5 Pros & Cons of Turning a Single-Family Home into a Duplex: Buy New Or Convert?

Should You Convert Your Home or Buy a Mult-Family Home?

Are you strategizing your first rental investment property? One of the most common questions is the choice between purchasing a multi-family home (such as a duplex, triplex, or quadplex) or taking the transformative route of converting a single-family dwelling into a duplex. Both options hold distinct potential and unique challenges, and understanding the differences between them is pivotal for any investor looking to maximize returns and navigate the intricacies of the property market. Delve deep into each approach's comparative pros and cons and gather the insights you need to make an informed decision.

Pros & Cons of Buying a Multi-Family Home

Buying a multi-family home is one of the most popular ways to start investing in real estate. Residential multi-family homes come in three main styles: duplex, triplex, and quadplex. These properties make great first investments because they're relatively low maintenance and more straightforward to finance than commercial real estate. However, they also come with several drawbacks investors must know before opting out of a home conversion. 

How Much Does a Multi-Family Home Cost?

Buying a multi-family property can be an affordable entry point to real estate investing. However, you must recognize the average price of a multi-family home can differ significantly based on location. For instance, within Ontario's vast property market, Toronto stands out as the priciest city for multi-family dwellings, where the average sale price often surpasses the $1 million mark. Contrast this with the city of Ottawa, where the average cost of a multi-family dwelling is notably lower, typically under $700,000.

Financial considerations don't stop at the purchase price. If you choose to live in one of the property's units, you can secure the property with a down payment of just 5%. However, if you plan on being a non-resident landlord, the financial landscape changes, necessitating a more substantial down payment of 20%. 

Regardless of your living situation, there's a silver lining when securing financing. Buyers can leverage up to 50% of the anticipated rental income to bolster their qualification for the loan, providing a significant boost to those relying on this income stream to support their investment.

What to Know Before Renting Out a Multi-Family Home

Renting out residential multi-family homes, like duplexes, triplexes, and quadplexes, presents an attractive proposition for seasoned investors and newcomers alike. One of the shining advantages is the stability and affordability these properties usually offer. 

Investing in a duplex can be a particularly savvy move for first-time buyers. By living in one unit and renting out the other, the rental income generated can significantly offset and reduce the owner's living expenses. When scaling up to triplexes and quadplexes, they come with an added safety net for the owner. If one or two units are vacant, the income from the other occupied units can cushion against the total loss of rental income. 

Owning multi-family properties often comes with its set of challenges. These can be more restrictive in terms of personal use. Those who add a rental space to their existing home have more control over their use. If comfortable house-hacking is your goal, converting a single-family home may allow for more customization. 

Moreover, the hands-on management of multiple units can be labour-intensive, demanding more of your time and energy than you might initially expect. Balancing these pros and cons will ensure you make an informed decision that aligns with your investment goals and lifestyle preferences.

Are Multi-Family Homes Hard to Sell?

Selling a multi-family rental home can be a mixed bag, offering opportunities and challenges. On the positive side, a well-maintained multi-family property with a proven profitable rental income history can be an attractive asset that stands out in the real estate market. Investors are always looking for properties that promise a reliable return on investment. 

However, the nature of rental properties — specifically, the regular wear and tear from tenants — can complicate selling a multi-family home. The property's condition can be a significant factor for prospective buyers concerned about immediate maintenance or renovation needs. Consequently, what could be a profitable venture may require upfront work and investment to make the property market-ready. Balancing these factors will determine whether it's hard to sell and how beneficial the sale can be.

Pros & Cons of Converting Your House to a Multi-Family Home

Converting a Single-Family Home to a Multi-Family

Converting a single-family home into a multi-unit rental property offers advantages and challenges. On the upside, such a conversion can increase the property's potential rental income and overall value, providing the homeowner with multiple income streams from one property. On the downside, the initial conversion cost can be significant, requiring utility adjustments, zoning considerations, and potentially extensive renovations. The decision to convert should be based on a thorough analysis of costs, potential returns, and personal capacity for increased management responsibilities.

How Much Does a Single-Family Home Conversion Cost?

Before converting a single-family home to a multi-family property, homeowners must meticulously analyze the financial implications. The cost of such a conversion largely hinges on the scale and complexity of the required modifications. For example, creating a separate living unit might entail only minor adjustments, such as renovations under $50,000. However, more ambitious undertakings, such as adding an entire story, can skyrocket costs to approximately $250,000 or even more. 

Fortunately, those who have built up equity in their home over the years can offset these expenses by securing a Home Equity Line of Credit (HELOC). In this case, it may be cheaper for established homeowners to convert a single-family home to a duplex. First-time property buyers may find taking out a mortgage for a multi-family dwelling is more cost-effective. 

Beyond the initial financial outlay, prospective investors should prepare for the duration of these projects; home renovations, especially of this magnitude, can often be time-consuming, extending far beyond initial estimates. This time factor impacts living conditions and can influence the cost and expected returns on the investment.

Check the Zoning Codes

It's paramount to check with the pertinent zoning bylaws before adding a rental unit to an existing home. Zoning codes may vary from province to province and down to the specific city or neighbourhood level. Taking Ottawa as an example, homeowners aspiring to add rental units to their existing dwellings must navigate a set of zoning rules. 

First, they must secure a non-negotiable building permit before any work commences. A stipulation also prohibits more than 40% of the home's total floor space from being dedicated to this new rental unit. Unless there are exceptions due to building or fire codes, the new unit should have separate access on the ground floor of the main dwelling. 

An additional caveat is that when creating this secondary dwelling space, homeowners cannot introduce any new doorway entrances on the home's front wall — the wall closest to the front lot line. Navigating these rules is crucial for legal compliance and ensuring the homeowner's and potential tenants' safety and well-being.

Buying a New Multi-Family Home vs. Converting Your Existing Property: What's Right For You?

Both avenues present unique advantages and challenges. Purchasing a multi-family home often offers a turnkey solution, ready-made for immediate rental income, while converting an existing home allows homeowners to tap into their property's latent potential, albeit with potential zoning hurdles and renovation costs. Your decision should be rooted in a comprehensive analysis of your financial position, tolerance for management responsibilities, and long-term investment goals. Ultimately, the choice between buying a new or converting comes down to individual circumstances and aspirations, ensuring your real estate journey aligns with your vision for the future.

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