Finding an investment property in Vancouver proper is challenging, to say the least. With average property values at over $1.1M, acquiring a property with an attractive cap rate is nearly impossible.
The move to laneway housing could help with this. The concept is very simple: rather than building a two-car garage in your back yard, build a small rental house that fronts onto the lane. Like most things in life, the practice is more difficult.
Laneway housing solves a number of problems for city planners. First and foremost, it allows the market to respond to the lack of affordable rental housing in Vancouver. With vacancy rates hovering at around 1%, laneway houses could create a large stock of purpose built housing. Secondly, in principle, it is meant to allow for densification without destroying the character of a neighbourhood (although some residents would disagree). At a macro-scale, it accomplishes both without straining city infrastructure. At a micro-scale, at street level, adding density to streets that were not planned to accommodate it, laneway housing can cause distress among neighbours.
Laneway houses are a challenge for builders. It is not a simple process. The City has some tight guidelines as to how a laneway house is to look. The project must go through pre-application review, planning, design, engineering and plan checking before final approval is granted. The entire process takes four to six weeks for city approval and another four to six months to complete construction. And this is an idealized scenario.
Also, site servicing fees vary widely: electricty may cost between $600-$20,000; sewer fees are $1,750-$7,850 plus additional trenching; water is $4,200 and gas is subsidized by FortisBC but only up to $1,535. Oh, and these fees do not include construction done on your own property, only up to the property line.
Although laneway houses are small (typically 500 to 750 square feet in size), they are not cheaper than a primary residence to build. A typical 500 square foot home with enclosed garage can cost between $230,000 to $275,000 ($460-$550 per square foot), depending on site conditions.
However, even with the big price tag, laneway houses make financial sense. Coupled with a rented basement suite, a laneway home could serve as an attractive mortgage helper (particularly for first time buyers). They have also been used for adult children, "grandparents" and caregiver suites.
Laneway houses rent for between $1,000 and $2,100 with the utilities being the tenants' responsibility. As an example, assume your 500 square foot project costs $250,000 including taxes and permits. Also assume that you can rent your unit for $1,600 per month (about what a one bedroom condo would rent for downtown). Taxes and other costs may be $1,000 / year. This would calculate to a decent cap rate of around 6.8%.
Laneway houses are allowed in RS-1 and RS-5 signle family areas. Although it is difficult at this time to know exactly how a laneway house will impact property values, I personally believe that you will recoup your capital investment when you sell your property, as there is a limited number approved in the City of Vancouver.
