“Today at lunch my friend who lives on the westside said he just accepted terms with a contractor to build him a $300,000 laneway house at the back of his lot.”

“I never bring up the subject of RE with friends, but they always just volunteer this stuff. However today at lunch, my friend who lives on the westside said he just accepted terms with a contractor to build him a $300,000 laneway house at the back of his lot. 2 stories, 700 square feet.

I asked him how much he thought he could rent it out for and he said about $2000/month. I guess on paper that is sort of a 10% net return if you don’t consider the $1.7 million it cost to buy his house in the first place. Although I kind of wonder who would want to pay $2K/month to live in a shoebox in an alley, westside or not.

Also the contract is not fixed price, so if costs go over (like if it rains and lengthens the period of construction … and sometimes in January it does rain here) maybe the house ends up costing $350K-$400K. Seems like an odd thing to spend more than 2x the average US home price on a bunky in Vancouver.”

HAM Solo at VCI 7 Dec 2012 1:58pm and at VREAA 7 Dec 2012 2:22pm.

Owners building laneway houses aren’t factoring in the market value of the land, which makes the price:rent math even worse. – vreaa

Further: People deceive themselves into thinking that they own a SFH in a desirable area of a desirable city, but they actually end up amateur landlords, running a rooming house with tenants in their basement and garage. [This applies to basement suites as much as it does to laneway houses].
That self-deception has been one of the bubble subplots; one of the mechanisms that have driven prices to artificial heights.
When folks sign the papers for these purchases (for which they have overextended themselves cruelly), they’re not thinking about the landlord math, they’re lost in the fantasy of SFH ownership. – vreaa

Prior related posts of possible interest:

“What’s the Difference Between A Shed And A ‘Laneway House’?” [Drum-roll] “About $268,000!” [Cymbal]
VREAA 29 May 2012

Basement Suite In East Vancouver Sells For $590K
VREAA 24 Feb 2012

80 responses to ““Today at lunch my friend who lives on the westside said he just accepted terms with a contractor to build him a $300,000 laneway house at the back of his lot.”

  1. This would analgous to adding an extra level on a midrise apartment. To understand if it’s worth it, it should be a relatively straightforward calculation.

    • But how does it affect the overall value of the property? Rich folk would rather have a two car garage or a bigger backyard than have po’ folk encamped, and the demi-rich, who can only afford the main house if it comes with the barnacle, are very dependent on the financing conditions of their lenders.

      • Yes this is one of the penultimate problems with Vancouver in general, Ralph, where in order for families to afford certain areas they are required to be small-time property managers and necessarily carry what amounts to short-term debt (given the capitalization schedule of real estate). To wit a house like the one ‘anecdotalized’ is a good example of this effect. Some houses have say two “secondary” basement suites, an upstairs “main” living area, and now a laneway. That amounts to well over $2000 of income that goes into setting baseline price — this is heavily dependent upon financing terms. This does not really help affordability, rather it requires increased correlated risk exposure for those who are required to supplement income to make properties affordable. Whether or not the property is at high density is beside the point, the land value prices in highest and best, which is now, really, a mini-compound.

        If families admonish the responsibilities and risks associated with property management or are unwilling to lever up into real estate for whatever reason, whether it be concerns over long-term land values or wanting increased investment diversification, this cuts off a large chunk of Vancouver properties available for purchase. It should be no surprise in the slightest that middle-class family growth in areas like Surrey and Langley are flourishing while stagnating in Vancouver proper.

      • jesse/yvr -> Very well put.

      • Real Estate Tsunami

        You nailed this one.
        Our hockey team travels frequently for games to Langley and Abbotsford.
        And I’m always amazed on how many new sports facilities these communities have built, whereas Vancouver and Richmond have many old and crumpling facilities.
        The young families are moving to the Fraser Valley, and Vancouver will just become, well HONGCOUVER.

    • jesse/yvr -> But is it the equivalent? Wouldn’t one argue that the roof-space of the mid-rise apartment is of no practical value, whereas the land on which a laneway house is built essentially use up the back third of a standard lot?

      • In terms of FSR I think the two are mostly equivalent. The same effect would be in place if the City, instead of allowing laneways, allowed an additional story on top of the existing structure, at least in terms of capital cost and income generation potential.

