Still dreaming of a detached house? Have you considered a duplex?
February 23, 2018
A detached home in Toronto is still the dream for many home buyers – no shared walls, no condo maintenance fees, a yard and (possibly) parking. But with an average price of $1,283,981, it’s still out of reach for many people. Not only is a $1 million mortgage hard to wrap your head around, the monthly payment is roughly $5000, plus all the other costs associated with owning a home.
The rising cost of houses in Toronto is one reason the condo market has been exploding – and at the rate condo prices are increasing, it won’t be long before condo prices get even closer to houses. In the long term, though, I believe house prices will continue to rise at a rate higher than condos for the single reason that there are very few, if any, places to build houses in Toronto, while there are tens of thousands of new condos being completed every year.
For buyers who want a detached home, one option is to buy a duplex – a house that’s been separated into two self-contained units. Renting out one of the units can go a long way towards the monthly mortgage payment, allowing a buyer to spend less per month, build more equity and be able to live in the kind of home they want.
It’s not all unicorns and rainbows, though. When you’re applying for a mortgage, the average lender will only take into account six months worth of rent, so you would still have to qualify for a higher mortgage on your own.
Breaking down the numbers:
Let’s say you have a budget of $600,000 with a down payment of $60,000.
You can find some good-sized condos for $600,000. A $540,000 mortgage will carry for roughly $2700* with a minimum of $400 in fixed monthly maintenance fees.
If you found a duplex you liked for just under $1M, your mortgage total would go up to $940,000 with a monthly payment of roughly $4700*. That’s quite a jump. Keep in mind anything over $1M requires a 20% downpayment.
However, the average rent for a two-bedroom apartment in Toronto is north of $2300. All of a sudden, your portion of the mortgage payment is now $2400 – less than you’d be paying on that $600,000 condo.
If you’re looking for a duplex, you have to do your research. If you can find a property that already has two units, that is helpful. A lot of properties have ‘nanny’ or ‘in-law’ suites that aren’t up to current code, but can potentially be grandfathered in if it fits within the parameters of what the city says is a legal or non-conforming income suite. If you’re buying a home with the potential of converting it to two units, you’ll have to make sure the new unit is up to code.
The challenge is that duplexes don’t come on the market that often, but it can be better to buy a house that already has two units and updating it than jumping through hoops at City Hall.
As with anything, there are pros and cons.
The main bone of contention for most when one considers buying a duplex is dealing with tenants. Landlords have to deal with the idiosyncrasies of living in a home with someone above or below you as well as someone else’s demands. Some of us are so busy worrying about ourselves, we don’t have time to worry about someone else!
Some landlords feel that they don’t want to rent out a unit they wouldn’t want to live in, which is a dangerous mindset. When you start renovating a rental unit to the standard where you would live in it, it can become a bottomless pit as anybody who has ever done renovations knows.
It takes a certain kind of person to be a landlord – you’re legally responsible for someone else living in a safe, livable environment.
There’s also the challenge of finding the right tenant and collecting rent. It’s not that hard to find a good tenant, especially in a rental market like Toronto. Also be sure to keep up-to-date on the Landlord Tenant act especially now with the new Fair Housing 16-Point Plan… there have been some changes to rental increases and removing the tenant should you wish to sell the home with vacant possession or occupy the space yourself.
For one thing, if you’ve got a good relationship with your tenant and they actually have a pride of ownership, it’s nice to go away and know that someone is watching over things and can contact you or the right service people should anything go wrong.
Another advantage is knowing you don’t have to stress about the payments on a million dollar mortgage. Even basement apartments are commanding rentals of $1000-$1200 a month for a one bedroom or $1600 for a two bedroom. If you’ve got a two-bedroom unit above ground, rents are sitting at about $2400 a month.
It’s also worth considering that it doesn’t have to be a permanent situation. If your income goes up or you need more space, you can always convert it back into a single family home. It’s a lot easier to do that than to convert one into two units.
If you want to learn more about the benefits of having a tenant or the Toronto real estate market, please get in touch!
*based on a mortgage rate of 3.45%, amortized over 25 year