09 - Looking for Citizen Developers
I love the idea of gentle density
The idea of introducing additional dwelling units seamlessly into the existing cityscape. Some refer to this approach as a potential solution to the missing little, bridging the gap between single-family houses and mid-rise buildings.
Cities have generated studies and implemented by-laws to facilitate this type of housing, however the uptake in Toronto has not been lower then expected. According to Adusearch there are only 126 built ADU in total out of 261,262 suitable properties. The program started in 2018.
WHY AREN'T THERE MORE LANEWAY OR GARDEN SUITES IN TORONTO?
I wanted to find out why, so I did the research and crunched the numbers so you don't have to. let's start with the building type and available products:
Prefab or Modular Units:
On the smaller scale, we have spaces like the bunkie, suitable for a sleeping room or a home office/studio without water services. Moving up, there are larger spaces ideal for short-term rentals, such as Cabn or Arcana, and even more significant ones like Nomad or Ukkei, offering a full-fledged apartment. But there's another option beyond ready-made solutions.
Image from Ukkei
Tailor-Made Solutions:
This is very personal process to create a one-off solution specific to your site and needs. This is the type of services my design studio used to offer – a full-service approach to conceptualize, develop, and draw a unique design for your property. It's a boutique option and comes with added expenses.
My objective is to examine why someone might consider adding a garden/laneway suite to their property and align with the city's goal of increasing the number of dwelling units. Let's break down the size categories:
Small (Under 100 sqft): No services; no building permit required. These units are essentially extensions to the main house used as a bunkie, home office, gym...
Medium (With plumbing):Great for guest suites, vacation rentals, or in-law suites. Slightly on the smaller side but can be considered dwelling units.
Larger (1-2 Levels or 1-2 Bedrooms): Suitable for long-term rentals. This is a proper apartment or a small house.
The first question is - could this be a good investment as a rental unit. For this analysis, I focused on the medium-sized one-bedroom prefab or modular unit, suitable for most city lots. Used as a full-time rental at market rate. Here are the assumptions:
Project Cost: $500k (hard and soft costs)
Financing: 20% equity, 80% debt at 7% (30yr) with a WACC of 7.6%
Holding: 10 years
Income: $3000/month with 8% vacancy
Expenses: 5% of gross
Annual Growth/Appreciation: 2%
Capital Reserve: 5%
Purely based on the pro-forma, the project doesn't seem viable. The leveraged IRR is just below 5%, making it more attractive to invest in a stock index like the S&P 500, which historically grows at 10%.
SO WHO IS THIS FOR?
It could be an extension of the house used by the owners, a home office, guest suite, games room…
It could be space for aging parents or a home for children starting out in life.
Or an over-housed owner could move into the garden suite and rent out the main house, this might be the right investment model.
However, for the savvy investor, considering the added risk, work, and stress of being a landlord or vacation rental operator, it might not be the most attractive option.
Is the citizen developer model a good way to "add density and solve the missing middle"? I'm inclined to think otherwise.