Illegal Suites

[nickek]

Hey



Lately I've been looking at properties that had illegal suites. The deals are great, and some of the suites complied very well to regulations (separate entrance, large windows, large staircase, etc) but it was the zoning that was the problem.



Is it worth it having an illegal suite?



I've been reading a lot on this forum and noticed that recently lots of people were having problems with inspections.

 

[KenBoutilier]

Hi There...Personally speaking I would completely avoid illegal suites.You risk far too much venturing into the illegal suite business. I client of mine spent over $20,000 renovating a property to add a suite only to have neighbours complain about too many cars and the investigators made him rip out a portion of the suite.

Not worth the risk...there are plenty of opportunities out there doing it the legal way.

 

[OurRealtor]

[quote user=nickek]Hey



Lately I've been looking at properties that had illegal suites. The deals are great, and some of the suites complied very well to regulations (separate entrance, large windows, large staircase, etc) but it was the zoning that was the problem.



Is it worth it having an illegal suite?



I've been reading a lot on this forum and noticed that recently lots of people were having problems with inspections.


Is it being disclosed in the listing or only after later investigations, we can find that its illegal. How do one can find illegal suites?

 

[RedlineBrett]

The guy posting from Halifax doesn't seem to know the Calgary market well enough to be able to comment on suites here.



If you are a Calgary landlord with an illegal suite that is operating nicely what incentive do you have to legalize it? There are all kinds of application fees and lots of retrofitting required and guess what your taxes usually go up too. Rents are the same regardless of whether or not you dance around the red tape required by the city. So lots of risk and cost and no reward. Not exactly a good business decision and for this reason most of the suites you will see are just as you describe
- safe with good size but are illegal in the eyes of the municipality.




The red tape exists because council cannot make up its mind on the
secondary suite issue and it wishes to have control over what suites are
where via a case by case basis which seems to come down to what mood everyone is in on the day they vote on a particular application.



Take a look here Secondary Suites Map



You see very little trend in what applications are approved or rejected. Most are approved, but there are red dots and green dots intermixed everywhere.



I have sold dozens of "illegal" suites to investors. Investors usually fall into one of three camps:



1. "I need a fully legal suite with the paper to go with it". This camp takes the least risk but also gets the lowest return. They have to pay more than 500k usually. Can still cash flow due to better rents and properties are in better areas but you need a larger down payment.



2. "I want a safe suite but I'd like a property with the appropriate zoning so I don't need to file for a land use designation change in the event I get a complaint on my suite" These guys take the middle road and are ok with some risk but are willing to pay a little extra to have better options in the event they are forced to fight to keep their suite. They don't have to change the zoning so they can go straight to a permitted use secondary suite application.



3. "I will make my suite safe and I don't care about the zoning" These investors take the most risk but get the better returns as R1 properties are usually cheaper, newer and bigger but if there is a complaint it is much more work to get a secondary suite permit as the zoning needs to be changed. Most investors in this category have a certain 'disdain' for the city's policies and generally arrive in this bracket after doing one or two properties that fit the criteria for 1 and 2 above and see all the properties that are available.



Getting that pretty piece of paper from the city is very hard to come by on the open market and very expensive to obtain yourself. The frustrating thing for investors is that (based on the map above and countless applications behind them) there are approved suites in many communities with special amendments all over the place and functionally speaking they are no safer than what a responsible investor could accomplish themselves without the city's blessing.



Just my $0.02.

 

[Mike Milovick]

It really depends on the environment and your risk tolerance level.



In Waterloo, the City shuts down illegal units/rooms/properties etc.



In Kitchener, the City's fire department will generally bless extra units - provided they meet fire code.



As such, the answer really depends on both the municipal environment and your risk tolerance level.



On the "extra" units - I would also suggest getting written clarification from your insurance company. I have never bought a property with an unrecognized unit; however, I have asked my insurance company what would happen in the event of an insurance-related event. I am awaiting the answer...



Mike

 

[nickek]

OurRealtor: It's all posted in the listing



Brett: Thanks for your info. So I shouldn't look into them?

 

[RedlineBrett]

[quote user=nickek]OurRealtor: It's all posted in the listing



Brett: Thanks for your info. So I shouldn't look into them?




I didn't say that. I have lots of clients that invest in them. You need to get educated on the issues and understand the risk/return profile before making such an investment. If you can't figure that out then no, you shouldn't invest in them.

 

[nickek]

You're right, there probably isn't a 'yes' or 'no' answer to this kind of situation.

 

[RedlineBrett]

real estate valuation is very seldom black and white. There are innumerable little factors related to any deal but the great thing about this business is that you as an investor get to decide which factors take precedence over others. Do you want cash flow with some risk or no risk and little cash flow? Up to you and how you plan to grow your business.



If you want to do property investment in Calgary (the #1 real estate market in the country by the way) sooner or later you will have to decide where you stand on illegal suites - there just isn't enough supply of fourplexes or smaller multifamily and condos / townhouses will barely break even.

 

[wgraham]

[quote user=RedlineBrett]

Just my $0.02.





Outstanding breakdown Brett and I agree 100%



The only thing I will add is that you take more risk ADDING suites then you do buying properties with existing suites. All of my suites already existed, the nieghbours are already aware of them and the city has never investigated the property.



Happy Investing

 

[nickek]

Good point. After investigating the scene, it seems that if I want to stay here, dealing with illegal suites is inevitable.



I'll also take your tip into consideration, wgraham.



Are there any other resources I should look at for more information?

 

[bizaro86]

[quote user=wgraham]The only thing I will add is that you take more risk ADDING suites then you do buying properties with existing suites. All of my suites already existed, the nieghbours are already aware of them and the city has never investigated the property.





