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Analysis: Secondary Suite Income

Analysis: Secondary Suite Income

Posted by: tyler hinrichsen
Category: Analysis, Secondary Suites
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Secondary Suite Income Analysis

Secondary suites are the hot topic in Calgary, with the City council focused on increasing density it provides the need for additional housing near the core. However council is divided on the impact secondary suites will have in many areas of the city. New communities such as mahogany, located in the south east quadrant of calgary have areas zone for secondary suites. Providing these home owners the unique opportunity to generate additional rental income. Throughout this article we will analize the various aspects of developing a legal secondary suite, such as construction cost, operating costs & rental rates to provide a clear picture of what secondary suites have to offer as a vehicle for genreating income.
Some of these areas may have a secondary suite listed as a permitted use, however secondary suites are not allowed in the the type of dwelling located on the parcel. An example would be R-2M with a duplex. On some duplexes, builders are including separate entrances on the side of the house leading to the basement.

Development Capital

Many people in Calgary that are looking to develop a secondary suite don’t have the required cash sitting around. Who can blame them, $65,000 buys alot of timmies. However many different financing options are available to provide homeowners the ability to generate additional cashflow. Infact, up untill recently the city of calgary provided a $25,000 grant to homeowners developing a legal secondary suite. It did come with some restricitons, but it does show just how much this city need secondary suites.

The Awnser: Home Equity Line of Credit or 2nd Mortgage

If you have eqity in your home it provides you the perfect solution to developing a secondary suite. By borrowing from the equity in your house to build a secondary suite, you are esentially borrowing money to add equity to your home. The final result in many cases is a net zero change in your debt load.
HELOC & 2nd mortgage rates vary, however they are normally very good at around 3%. This provides the financing required without eating into the rental income.

Rental Rates

Calgary is a big city, the rental rates for secondary suites vary, however based on data provided by rentfaster.ca on over 681 Listings. The rental rate for a basement suite ranges from $400 to $1900 with an average rent of $910. Note: Utilies may or may not be included in these prices.
The key factor in deciding rental rates is the location, with houses close to universities for exmaple commending a higher rate due to students need for housing. Additional factors such as the quality of the finishes and layout also play a factor in deciding the market value of the suite. One thing is for sure, good pictures go along way in this day and age to ensure you have the interest to demand a profitable rate.
Overall based on an average rental price of $910, that provides a annaul income of just about $11,000.

Development Cost

The development cost of a secondary suite is a complex question, akin to asking how much does a car cost. What type of car, what model or year. The same goes for secondary suites, however normally developments run in the range of $55,000 to $100,000. Suites that require the addition of a second enterance normally are towards the higher end of that range. If you are looking for a indepth analysis of the development costs of a secondary suite please check out the following article.

Operating costs

After paying for the development of a secondary suite you are not in the clear. Operational costs such as maintenance and repairs need to be included in the budget. However unlike a seperate rental property secondary suites can share many of these costs with the primary dwelling, even reducing the cost basis for many items. Utilities may or may not be included in the monthly rent as a way to attract tenants. however in this example we will assume the costs are passed on to the tenant.
Based on an average suite, roughly 5% of the total yearly rent should be dedicated to a maintenance fund. This fund will provide the ability for the landlord to ensure the suite is up to any changing building codes, replace old or worn out appliacenes and renovate the suite when the time comes.

Return on investment analysis

Based on the factors outlined above, we can safley calcuate the average return on investment for a secondary suite located in calgary.
Development Cost: $65,000.00
Yearly Rent: $11,000 ( 12×910.00 )
Yealy Operational Costs: $550.00 ( 5% of Rent )
Net Income: $10,500.00 or 16.1% ROI.

However this does not include financing the development of the suite through a home equity line of credit or 2nd mortgage. This time lets assume the development was financed via a 2nd Mortgage at 3% over 25 years.
Development Cost: $0.00
Yearly Mortgage Payment: $5,860 ( $488 / Month )
Yearly Rent: $11,000 ( 12×910.00 )
Yealy Operational Costs: $550.00 ( 5% of Rent )
Net Income: $4,590 The return on investment in this senario is irrelevent as it is technically infiity. You are making money without putting money in.
This means over 25 years, the tenant will pay for the development of the secondary suit, interest related to financing & maintenance all while generating free cash flow each year. Lets see where this puts you in 25 years, accounting for inflation & rental increases.

Retirement Considerations

However, 25 years down the road many people are looking to retire. Here are a few reasons why a single family dwelling with secondary suite provides the perfect retirement vehicle.

Two in one rental Property

As people retire they normally like to downsize or travel. By renting both the primary dwelling and the secondary suite, the owners can generate almost 4 times as much monthly income. Based on a 3 Bedroom home, currently renting for $2000.00, with a secondary suite renting for $1000 per month, this would be equivelent to $36,000 per year income.

Downsize without Moving

By moving down into the secondary suite, the primary dwelling can be rented. In most cases the primary dwelling would rent for 2-3 times more then the basement suite, providing significant income while avoiding any additional housing costs.

Author: tyler hinrichsen

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