      • But a roof isn’t being used; the back third of a lot is being used.

      • The concept is the same. An existing lot is being used to increase density. It may not be the most construction-efficient way of doing so but it is a method of doing so. Evaluating this method from a cost vs return perspective is valid, at least to determine if laneways are a speculative feature or will be a mainstay even after a crash.

      • With a laneway house one must factor cost of land into overall cost (land that was being used as a garden, a carport, etc); adding another floor to a multiunit dwelling could be argued to be ‘creating’ useful area where none existed, with no use of further land.

      • Ralph Cramdown

        The way to phrase the question is “at a cap rate I’m comfortable with, does (the rent from the main house plus the rent of the lane house minus the amortized cost of construction of the laneway house) better the rent from the un’improved’ property? Or, can I add a storey legally and cost effectively, profitably (including foregone rent during construction) at my desired cap rate?

        By allowing laneway houses, the city has effectively increased highest and best use. And once a certain number of houses in the neighbourhood get their barnacle, the remainder won’t rent for as much without them (“I may get a great backyard,” says the prospective tenant to himself, “but I’m living in a favela.”)

        In this particular example, the owner fudges the business case by not accounting for likely, er, certain overruns, by being optimistic on the rent he’ll be able to charge, and by disregarding the loss of owner imputed rent he’ll get. The city gets the higher tax base at a low cost to service, the contractor gets the work and the bank gets the interest on the money.

      • Yes Ralph I don’t disagree the fellow’s calculations are suspect. The question, I think, is if “highest and best” has increased with laneways, that is, are the construction costs and lowered utility by sharing less than the expected future income stream. I think they are, but the case will work best with new builds and not infill, and I’m suspect owners are generally capable of being property developers meaning costs in general will be poorly contained.

        But the principle of increasing density, in certain areas, is long overdue. Laneways are a way of accomplishing this that is politically expedient. More sustainable forms of density, in my view, are not popular because of incumbent interests, but that’s a whole other complicated topic!

  2. I don’t think I’ve ever seen a two-story house that is only 700 sq. ft. I’m surprised that would pass code.

  3. Hmmm… 300K to construct a 700ftsq LaneWay renting at 2K PCM… or, he could do it KelownaStyle!… and self-assemble a 0.5K 100ftsq storage shed that rents at 0.2K pcm…

    [CBC] – Homeless couple, 3 dogs, lived in garden shed: Man, woman and pets living in tool shed in Kelowna, B.C. paid $200 a month

    …”A B.C. woman has been fined $500 for renting out a garden shed to a homeless couple and their three dogs. A power cord that ran from the woman’s house in Kelowna, B.C., supplied electricity to the small metal building, for which she was charging rent of $200 per month.

    It’s not clear how long the people and pets had been living in the shed. Bylaw officers warned the owner two weeks ago it was not suitable accommodation, but the advice was ignored, said city spokesman Stephen Fleming. Fleming described the small building as “a standard type of metal garden shed that you’d get at your local hardware store. It certainly doesn’t look like a place for people to be living in.”….


    [NoteToEd: Ever cognizant of YVR’s HoityToity AlleyWay property trends, the HillBillies are, evidently, doing what they can to maintain appearances.]

    • How’s this for hoitytoity?

      • I’ll see your HoityToity, CT – and you raise one “Ol Sh***y”…


        [NoteToEd: In a new iteration of the HighlandClearances of yore, an ElBerTah refugee encampment takes shape in an Okie WalmartCarPark – the trailer’s sorry occupants having been forced to flee their beloved TarSandsHomeStead by agents of CNOC, Petronas]

      • Ralph Cramdown

        Now really, comparing a race that repelled the Romans (and made ’em build their own damn wall) to a race that repelled the Easterners by building a ‘firewall,’ but ended up getting cnoocered by the next wave of invaders? Albertans might be better served by becoming shepherds and bleating about the environment.

      • call … http://tinyurl.com/kw4uj8 … and don’t forget it’s mobile

      • Its ‘ShowTime!’…

        “You’re throwing me out! You’re sending me out to a doghouse! Why not put me in a manicomio?” – Viola Baez, 88 – using the Spanish word for madhouse.

