Interest in backyard homes grows amid soaring real estate costs and a shortage of housing

In November, 2018, Chauncey Birch was scoping out a fixer-upper in Toronto’s Cabbagetown neighbourhood to buy, renovate and then rent out. He came across an outdated four-bed, three-bath duplex sitting on a lot that was 63 metres deep. But it wasn’t until he spoke with the architect who would oversee its renovation that Mr. Birch realized he could also build a laneway suite.

“After looking at the size of the property, its location with a laneway and the ability to fit a laneway suite in that space, the architect could tell we had met the preliminary parameters,” Mr. Birch explains.

He chose to build a three-bed, three-bath home with a basement and carport in the hopes of appealing to a family as future tenants. “I saw the ability to add that much space – in essence, a small home on an existing property,” says Mr. Birch, who expressed an interest in the smart densification of cities and reuse of existing land.

Mr. Birch is one of a growing number of property owners in Canada that are building secondary homes in their backyards. These structures go by many names, depending on the city where they’re located: granny flat, laneway home, backyard suite or accessory dwelling units.

The City of Toronto passed a bylaw in the summer of 2018 making it easier for laneway suites to be built. And in Edmonton, where they’re known as garden suites, similar bylaws were passed in 2017.

Travis Fong is a co-founder of YEGarden Suites, a non-profit organization that helps inform Edmonton homeowners about building a backyard suite. Mr. Fong, who conducts workshops and webinars and does consultations, says that interest has risen steadily since the organization started in 2017. In 2019, 70 garden suite permits were issued in Edmonton. That number increased to 92 in 2020 and 124 in 2021.

“People who are looking to build for rental make up about half of the suites that are built,” Mr. Fong explains. “The other half are being built for an aging parent, or it could be a child who they want to keep close. We’ve had a lot of families with children with physical or mental disabilities. They can maintain their independence, but they do need extra support.”

Mr. Fong says that the construction process, and financing of the new builds, are common hurdles for those looking at adding garden suites. “They can be a pretty expensive development,” explains Mr. Fong, who estimates the cost of construction in Edmonton ranges from $200,000 to $400,000. In Calgary, that price can reach $600,000 or more.

And in Toronto, laneway projects start around $400,000 and can cost upward of $700,000, which is what Mr. Birch spent building his three-level suite. The laneway build added 20 per cent to the loan that Mr. Birch sought out from a private lender to complete both the main house renovations and laneway construction. He’s now renting out the laneway unit for $5,500 a month, but his motivations for the build aren’t strictly about the income.

“The rent from the laneway suite has been beneficial, but not a windfall,” he says. But Mr. Birch believes that he’ll see greater benefit once he’s ready to sell the property. “Perhaps at the time you sell, the return on investment could yield much larger returns that allow you to climb the property ladder more aggressively.”

Linda Hayes, a chartered accountant based in Edmonton and Belize, constructed her first garden suite on an investment property in 2017. She’s since built five of them in the city.

All of Ms. Hayes’s garden suites were built as part of brand-new home projects, so she was able to secure a regular mortgage to fund the construction of both structures. “You can also use the equity in your current home to pay for it through a HELOC,” she says, referring to a home equity line of credit. Another option for those buying homes to build a laneway suite is securing a “purchase plus improvement” mortgage to borrow the cost of renovations, in addition to the price of the existing home.

Backyard-suite builders should also keep in mind that adding a garden suite adds value to your property and therefore increases your taxes. However, property taxes and some other costs can be offset by tax deductions that landlords can claim against rental income.

“For rental properties, you get deductions for the expenses related specifically to the rental suite,” explains Ms. Hayes. “Items like the additional property taxes, utilities, interest on your HELOC, advertising and repairs are some examples of deductions.”

New federal tax credits for 2023 also provide relief for some garden-home builders housing family members. The Multigenerational Home Renovation Tax Credit provides a 15-per-cent refundable tax credit to assist with renovation costs up to $50,000 for a secondary unit with a private entrance, kitchen and bathroom. “But to be eligible, the resident of the unit must be a family member who is a senior or an adult with a disability,” Ms. Hayes explains.

She also points to the GST/HST New Residential Rental Property Rebate, which refunds part of the GST paid on a laneway housing project. “The rules on this are complex, so it’s best to work with an accountant,” Ms. Hayes says.

Source link