As many of you probably know, the City of Ottawa recently changed its bylaws to permit construction of coach houses on many existing residential lots.
The new bylaw allows homeowners to construct small, self-contained accessory apartments called coach houses that are detached from the primary dwelling but still on the same lot. This is part of a worldwide effort to increase density in existing urban areas.
I expect coach houses – also known as “granny flats” – to have a profound impact not only on the urban fabric of Ottawa, but also on individual homeowners’ abilities to take care of themselves and their families financially.
Here’s an example. Let’s assume you own an existing house in Ottawa that is worth the city average of $380,000. You decide to add a two-bedroom, one-bath coach house in your backyard covering 40 per cent of the area there. The thought is that it’s going to add a bit of income for you when you retire.
Now, let’s suppose it costs you $120,000 to build your new coach house. What is your return on investment if you build something like this? I’ve calculated them in the table below.
So your cap rate (capitalization rate, a measure of return based on you making this investment as if it was funded in cash – that is, without adding to your mortgage) is 13.6 per cent a year. When you compare this to what you earn on your savings at your bank (anywhere from 0.99 per cent to 1.7 per cent annually today) or what most of your mutual funds are probably doing (mine are horrible – around 2-4 per cent in annual gains), it looks quite satisfactory.
There is also the hope that your real estate will go up in value over time, which compounds your return. A cap rate measures only cash returns, not inflation or mortgage principal paydown (if you have a mortgage).
Now, $16,316 of extra annual income might not sound like a whole heck of a lot, but when you compare it to the average Canada Pension Plan payout of just $550 per month, it can make a big difference, especially to elders living on fixed incomes.
So far so good. But changing bylaws is not sufficient to see a new industry bloom in Ottawa. We have to be cautious in our early assessment, because the coach house idea is not new.
I worked on a Kanata subdivision called Briarbrook more than 25 years ago when I was at Terrace Investments, the first parent company of the Ottawa Senators. We put in the zoning that granny flats would be permitted on larger pie-shaped lots – the ones that are created when a roadway turns a corner.
None were ever built. How come?
Because the former City of Kanata imposed rules that made their construction impossible. The flats had to be rented to tenants related to the owners, who could only get a “temporary” building permit of five years (presumably after which time you’d have to remove the structure or tear it down). Owners also had to pay a full development charge to help fund off-site infrastructure, even though none was needed.
Ottawa’s new coach house bylaw calls for a significant development charge of about $6,000, and it prohibits having both a coach house and an in-home suite on the same lot. This is a big mistake, in my view.
Essentially, you have to choose between, say, a legal basement apartment and a granny flat in your backyard. As someone who coaches hundreds of real estate investors, I already know this is a difficult choice.
So here’s what’s likely to happen: We are going to return to the situation that prevailed before in-home suites were legalized a decade ago. Folks will build coach houses, and after they get their occupancy permits, they will construct illegal basement apartments. The city probably had tens of thousands of those illegal apartments before the rules were changed, many of them not only illegal but unsafe as well.
If the city really wants to increase density, why not allow both coach houses and in-home suites?
Well, city planners and politicians live in perpetual fear of the NIMBY movement led by backyard political activists who detest almost any change in their neighbourhoods.
Their concerns? You’re bound to hear lots of talk about more traffic, increased pressure on municipal infrastructure and schools, negative environmental consequences such as tree removal and higher policing costs due to “undesirables” taking up residence in basement suites or coach houses.
But in reality, it all boils down to one thing: Money. NIMBYites fear their property values will drop if coach houses are allowed in their neighbourhoods.
Yet in almost every instance I have studied, higher densities have resulted in higher, not lower, property values.
Take the Glebe, for example. A desirable neighbourhood to live in, no?
It has lots of side-yard, backyard and basement apartments, plus coach houses, an array of businesses, restaurants, offices, an arena, a stadium and, yes, traffic galore. But trust me, a home in that area is not going down in value.
The caveat on this is order and peace need to be maintained, the sine qua non of creating value in any society or town. Fortunately, Ottawa-Gatineau is still one of the safest cities of its size in which to live.
If we are still afraid of a NIMBY attack, maybe we could do worse than borrow a concept from radical English Prime Minister Theresa May, who found a way to turn NIMBY activists into PIMBYs (“please in my backyard”) supplicants. She did it by making sure that any so-called “undesirable” use of property requires a royalty, which instead of being deposited in the coffers of governments goes directly to neighbours affected by the change.
That might be a bridge too far for Ottawa councillors, but it would probably work.
Out of curiosity, I calculated what would happen if other cities, towns and villages followed Ottawa’s example and permitted coach houses.
I estimated there are about 195 million dwellings in the United States and Canada. If 20 per cent of those are suited to adding coach houses, and if all of them did so, it would add $1.8 trillion per year to the total GDP in those nations. Wow.
I love what the tech industry can do for a town like Ottawa. It’s also great to have other economic engines running flat-out, such as the public sector, tourism, education, health care and entertainment.
No industry, however, is bigger than real estate. Everyone needs a place to live, shop, work, learn, make, play and earn.
If we could take the planning shackles off urban designers and real estate investors, they’d be able to create a much more vigorous environment in which to generate wealth.
Why not try to create neighbourhoods that encourage innovative planning solutions without the dead hand of regulators constantly shooting them down?
Here’s wishing everyone a safe and prosperous New Year.
Sidebar: What’s the potential ROI on a coach house in Ottawa?
• Cost of construction: $120,000
• Rental income: $1,800 per month, including utilities
• Tech package (Netflix, basic cable, phone, Internet, Wi-Fi, large-screen tv): $115 per month
• Total rental income: $1,915 per month
• Operating costs, utilities, property management, tech package, administration and insurance: $459.60 per month based on 24 per cent of total rental income
• Vacancy allowance: $95.75 per month based on five per cent vacancy rate
• Net operating income: $1,359.65 per month or $16,315.80 per year
• Cap rate: 13.6% per year
Bruce M. Firestone is founder of the Ottawa Senators and a broker at Century 21 Explorer Realty. Follow him on Twitter @ProfBruce.