        [WaPo] – Pioneering the granny pod: Fairfax County family adapts to high-tech dwelling that could change elder care

        …”She told her family she would rather continue living in the family’s dining room than move into the shed-size dwelling that had been lowered by crane into the back yard of their Fairfax County home.”…


      • eternal riddle answered? … http://tinyurl.com/365rhc5

  4. After taxes (property and income), maintenance, insurance, and lost rent when unoccupied, the return on this venture is clearly going to be negative. And that’s not counting the cost, in time and effort, of being a landlord.

    • Agreed.
      Laneway houses, at current construction and land prices, make no economic sense. In that regard they also fail as a method of increasing density.

      • Ralph Cramdown

        What if you look at it in terms of those odious commercials selling electric chairlifts and walk-in tubs to seniors? Reduces the value of the house, but increases the livability for the occupants. A laneway does that via cashflow. And hey, by that logic, you can deduct the realtor’s commissions you avoided because you didn’t have to sell!

  5. At 300K for 700 square feet that works out to 428 dollars per square foot, a staggering reminder of the high cost of building in this city. Taxes and bureacracy for builders, along with high construction costs generally all work against housing affordability. Building costs for SFH are quoted at 200 dollars + per square foot. Who can afford these costs even if you own the land?

    • The problem here is it wasn’t built with the main structure. I expect laneways can be profitable if built as part of the original plan. That does not mean laneways are profitable, but I do expect marginal properties to include them going forward, or new owners will need to pay a premium to not have them.

      • “..new owners will need to pay a premium to not have them.”

        That’s an interesting thought. This would be more obvious if they were cash flow positive.
        And perhaps another way of saying this is “..new owners who don’t want to work as part time landlords will pay a premium.”

      • Yes that’s another way of putting it. It already exists with older vintage properties in Vancouver. The rent nowhere near covers the carry costs; the option play is in future redevelopment to “highest and best”.

        If laneway becomes de facto standard and does produce a higher use (which we can debate), that means if laneways are not produced that is a premium of price over the imputed rents. Scarce resource and all that.

      • You can go to a small town, cheaper places like Quebec, and Atlantic Canada and buy a home and land for less than $200K. It is crazy that even when you own the land in Vancouver, the costs of building a 700sq ft home will cost more than than a whole house elsewhere. Obviously, all the contractors and city are making a killing.

  6. I´m terrified when I hear about projects like this one. Are people really so dumb to think that only by mentioning Westside others will pay a double? Even with the relatively positive outlook of Vancouver RE market, this is a form of financial suicide for the builder.

    The problem of Vancouver is that people are complaining all the time about the insane prices, but whenever they get a chance, they try to realize their greedy dreams about being a landlord or seller. The reality, however, is much more harsh and they will probably realize that their investment was a really bad choice (which will happen in the moment, when their laneway house gets occupied by some sibling who is trying to resolve his financial difficulties by cutting down his rent).

    • >The problem of Vancouver is that people are complaining all the time about the insane prices, but whenever they get a chance, they try to realize their greedy dreams about being a landlord or seller.

      This sums the problem up right here.

      You win at internets for the day good sir.

  7. As more people realize they would rather have the money than the yard space, won’t there be some pressure from residents to allow proper rezoning as duplex or row housing?

  8. A lane way home can increase the value of your home. But that’s assuming you can rent it out. There is a new SFH selling for over 4m around the corner where I live that’s been on the market for almost a year. There are two basement suites and the lane way. That’s probably about 6k worth of income a month while you live on the main floor. At today’s rates assuming 25 year mortgage, that’s 10k a month-4k equals about 6k a month in mortgage payment, which is quite a bit of money. Even, for me, I would not feel comfortable paying for that and that’s assuming I can come up with a 2m dollar down payment. Lane way home is just not worth it.

  9. Ask your friend: if he quit his job, and spent 40 hrs a week building the shed by himself, how long would it take him? 1 year tops? Assuming he could find a job again easily, which would be the smarter move financially: paying someone $300k for a shed, or buying the materials himself and foregoing 1 year of salary.

