What are some of the pros and cons of a laneway house? Laneway houses were created to increase population density and provide options of more affordable housing for people living in cities. Laneway houses also provide more convenient transit access for work. While they can be convenient and a great way for people to remain in the city, and for landlords to earn extra passive income from their property, there are some drawbacks to having tenants in your backyard.
Currently, according to this Simplii Financial article (no affiliation) you can build a laneway house in three Canadian cities: Vancouver, Toronto, and Calgary. Vancouver has been the forerunner int he Canadian laneway house landscape since 2009. Toronto gave the green light for its laneway house program in 2018. Laneway houses have been in Calgary for a few years and apparently doesn’t regulate short term rentals.
In this post, I’ll go over what a laneway house is, how much it costs to build a laneway house in your back yard, and what are some of the benefits and drawbacks of a laneway house.
Table of Contents
What is a Laneway House?
People I talk to who are not from Vancouver usually give me a puzzled look when I mention the word ‘laneway house’.
A laneway house is something like a ‘coach house’. They are like tiny houses behind a big house. It is a detached from the main house and is considered a secondary suite. A laneway house basically has the garage area of a property turned into living space, complete with a full kitchen, a washer and dryer.
Laneway houses can also have a garage (often this is kept for landlord/ owner use), but there are also laneway houses where there is no garage at all and instead more living space is allocated for the laneway house.
I’ve seen laneway houses anywhere from 500 square feet (a 1 bedroom laneway house) to over 1000 square feet of living space for a 2 bedroom laneway house. Some people have a laneway house constructed from the outset of the new build and some people convert their existing garage into a laneway house. The front door of the laneway house opens up to the back lane or alley.
What is the Vancouver laneway house maximum size? The size of the laneway house that you can build depends on your lot size, in Vancouver. On a standard 33×122 lot in Vancouver, laneway houses that I have seen are typically in the 500 square feet range with a one bedroom. The City of Vancouver laneway house maximum size cannot be more than 16% of your property lot size.
Can You Sell a Laneway House Vancouver?
Is there a laneway house in Vancouver for sale?
In recent years there was talk about parcelling our your land and selling your laneway house, but laneway houses cannot be put up for sale right now.
So the answer is no, at this moment, you cannot sell a laneway house in Vancouver.
how much does it cost to build a laneway house in vancouver?
How much does it cost to build a laneway house in Vancouver?
The typical cost to build a laneway house is around $200,000 to $300,000. There’s a detailed laneway house survey summary from the City of Vancouver of owners and occupants of laneway houses, and most people responded that the laneway house cost between $200,000 and $300,000 to build.
For us and our house build, it did cost between this amount of $200,000 to $300,000 but more on the lower end of the spectrum. I would think it would cost on the higher end of the spectrum if you are converting your existing garage into a laneway.
Is a Laneway House a Good Investment?
To look at whether a laneway house is a good investment, we can calculate the cap rate.
Cap Rate = Net Operating Income (NOI) ÷ Purchase Price
Well, if a laneway house costs $250,000 to build and rent is $1800 a month net after accounting for increased property taxes, and property insurance, and maintenance or repairs, that’s a 8.6% cap rate, which is pretty good.
Here are some of the pros and cons of both living in a laneway house and also on the flip side, building a laneway house to rent out.
Pros of a Laneway House
Minimal travel time to address tenant concerns
Some of the pros of renting a laneway house include proximity if dealing with an issue on the property. If there’s a concern, you can just walk a few steps and address the problem, whether it be a faulty stove, leaky toilet, or issue with heating.
Because of the close proximity, there is automatic person to keep an eye out on your home (and vice versa). If you’re away for a few days or a week or even a month on vacation, you have someone who will be an additional set of eyes and ears in case there are security issues around your home.
More Light With Laneway Living
As a laneway house renter, there’s much more natural light living in a laneway house than in a basement rental suite.
Because of this, renting a laneway house costs more than renting a basement suite (and renting out a laneway will provide more rental income than renting out a basement suite).
More Privacy In Laneway Living Than a Condo
As a renter, living in a laneway house is similar in cost to rent compared to living in a condo.
