What is a Laneway House?
The laneway house has become increasingly popular in large metropolitan areas trying to preserve great neighbourhoods while increasing density.
But it makes for a terrific rental property, among other uses, in any town or city.
Essentially, a laneway house is a suited garage (1 or 2 bed) built in your back alley.
They will either have a suite located at grade, above grade, or a combination of both. Having the suite above grade is the most common, as to make efficient space for parking.
According to Lethbridge city bylaw, the primary residence must have 2 off-street parking spots, and secondary suites require 1 additional off-street parking spot. So, your laneway house must have 3 parking spots.
Each municipality may have different regulations.
Laneway House by Greener Homes
The best value scenario is having a double garage under the laneway house with a parking pad beside it. If you have a driveway or carport in the front of the home then you’ll have greater space to build in your alley.
If you don’t own a car, feel free to use a garage bay as a workshop, storage, or whatever your heart desires. Be creative!
Who are laneway houses built for?
Good question, most people will build these for family members, for themselves to downsize in, or as rental properties.
As a rental property, these are a great alternative to suited basements.
You’ll no longer have to worry about loud tenants, or giving up half of your house.
Your tenant turnover will also be reduced, as a laneway house provides them with a more private, comfortable living environment filled with natural light; which also increases the value of your rental.
Let’s look at a couple of scenarios that will encompass a few possibilities of this secondary suite.
We’ll look at a scenario of a young couple – first time buyers, then we’ll look at a scenario in which a homeowner has already built equity in the property.
The Young Couple, First Home Scenario
In this scenario, a young couple considers buying a beginner 3-bedroom home with a lot large enough to build a laneway house on. When buying the lot, they are already planning on building it.
They live in the primary residence while the laneway house is being constructed. They’re also doing some minor renovations on the primary residence, getting it ready to rent out.
Once the laneway house is constructed, the young couple moves in. They rent out the existing home, and use the rental income to supplement their mortgage payments.
5 years later, the young couple is now having a child and are either A) going to move into the original home and rent out the laneway house, or B) demolish or move the existing home and build their dream home (which is, of course, a Greener Home) and rent out the laneway house.
Lethbridge’s First Net Zero House
Brace yourself, the financials are coming…
Compliments of Graham at www.mortgagecrusher.ca
Let’s say the original home and land – no laneway house – was purchased for $250,000 at 2.99% interest, amortized over 25 years, with a 5% down payment. Because they’re putting less than 20% down they’ll have to pay mortgage insurance.
The couple’s mortgage payment will be $1,168 per month.
Now let’s say the original home and land costs $250,000, and the construction of the laneway house costs $220,000. This brings the total purchase to $470,000. At 2.99% interest, amortized over 25 years with a 5% down payment, they’re now paying $2,195 per month.
But, they’re living in the laneway house and renting out the 3 bedroom home in their great neighbourhood for $1500 per month.
Which brings their portion of their mortgage payment to $695 per month and allows them to save a whopping $28,380 in payments over the next 5 years as compared to not building the laneway house. ($695/month vs $1,168/month)
Now they have the option to move into the 3 bedroom home where they can raise 2 children while either renting out the laneway house or moving in their retired parents to watch the children while they go to work.
What if They AirBnB the Laneway House?
Because they’re in a great neighbourhood, they charge $75 per night for the laneway house and they have an 80% monthly occupancy rate.
They’re now able to bring in $1800 per month from renting out their secondary suite.
Now, living in the 3 bedroom home, their portion of their mortgage payment is only $395 per month.
Fast forward another 20 years, they’ve now saved an additional $185,520 in payments on top of the $28,380 they saved in the first 5 years for total savings in payments of $213,900, as compared to not building the laneway house.
Their mortgage is now paid off and their two children are moving out.
Over the last 25 years they’ve managed to save a total of $213,900 by building a laneway house. Because they have the secondary suite with proven cash flow their property also has a higher value.
Congratulations to them.
Fast forward 10 more years and one of their children is starting a family in the 3-bedroom home. The once young couple, now grandparents and retired, have downsized back into their laneway house so they are close to their children and grandchildren.
There are obviously other things that need to be considered, such as income tax for the rental property, and increased property taxes, but in the big picture they are marginal.
Now let’s take a look at a different scenario.
The Property Owners With Equity Scenario
In this scenario, let’s assume that a homeowner has been in their mortgage for 10 years, and has built up some equity in the home.
By making their mortgage payments, the homeowner has now built almost $73,000 in equity with an interest rate of 3% for 5 years, and 5% for the next 5 years. – These interest rates are just for the sake of the scenario, and are not intended to reflect actual historical rates.
On top of that…
Let’s assume the purchase price was $250,000, and that the annual compounded appreciation was 3% – meaning the home increases in value each year by 3%.
Since the home’s value increased 3% every year from the previous year’s value, the home is now worth about $336,000. This equates to another $86,000 in equity ($336,000 – $250,000). In this scenario the homeowner got a verified appraisal for this amount.
Their total equity in the home is now equal to: $73,000 + $86,000, which is $159,000.
How Can They Create Cashflow?
The homeowner has now decided they would like to make cash flow, so they’re going to build a laneway house.
Greener Homes Laneway House Kitchen
They approach their mortgage broker, Graham at Dominion Lending, to remortgage their home in order to build the laneway house and upgrade their primary residence.
Let’s say the cost of the laneway house will once again be $220,000 and they’d like to spend $40,000 for the renovation of the primary residence.
This would typically be a $260,000 cost.
But since they have $159,000 in equity, the real additional cost to them is $101,000, over and above their current $250,000 mortgage.
After using $159,000 in equity as a down-payment, they are able to remortgage for $351,000.
In this scenario, the homeowner doesn’t want to add additional time to their mortgage, so they amortize their new $351,000 mortgage for 15 years, at 3%.
Their mortgage payment has gone from $1,168 ($250,000 mortgage) to $2,419 ($351,000 mortgage)
The homeowner is now renting out the laneway house for $1250 per month, which means that their portion of the payment is $1,169.
So, for $1 per month for 15 years ($180), they’ll be generating $15,000 of passive income annually when the mortgage is paid off.
Let’s say they’re comfortable with remortgaging for 25 years because they know their new laneway house will give them significant cash flow.
The total mortgage payment would be $1,659, and the homeowner’s portion is $409, which is a little more than a third of what it once was.
In either remortgaging scenario, the homeowner is getting a great deal. The homeowner will cashflow even greater if they don’t renovate their home for $40,000.
That is the financial value a laneway house can offer.
Not sure if you’re allowed to build a laneway house on your property, or are interested in building? Contact us. We would be happy to complete an assessment for you.
If you want to talk to a mortgage broker about building a laneway house in Lethbridge and area, we would highly recommend Graham at Dominion Lending. Visit www.mortgagecrusher.ca