of cash flow with single tenant rentals. The way to generate solid cash flow is lease to multiple tenants via rooming for floors. Again I don't want to type out an essay on this

Jonathan R McLaughlin · Answer

@Hai Loc what’s your exit plan? If owner occupants or condos I’d suggest 3 family as you will have a larger market.

Whose the tenant pool? Cheaper housing = more beds better, but one beds can be rough for both questions. Look through demographic data to see any changes.

We have repositioned a number of older properties to a different tenant pool.

Make it clear to your parents they are the experts on the market they currently serve. If u have data to suggest changes of focus that will be an easier conversation than “trust me”

Bjorn Ahlblad · Answer

@Jess Chan Make sure you check zoning for the property and codes for the units-fire etc. Our two bed units are the easiest to rent. Think about the tenants you want to attract. Tenants with higher income are generally preferable. However the best tenant is the one who is properly and thoroughly screened! To your point is a triplex at 2k ea better than 4 plex at 1.5k ea. Personally I would opt for the 4 plex simply because it is more doors and absorbs expenses and vacancy better. Keep us posted we love your 'problems'!

Hai Loc · Answer

You can create self contained units by floor. Most 2 story homes are at least 800 sqft per floor. This is plenty of space to have at least 2 bedrooms a full bath and kitchen.. Remember they make 600 sqft 2 bed condos these days.. If you can get a 3 story home + basement with a solid footprint/layout you can create some serious cash flow. I remember there was this 3 story home on Albany behind Bathurst station. They created I think 6 units that generated $15k gross income per month.. It just needs to be done right

Jess Chan · Answer

Thanks for your thoughts! Yes, we're primarily focused on single family residences but - to clarify - not creating rooming houses (4+ rooms with locked door, shared kitchen/bathroom). Instead, we're debating on the number of self-contained units to try to fit in, and I'm trying to define/quantify the tradeoffs between sq footage, tenant quality, number of beds, and number of units.

@Jonathan R McLaughlin Thanks for suggesting taking a look at demographic data of the tenants themselves! Trying to create a list of factors to evaluate, and those will be some good ones to include during comparisons. As for exit plan - my parents have different answers (yikes); one would like to incorporate, and one refuses to think about disposition till forced to. Trying to work with them on that front as well, but that's a whole other story...

Jonathan R McLaughlin · Answer

tagged the wrong poster, sorry @Hai Loc What is laneway housing, anyway?

Hai Loc · Answer

Jess

I can write a whole essay replying to this.

PM me and I can provide you some informative tips

Jess Chan · Answer

Thanks, and good point! Yup, we always try to make sure zoning and everything is up to code. Luckily my parents see the value in making sure we take care of that, especially since there are so, so, so many Toronto landlords out here renting out basements with no windows and such.

Good point about the vacancies too! I suppose in my mind tenants with higher incomes would rather feel they have more space, but perhaps we could go with a 4plex with high ceilings and invest in higher-end renos to attract them as well.

Chopping a house into as many units as possible -- opinions?

Chopping a house into as many units as possible -- opinions?

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