    • Interesting thought. I’m sure that one embarking on such a scheme would be sorely punished by vested interests for what would be seen as a revolutionary act — Costs of (compulsory) specialist subcontractors (concrete foundations; ‘ticketed’ electrician; etc etc) would be preposterous; City-hall red-tape would be that much stickier for the maverick; etc., etc. — The initially calculated margin of gains would probably be substantially reduced.
      The friend would learn an immense amount in the process, though (ask Froogle Scott).. and that itself could be argued to be of some value.

      • Ralph Cramdown

        In Ontario, you can do your own electrical, plumbing without a ticket if its for your own dwelling, but not if you’re the landlord. Anyone know the deal in BC?

        And how does the CRA look at capital gains when you build a rental suite partway through your ownership? One would think it would be a nightmare requiring before and after appraisals… etc, but I bet they’ll just ignore it if the owner does, part of our new glorious tax evasion Nirvana.

        Has anyone considered the inevitability that these properties will eventually become severable? It’s only a matter of time and critical mass. And it’ll be billed an affordable homeownership initiative.

      • BCIT offers a very good course on building your own home.

  10. Having just moved here, the sheer amount of laneway houses, people living in others basements, etc is eye-popping. In our neighborhood in Lawrence Park it was basically unheard of. Here, all over the place.

    We did buy a house here (I know, I know) and people in the neighbourhood were shocked that we didn’t want to (and never will) rent it out.

  11. Yeah my parents have been trying to talk me into building them a lane-way house on their $2mil west side home for years. Their reasoning is it will significantly increase the value of their home. And they’re always reminding me I will inherit it. They also believe that eventually lane houses will be stratified and thus home owners will be able to sell off the lane house. …..I’ve shown them all the numbers, rebgv reports, etc but they’re sold on the lane house idea. Despite being multi millionaires on paper they can’t afford to build one. I hope they’re just really naive, but sadly I have a suspicion that they’ve been using they’re home as an ATM and are over extended despite buying their home for 300k thirty years ago! If I got involved with their lane house deal guess who’d be on the hook for their debts.

  12. Terrible idea… We live in the heart of L.A. in a gorgeous 2 bedroom 1925 appartement with a fireplace and views of the Hollywood sign for 2k in rent a month. I’m not writing this to brag, just as a point of comparison.

    I feel Canadians and people in Van in particular are delusional. They’ve been drinking the cool aid for so long, even the most extreme behavior is justified and commonly accepted.

    • CanuckDownUnder

      We get a nice 3 bedroom 2 bathroom apartment for that price in Sydney. What the locals would call an enormous unit.

    • No offense, I’m sure it’s lovely, but $2,000 a month can get you an ocean view 2 bdrm rental in Vancouver’s West End. A very walkable neighbourhood that doesn’t require a car to get everywhere next to downtown.

  13. Interesting concept, but IMHO a waste of money after due diligence is performed.

    I rent in a condo here in Calgary where we have a house on our street for sale with a “carriage house” (that’s “cowboy speak” for tool shed……errr…..laneway house)…….heh. Here is the listing…….


    This sucker has been listed for a couple of months now, with 2 diffent agents, and has been reduced $70K already, and I expect it to drop well under $900K after Christmas. The $240-300K price difference and associated carrying costs between it, and the 4 other comps in the neigbourhood without “carriage houses”, is it covered by the “$930 a month of legally tenanted rental income”……..it’s not even close.

    It will never sell until it makes mathematical sense. The risk/reward ratio is all out of whack and the logic just isn’t there.

  14. The more I think about these, the less I like them. Currently many people, if they want SFH in Vancouver, have to be either a landlord or a tenant, even if they’d prefer to be neither. I don’t like the idea of amateur landlords. Not that I think it shouldn’t be allowed, just that it’s something people should desire to become good at and professional about, with a number of tenants to minimize the cash flow crunch should one of them decide not to pay for a few months and trash the place before moving on. As contrasted with something that people do grudgingly and at great financial risk, viewing it as more of a life stage than a vocation.

    Laneway houses CODIFY this arrangement, creating thousands more amateur landlords, and properties where every resident has to be a landlord or a tenant. And if real estate prices DO correct by 40%? Suddenly fewer people will need to be landlords, and fewer tenants. That lowers the value of the package and the rent of the laneway, which lowers the value of the package again, lower rents and lower house prices mean the tenants you can attract are more marginal, and there goes prices again. Sounds like hell. There’s no option here to convert the basement apartment back into finished living space for the owner.

