Ottawa's Current Housing Situation
The housing market is anything but predictable right now. 2022 was a ground shaking year with skyrocketing property valuations. That coupled with a kind of scarcity that hasn’t been seen since the 1990’s but unlike the “post cold-war” decade, there’s no amount of public stimulus that will turn this around.
Opportunities are ripe for the picking if you can access the right kind of financing to get your dream off the ground. This year in 2023 the Ottawa Business Journal predicts home prices will rise another 4%. While compared to the increases we saw in 2022 this might seem modest it’s important to consider that the average home in Ottawa is going to sell for a whopping $683,000 this year. In October of 2022 the average sale price was $657,000.
The shortage narrative, according to the Globe and Mail, isn’t the primary cause of these climbing valuations in the housing market, however. George Fallis wrote back in March of 2022 that population increased across Ontario by 10.7% but in tandem with this growth we saw the number of dwelling units grow by 12.5%. So there is an argument to be made that a housing shortage exists in some paradigms but not all. Fallis writes that national interest rates, as many presume, can’t bear the brunt of blame either, at least not as a stand-alone factor. We must also consider the consumer expectation as the final instrument in rising valuations. And those expectations are setting the pace, even now in 2023.
If you’re thinking of investing in building a multi-unit income property you’re here because you want to know where to start and what am I getting myself into?
When building structures designed solely for the purpose of generating revenue the cost considerations are unique. Because multi-unit income properties are considered high-growth, high-yield investments they often require a higher financial investment.
The cost of building a multi-unit income property in Ottawa ranges from $388 per square foot to $522 per square foot. These numbers take into consideration a fast variety of factors that are predominately unique to this type of build.
Financing An Income Property
I reached out to Jean Lamarche of Ottawa Mortgage Guys for his expert advice regarding what ottawa income property borrowers should expect when jumping into the Financing Phase of their build.
On the call Jean explained that for the purpose of construction loans, oftentimes a mortgage broker won’t be able to assist however at Ottawa Mortgage Guys they are able to connect borrowers with private investors. Though costs are a bit higher with private investors, the building process goes much smoother because the access to capital is less restricted. He said that today the majority of the construction loans are provided directly by the large financial institutions. Banks will require the standard income verification and notice of assessments, if the borrower is self employed the bank will require two years of financial statements.
For a construction mortgage most financial institutions, Jean outlined; will initially require a clean deed to the land. (Which means you need your own capital to buy the land – except in some cases with private investors) You will also need the building plans of the proposed building. Accompanying those drawings, Jean details that the borrower will also need to supply an appraisal of the proposed build. That appraisal will illustrate the projected value of the build when completed. Jean also mentions that it’s important to get direction from your lender (Either a bank or private investor) when selecting your appraiser. Lenders will have a list of approved affiliated appraisers for you to work with. The bank will also want to know who you intend to hire to execute the build. The bank will want to ensure that the builder is financially capable to be trusted with the build, and if the builder has adequate experience with this type of work. Reputation will be taken into account.
When you purchase a multi-unit income property that’s ready for move-in, there are some benefits if you, the owner, intend to live in the building. For example you may only need to provide a 5% down payment if the building is less than 3 units and only 10% of the building is 3-4 units. But if you don’t intend to live in the move-in ready building you can expect to dole out a 20% down payment for your investment property no matter how many units it has. Concerning a construction mortgage whether you plan to live in the unit or not the down payment requirements won’t change.
Jean goes on to explain how your down payment can affect the amortization of your loan. In the case where you put 20% or more will give you more flexibility in your amortization schedule. With 20% down you can go up to a 30 year amortization schedule. Any down payment less than 20% only allows for a maximum amortization schedule of 25 years.
I asked Jean if he sees any trends so far in 2023 regarding fixed and variable rates. He said clients seem to be taking shorter terms but some clients are staying with the variable terms they have even though the rates have gone up, based on the hope that the pain will be short term and rates will come back down in the next 12 months. However most people coming due for renewal are locking into a 2-3 year term.
Even after you jump through all the hoops in the approval process, Jean says, you should still be prepared for a controlled release of funds throughout the various phases of the build.
The initial amount released will be based on the actual value of the land. This capital will be used to install the building foundation including service hookups.
Once foundation is complete the bank will issue another appraisal based on that work completed and release the next injections of capital. This deposit needs to be used to fund the project to a point where it can be locked and secured. Typically this means the framing and OSB is done, roofing is complete and windows and doors are installed to a point where the building can be locked and secured.
The last progression payment is done when the build is ready for occupancy. All building inspections have been completed and signed off, and its move-in ready.
As you can imagine it’s important to work with a company that has the working capital to manage the restrictions that 3 progression payments introduce to a project. Banks are not in the business of project management, but rather risk management and therefore it’s upon your contractor to have the working capital required to complete the phases of the project without solely relying on the restrictions of the bank progressions
Hire an Investment Property Contractor to Develop Reports and Surveys
One of the first steps to pre-planning a multi-unit income property build is putting together the necessary reports and surveys that will determine the condition of your site. In Ottawa,
These will help you craft a more specific list of costs and develop preliminary multi-unit income property designs and building contracts.
Without these surveys and reports, it may be harder for builders to determine accurate site costs except through visual inspections and previous builds, which may not be exact.
Architectural Designers at My Next Home Reno, for example, require initial deposit funds for a soil test, designations and land use reports, neighborhood character surveys, and property service information. Also at this early phase we would require an updated copy of the title.
You may also have to pay for a re-peg survey and site inspection report, which helps you identify any footprint restraints to the building.
