Money

The Win-Win Plan is Only for Secondary Suites

Secondary suites are a type of rental housing located on a property that normally accommodates a single-family house.  It is a dwelling unit secondary to an existing primary dwelling unit and contains its own entrance, kitchen, bathroom and living area.  Secondary suites can increase the number of affordable rental units available in the housing market and create more opportunities for home ownership.

It has become increasingly difficult to get money from the banks through a mortgage. You might want to have a suite to bring in extra income, for your young adult children, for your aging parent, or even for you after you retire. The problem is that you might not want to be stuck with all the financial burden that surrounds making a decision such as this.

The Win-Win Plan

We have named this program the win-win plan for many reasons. You win because after the term rental period (between 5 and 10 years) You get a fully finished secondary suite that you can use to earn extra income, have your children, parents or other relatives use as a home, or even use it as a part time home while you winter somewhere warm.

We Win because we get the income from the tenants at the suite for the first 5 to 10 years. So we get paid back for building the home with some extra for managing it and giving you the free money.

The Downside of the Win-Win Plan

We want to be transparent. There is no question that it is less expensive in the long run to get a bank loan, or even a private loan to pay for the building of your secondary home. If you look at the real cost of building and financing, there are better alternatives to the Win-Win Plan. We know that this plan is not for everyone. You should consider the options below as a way of funding your new secondary suite before you consider the Win-Win plan.

Financing Alternatives

There are a number of alternatives that you should consider if you are concerned about the least expensive option for financing the building of your secondary home.

1. Savings

You may have to cut back on discretionary purchases and find places to save money here and there for a few months. But when you do that, you will be able to pay for your home renovations in full without borrowing from a lender or using the Win-Win Plan.

The obvious downside to using cash is the fact that you may have to delay your project for several months. However, there are major benefits to paying for your project this way. Paying with liquid assets means that you won’t be stuck with ongoing payments, high interest rates, lending fees or surprise charges. You can also skip the often lengthy approval process that you would have to go through to secure a loan via a lender.

2. Use Home Equity (HELOC)

A home equity line of credit (HELOC) is a loan that’s structured like a standard line of credit.

You can typically gain access to 80% of the equity in your home. The equity is estimated by deducting your current mortgage liability, from the market value of the property. For instance, if your home has a market value of $400,000, and you owe $300,000, your equity stake is $100,000. Since you can borrow up to 80% of the value of your home, you can then borrow up to $320,000. Given you owe $300,000 still, you could borrow the remaining $20,000 in equity.

In some jurisdictions such as Toronto and Vancouver, the home values have increased so quickly that you might be able to get a substantial amount of money for the building through this means. Then after it is built, you can rent out the suite yourself and pay back the loan very quickly.

HELOCs are a great solution to your question about how to pay for home renovations, but be sure to speak with a qualified mortgage specialist to discuss your specific circumstances.

3. Refinance your primary mortgage

Another way in which you can tap into your equity for home renovations is by refinancing your primary mortgage. With a cash-out refinance, you will negotiate the terms of your mortgage and secure a loan in the same way you did with your primary mortgage. However, you will receive any equity you have in your home at the closing of the new loan.

The benefit of refinancing over a secondary loan like a HELOC is that the interest rate is fixed and you will be able to make small, consistent payments for the duration of the loan term—which can be up to 30 years. Certainly if you were considering a 10 year Plan with our Win-Win offer, you would be able to pay the amount back if you are able to rent the suite at a reasonable price and pay down your mortgage as fast as you can.

4. Secure a second mortgage

As an alternative to refinancing, many people choose to pay for home renovations by taking out a second mortgage. With this option you are borrowing against the equity of your home and using your house as collateral. Securing a second mortgage will provide you with a lump sum of money that you can choose to spend however you wish.

You will be subject to closing costs in many cases, and the interest rate can be fixed or variable.

Instant cash sounds great—so what’s the catch? The second mortgage will be at a higher rate than your first mortgage. You should also consider that if you look at the lost opportunity in collecting rent for the first 5 to 7 years, you would have made more money by funding the purchase yourself rather than using the Win-Win Plan.

5. Sweat Equity (DIY)

One of the most significant expenditures of any home renovation project is the cost of labor. In fact, many homeowners spend more on labor for a project than they do on materials. With that in mind, many choose to offset the costs of their home renovations with “sweat equity.”

Instead of hiring a contractor to bring in a paid crew of laborers, homeowners are increasingly tacklingthe job on their own, or with the help of friends and family members.

There is a lot of work in building a container home that you can do yourself. There are many youtube videos where individuals talk about their experience building their own container home. Alternatively, you can get our company DynaSpaces Inc. to take on some of the work that you are not able to do and just do what you can by yourself.

If you are an able-bodied individual with several willing volunteers, sweat equity could be a viable option for building your laneway or gardenhome. The clearest benefit to you as a homeowner is that your friends will likely help you out for free (or for some free pizza and beer!). You can save thousands of dollars by working on your home yourself and by enlisting your friends. What’s more, you can get your hands dirty and play an integral role in the building of your secondary home and you will gain new knowledge and skills that you can apply to your primary home.

Some people just love to do work like this, others would rather get someone else to do it. Everyone is different, but if you have some of these skills, it might make more sense for you to take it on as a project. It will certainly take you longer, but it might well be worth the waiting.

Which is the Best Option?

It’s impossible to say which option is best when it comes to financing the building of a secondary home like a laneway home or garden suite. You will need to consider your assets, your home equity, and your potential payments to determine which method of financing makes sense under your specific circumstances.

It’s helpful to consult a financial planner or a friend who has good money sense to help you consider your options and determine which one is best for you.