  15. To me, the goofiest thought that goes unchallenged about this kind of venture is that it “cash flows” for the owner. If you think about it, the owner pays $350,000. Then, if he is so lucky, the first year after completion, he has earned back maybe $20 K in rent. That would be a 17.5 year payback, before interest charges. In business that would never fly!! The only reason that people say it cash flows is because some financially mal-incented bank, propped up by a government guarantee, will lend the $350K to backstop the whole fiasco.

    Ask not for whom the debt clock tolls … It tolls for thee

  16. I think that is exactly why a couple of comps in our area ($250-300K cheaper and without apts) similar to the house I posted about have sold, whereas this one is languishing on the market.

  17. The person building their 300,000 laneway house has kind of overzelous expectations of rent. A quick creigslist search give you about 1300-1400 expected rent, not 2000.


    • UBCghettodweller

      When the first wave of “nice” laneway housing was posted a year or two ago, the asking rental rates were $2000ish- sometimes quite a bit more than that. A quick survey of any rental listing service will tell you that $1250-$1500 is now the going rate. I wonder what happened?

  18. I’m honestly shocked its even that much. You have to compete with regular 1bdrm apartments. I personally would prefer a regular apartment over a laneway house.

  19. “If you think about it, the owner pays $350,000. Then, if he is so lucky, the first year after completion, he has earned back maybe $20 K in rent. That would be a 17.5 year payback”

    Doesn’t the owner have to pay income tax on the collected rent? Or does BC not require this?

    • If everything is done above board, as it should be, then the owner declares the rental income but also gets to deduct things like maintenance, interest on loan, a fraction of property taxes, etc, etc… in the end, given the current math (plus the fudging that so many taxpayers feel is their right to perform), there is very little tax, if any, from the income.
      Of course, many (most?) basement suites are illegal, and the income from rent is not declared.

      • There’s no reason income from an illegal suite can’t be declared. CRA doesn’t talk to municpal govts.

      • Froogle Scott

        That’s true. Our rental suite was illegal when we bought the house, but we did declare the income, and it worked out okay, because we were replacing big ticket items and were able to generate a rental loss (see below).

        The feds get the tax dollars, so that’s their area of interest. When we started on the process of legalizing the suite, City Hall was all about safety and livability standards — minimum ceiling height, smoke detectors, properly sized windows for emergency egress, wiring and plumbing to code, etc. People may recall the three guys who died in a fire a few Christmas seasons back. I think they were living in an illegal suite with faulty wiring.

  20. Following up on vreaa’s response…

    Rental income, assuming you declare it, is income like any other, added to your regular income, and taxed at your marginal rate. Most amateur landlords with basement suites in Vancouver do not declare the income, although that may be trickier to get away with on a laneway house that’s part of a permitted new build.

    If you do declare your rental income, you can claim deductions against it for mortgage interest, house insurance, property tax, repairs and maintenance, and any other ‘current costs’. But if you deduct ‘capital costs’, such as the cost of building the place, or making major improvements, then you’re liable for capital gains tax when you sell. From what I read a few years back, the advice was not to claim any capital costs if you’re renting out a portion of your primary residence, because you’re risking your capital gains exemption.

    For houses with rental suites, you use a percentage-of-square-footage calculation to figure out how much of the total mortgage interest, total insurance, etc., you can deduct. In our case, with our rental suite, it’s 40%, as that’s the approximate percentage of our total square footage taken up by the rental suite. I’d assume you’d perform a similar calculation for a laneway — laneway as a percentage of the total living space on a lot. Apparently if you go over 50% of your square footage devoted to rental, that can also trigger a capital gains situation. Something owners of those “mini-compounds” might do well to investigate. Although apparently there was a legal case a number of years ago in Ontario in which a guy living in one unit of his triplex, with greater than 50% of his structure devoted to rental, challenged the CRA when they tried to assess capital gains tax, and he won, which may have set a precedent.