You'd be taking more risk adding a suite, but are you also getting more reward? I don't know the answer to that question, but it's worth thinking about. If illegally suited houses in a neighbourhood are going for 400k, while the unsuited versions are going for 300k, and you estimate 35,000 to add a safe suite, it might be worth the risk of getting shut down, since the cashflow/capital gain could be significant.



I've only used hypotheticals for numbers, and would be interested in hearing what those in the market are seeing in Calgary for suited vs unsuited prices. Do they vary dramatically?



This could be an important risk mitigation piece of information as well. If a suited and unsuited house are worth about the same amount, then if an illegal suite is shut down, the house could presumably be re-sold without the kitchen as a single family dwelling without a significant loss. If the price difference is significant, that may not be possible.



Regards,



Michael

 

[Lucy]

Illegal suites are an interesting topic. In Downtown Toronto, over 90% of the 3 and 4 family homes are simply houses converted to 3 and 4 apartments, one apartment for each floor and because they still qualify for residential rate mortgages they are very attractive investments. The returns are superior to every other investment and they still pay single family home property taxes rates. I do know friends who have spent anywhere from $50,000 to $200,000 for a Reno/conversion. The obvious common overused argument is that the city will not shut them down as there is a huge demand or shortage for the rentals.
It's actually gotten way out of hand and like an epidemic. And it's not as though they rent for cheap. 2 bedroom flats along the subway lines are renting for $1750 plus utilities. You buy a 3 story semi, create 4-2 bedroom flats and you create a $75,000 net return before debt! An 8-9% cap in prime downtown Toronto. Unheard of!

I always fear, what if the city decides to do a crack down and I am mesmerized that they are ignoring this out of control epidemic. How would you like some investor to purchase the house next door and convert it to a 4 family home shunning his nose at the by-law officers? Or how would you like to own a LEGAL fourlex and obey the laws and have to pay double or tripe property tax when the investor with the house conversion is getting away with paying only $5,000 while ignoring the by laws and laughing at you for being legal!

Prime tenants with amazing cash flow and a 9% CAP rate.

Hello Rob Ford....are you reading this?

 

[invst4profit]

I can't speak to the subject of illegal suites in Calgary but when it comes to Ontario and specifically Toronto a interesting situation exists. The government is attempting to down load the responsibility of affordable housing off of the city/province and onto the shoulders of private investors. This means taking on most if not all of the tenants on OW and ODSP which means turning a blind eye to illegal suites in private residences. These suites, mostly converted basements, are required in order to make home ownership affordable.

Their are some down sides and possible causes of a future implosion of the status quo. To begin landlords are becoming fed up with having to deal with low quality tenants. The major cause being the fact that the government is forcing landlords to keep these tenants against there wishes. Secondly legal landlords are feeling the abundance of unregulated suites may be pulling down the rent levels. Finally in Ontario there is a spreading fear of landlord licensing. Licensing will put a end to illegal suites, displacing tenants on government assistance and making home ownership near impossible in some areas. Shutting down of illegal suites is not presently a option on the part of government but possibly inevitable for multiple reasons beyond the control of anyone.

The upside will be a win for investors in legal units. A major win in fact as rents will go through the roof.



I don't know how any of this effects Calgary but in Ontario with a upcoming election and a growing tide of resentment among landlords toward the present governments tenant friendly Landlord Tenant Board there could be major change in the not to distant future.

 

[Lucy]

Landlord licensing may be a good idea in Ontario to curb the illegal suite epidemic. Rewarding the good and legal landlords. It's only $1.50 per month per suite.

 

[invst4profit]

It could change the landscape, for the better, in Ontario cleaning up the illegal suites and the cost will simply be passed on to our tenants.



The downside may be in what conditions politicians try to slip into the mix disguised as landlord licensing.

Tenant activists will pressure politicians to include even more ridiculous rights for tenants than we are already forced to work under.

As the system now stands the business environment in Ontario is becoming even more undesirable and unless the RTA and LTB change soon investors are well advised to go elsewhere. Go west and allow Ontario to feel the pain for a while and we may see some improvements for those that survive in the business. As it stand right now the sign reads "Investors Not Welcome".

 

[AndreiAngelkovski]

I agree that in Toronto, the city is definitely turning a "blind eye" with illegal suites. However, if "someone" was to complain, the city will be knocking on your door. Although it is rare, but it still has happened.



My recommendation is understanding your risk tolerance and understanding what your worst case scenario can be. Then, asking yourself if you can deal with your worst case scenario? For example, if the city comes in and shuts down your illegal suite and you can no longer rent out that basement apartment, will you still be cash flowing postively?


I know people who have invested this way and have told me that they are willing to take the chance of getting that one illegal suite shut down and still rent out the rest of the house with postive cash flow.

 

[Lucy]

I have friends and clients who are adamant that the City of T.O. Cannot and will not shut them down.

 

[bizaro86]

[quote user=Lucy]I have friends and clients who are adamant that the City of T.O. Cannot and will not shut them down.



Whenever someone says the gov't "Cannot" do something, I always ask what part of the constitution explicitly forbids it. Because otherwise the only thing limiting the gov't is the adversion to perfidity of our elected representitives. Unless you're sure (and they're sure) it would make them unelectable in the future, it could happen, even if it's illogical and venal.



Regards,



Michael

 

[invst4profit]

Anything is possible and with the possibility of a provincial Conservative win in the fall election "possible" may be closer than we think.



If the landlords of Ontario continue to pressure the government as we are now and we do end up with the Conservatives in Ontario we believe change is definitely possible and the trickle down effect could impact illegal suites.