Certain reports are also required as part of the development application, including site analysis reports, statement of environmental effects, shadow diagrams, landscape plans, stormwater drainage design, and a waste management report.
Not all of these reports will be required but working with a professional in your region who has experience navigating these roadblocks will reduce your anxiety and expedite the process. From a cost perspective this phase in your project can contribute to about 1.5% of your startup costs
Physical Factors Relating to Your Ottawa Investment Property Building Project
The results unearthed in the surveys and reports phase will then help determine the costs associated with the external physical factors relating to the site plan on the lot..
Depending on the details concerning the substrate and soil condition, costs will branch off relatively and may include slab/foundation upgrade, site cut or fill, retaining walls (block, boulder or timber), rock removal and compaction of existing fill.
The costs will also be influenced by the size and orientation of your lot, the way your land falls and the width of your lot/block, as well as the conditions of the planning permit and local council zoning.
In order to avoid unnecessary additional costs or prolonged planning, be aware of development restrictions and requirements in your area by getting in touch with your local council.
Specific Multi-Unit Income Property Building Site Features
Other building features that may add to your budget are silt and pollution barriers, which the ministry of environment almost always requires when building near watersheds and wetlands but also it can be required and a more permanent feature of the landscape in some situations and therefore should be addressed in the planning/design phase. Another benefit of working with Architectural Designers at My Next Home Reno is that we determine if this is a requirement ealy in the design phase.
Parking will, of course, be an influencing factor in costs as well. Of course here in Ottawa and other parts of eastern Ontario many households have at least one vehicle. Designing your parking footprint based on the needs of your building and the limitations found in your site analysis and designation and land use reports.
Also consider the desired size of the multi-unit income property, the number of bedrooms, kitchens and bathrooms in each unit, as well as the quality of finishes. A tool you can use to help you make this call is the neighborhood character survey. With this information you will be able to extract the lifestyle expectations of the average resident found in your neighborhood. Imagine the differences between multi-unit income properties developed in Baseline/Woodroof compared to a modern multi-unit income property built in Manotick or Osgood. Lifestyles are different and those factors need to be considered.
Kitchens and bathrooms are usually the most expensive parts of any build, depending on their functions and aesthetics, as well as the quality of inclusions.
It’s good to mention here also the importance of factoring in optional extras such as landscaping, fencing, swimming pools and outbuildings.
While building a multi-unit income property is basically establishing an additional home on a greenfield site, some investors may opt to demolish a part of their existing property to make way for the new development. In this case, consider demolition cost as part of your budget, which will involve taking out all infrastructure, underground piping, rocks and other hurdles.
Water and Electrical Systems
Aside from external requirements, some areas around Ottawa also require a detention system to restrict the flow of stormwater and regulate its release into the easements or in more rural areas, assist with aquifer infiltration.
It’s not uncommon that other connections and services may be necessary to execute the build such as a new underground power pit, temporary service connections, additional water tapping requirements (wet and dry tapping), additional sewer requirements, upgrade of existing tie and, of course, all the relevant permits associated with these requirements
Income Property Contractor’s Safety Requirements
Finally, before we can proceed to the building phase, we have to comply with the Occupational Health and Safety requirements as stated by law, which ensures the safety and welfare of those in your workplace. Your General Contractor will ensure these requirements are being met as a standard practice but it’s important to understand the costs allocated to this line item of your project.
These may require costs for additional site cleans, temporary fencing, the carriage/slinging of material (including for the dogman), associated electrical authority requirements due to power lines, double handling, crushed rock to driveway for heavy vehicle access, additional scaffolding, porta potties, first aid, eye washing stations and tree protection requirements.
Final Considerations When Selecting Your Ottawa Income Property General Contractor
This is where I shamelessly plug My Next Home Reno as your best choice for running your next income property new build. But regardless of who you hire to GC your project here are some key performance indicators we think you should keep in mind.
1. Ask for more referrals and to see their work
Referrals are important but the best referrals are not the ones a contractor provides you. The best source for gauging a contractor’s true reputation is through publicly accessible portals like BBB and Google Reviews. A contractor can’t filter or whitewash these reviews. They are real people expressing their true experiences.
2. Do they hire subcontractors?
Almost every General Contractor uses subcontractors. With so many moving parts and intricacies its best to employ field specific specialists rather than a jack of all trades. But if you see work you like, you need to be sure they can source the same sub-contractors. It doesn’t mean they can’t do a great job and accomplish everything you wanted, just that the people renovating your home might not be the same ones who did the work that you fell in love with.
3. How many jobs do they manage at once?
It might not be realistic to expect the lead contractor or manager to be at your house from start to finish every day, but it’s helpful to know if you’ll get their undivided attention or if they’re balancing a dozen other clients at once.
4. When are they available to start?
Good contractors will be booked up several months in advance, especially contractors who built multi-unit income properties. My Next Home Reno is always growing and currently we are booking several months out.
5. How long do they think the work will take?
Nice and simple. Get an idea of how long your income property project will be a construction site to understand how this might affect payments you are making on your loan and when to start marketing for tenancy.
6. What insurance do they have?
Like any type of insurance, you hope to never need it. But, contractors will need specific insurance for different kinds of builds. You should also confirm that your building insurance policy is valid during renovations.
7. Know that they’re interviewing you, too
While you’re asking them questions to see if you want to work with them, they’re also determining if you’re a client they want to work with. Good contractors are in demand, and they want to make sure they’re booking jobs with good clients.
Are you ready to start your Ottawa Income Property Construction Project?