    The other interesting wrinkle is that you can generate a ‘rental loss’ by having rental expenses greater than rental income. So all the rental income becomes tax exempt, and you can reduce your regular income by whatever amount of the rental loss is still available to use. We had this situation when we first bought, because the rent we were charging was low, and we were replacing big-ticket items. I think in most situations, if you are not claiming capital costs, it would be hard to consistently generate a rental loss year after year. We haven’t been able to now that the rent on the renovated suite is a lot higher than it was on the old dump. (At least the dump was better than a waffle-board metal shed from Rona… We didn’t require our tenants to provide their own insulation.)

    I briefly thought about a laneway house, but when I found out the cost of an infill laneway was $250K+, money we’d have to borrow and pay interest on, I figured the business case just falls apart — although as jesse/yvr says, the economics of building a laneway at the same time as a new main structure are probably quite different. People a block from us have just done that. They also have a long, narrow lot — 175 feet deep — which provides plenty of space between the main house and the laneway. And there’s also a tree between them, which they preserved, and what will be a landscaped courtyard. So they haven’t sold off as much of their privacy as might otherwise have been the case.

    • UBCghettodweller

      Thanks for your usually well written posts. Very informative 🙂

      On the Westside, I’ve noticed many of the lots where a tear-me-down was put out of its misery and a whole new house built have included a laneway house in addition to an obvious basement suite. Maybe the economics do work out better when it’s an entirely new build?

      • Froogle Scott

        Thanks for the response, UBCgd. The next time I talk to the people who did the new build + laneway, I’ll ask them if they felt they were able to get the laneway built for a lot less than if it had been an infill unit.

    • Wonderful response; thanks Froogle.

      The whole capital gains issue is… sticky… isn’t it?
      If CRA had to go into full-on predator mode with illegal suites, the whole thing could get quite gruesome.
      At the same time, we don’t see there being the political will to assault a good number of Vancouver voters in this fashion. But then CRA is beyond politics (and even the legality of income), so, who knows?

    • Real Estate Tsunami

      So they preserved a tree, and there will be a landscaped courtyard.
      Good for them. Staunch defenders of nature.
      Just makes me sick.

      • Froogle Scott

        Well, you may not agree with densification, or laneway houses as a method of densification. I’m not sure I like the concept of laneway houses as a method of densification either, although I’ve seen some attractive individual examples of laneway houses.

        Even if the numbers worked to build a laneway as an investment property I don’t think we’d do it on our standard lot (33 x 122). It wouldn’t just be our own privacy that we’d be eroding. Even with the relatively careful codes regarding oversight of neighbour properties, I think laneways, in traditional Vancouver residential neighbourhoods, do erode the privacy of your immediate neighbours as well. And I think I value good relations with our immediate neighbours more than I would a few extra bucks of rental income (assuming you could actually make a laneway cash flow).

        In the case of these people on the next block, they had extra depth, so I think the result is pretty good. Many cities around the world do lots of interesting and attractive things with residential courtyards. You might even get more use/enjoyment out of a courtyard than the traditional patch of green stretching to a back fence, depending on your lifestyle. Not so good for throwing a football or a baseball.

        Regarding laneways, I’m not really trying to convince anyone of anything. Just sharing some observations.

  21. Once upon a time, “Apple” was a label… not an appliance…

    • Nice.
      Is that Jagger at 2:13?

      Did many/any readers here see Paul?

      • Yes to Jagger… No to Paul… I rewrote the first stanza of “GetBack” and dared him to perform that instead – but he declined… so I told him he was a pussy and didn’t go….

        …”XiXi was a man who thought he was an owner
        But he knew it couldn’t last.
        XiXi left his home in Fujian, Manitoba
        For some SaltSpringIsland grass”….

  22. Real Estate Tsunami

    What is the significance of someone building a Coach House in some place in Vancouver.?
    Obviously,another stupid, naive home owner/ buyer will take on more credit, because his house value can only go up, and there will always be renters paying excessive rents.

  23. Why don’t you all just fade away?

  24. So what do you do
    That’s guaranteed
    Hey little girl,
    you broke the laws
    You hustle, you deal, you steal from us all

  25. And now for your REBGV informercial…. =)

  26. Why are tradespeople so expensive in Vancouver? If you watch HGTV houseporn from Toronto, the cost seem a good 40% less! Can’t we just import a whack of Irish to lower construction labour costs?

  27. Pingback: $ 300,000 LaneWay house ??? |

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