However unlike a condo, you don’t have to deal with small talk in an elevator, or sharing walls with your condo neighbours and listening to their loud house parties at 11pm (pre-COVID of course).
Provides more flexibility
If you end up not renting your laneway house later on, you can have your extended family (or adult children) stay in your laneway house.
This works well if you are part of the sandwich generation and want your elderly but still independent parents closer to you.
A Laneway House Increases the Resale Value and Property Value
Homes with laneway houses on the property generally have a higher resale value and have an increased property value.
It can increase the return on investment on your primary residence.
Unfortunately though it will also increase your property taxes since property taxes are calculated based on property value.
Laneway House Rental Income
Last but not least, a laneway house can provide rental income which is probably the main reason why you may be considering building a laneway house.
Two bedroom laneway houses rent for higher than one bedroom laneway houses.
Even though 2BR Laneway houses can be small (with bedrooms being on the smaller side), I have seen two bedroom laneway homes in Vancouver renting anywhere from $1800 to $2300 a month. This is certainly no amount to sneeze at and can act as a Vancouver mortgage helper.
Tax Deductions for Laneway house
The standard tax deductions for rental property would apply if you won a laneway house, including office expenses used to keep records, repairs and maintenance of your laneway house, and a certain portion of your property taxes (depending on the square footage).
You can deduct any reasonable expenses incurred to earn laneway house rental income. Here’s a list of rental expenses you can deduct from CRA.
Cons of a Laneway House
There are a few cons to building a laneway house.
Long process to build a laneway House
It can be a long process to build a laneway house, at least in the City of Vancouver it is. The city has to approve your permit and have regular inspections to make sure the building is up to code. There are some very specific and arduous requirements (such as mandatory balcony space or ground floor patio space built within design plans) for laneway housing.
Lack of Privacy
Obviously, privacy is an issue. Since the tenants will be so close (you can see them, they can see you when the blinds are not drawn) you will need to find tenants who tend to be more private and who aren’t loud.
Make sure you screen your tenants very well because you will be living in very close proximity to them.
One thing that I have seen with designers have experience building laneway houses, is that they have no windows facing the main house (except for perhaps a frosted bathroom window upstairs). This will give both the house owners and laneway house dwellers more privacy because there isn’t a direct window.
Shared garbage, compost, and recycling
There is shared garbage, compost, and recycling with the laneway house.
This is probably my own problem but we’ve told our tenants that the boxes need to be cut down/ broken down to fit inside the paper recycling bag but each week I end up cutting them down myself.
Small closets and bedrooms
If the laneway house has a traditional sloped ceiling look in the laneway house plans, the closet doors typically look like only hobbits can enter them.
Also, the bedrooms can end up being pretty small, and some bedrooms can barely fit a double bed and a dresser.
No Airbnb for laneway houses
Before you think a laneway house can be an Airbnb income producing asset and passive income cash cow, technically you can’t do short term rentals in a Vancouver laneway house unless you are living in the secondary suite residence already (as in the laneway house is your primary residence).
Short term rental is defined as rental of a home for less than 30 days.
Though there are a lot of people who seem to bypass this by renting it out as a long term rental on Airbnb but having the renter cancel their rent. In Toronto, it looks like short term rentals like Airbnb are not permitted for laneway houses as well.
Tax Implications of Laneway Homes
Because a laneway house is in a separate suite or section of your home, that portion of your home is not considered part of your primary residence anymore.
Therefore the primary residence exemption on capital gains will have to be calculated more carefully when you sell- you will have to dispose of that area of your home and pay capital gains on it when it is time to sell.
The laneway house portion of the home (total property area of laneway house divided by total property area) would not be exempt from capital gains.
Water Utility Bill is Paid by Landlord
Although BC Hydro (electricity) can be separate billed to the tenant because of separate meters, the water utility is not (if the home is built newer than 2012).
Hopefully your laneway house tenants doesn’t take a huge bath every day. 😉
Here are other ways to save money on your quarterly water bill.
Higher Property Taxes
A higher home value unfortunately means higher property taxes to pay.
When paying your property taxes remember to use your Triangle Rewards Mastercard to get at least some Canadian Tire money cash back.
Higher home insurance costs because of the laneway
The tenants will have to have their own contents insurance though, as property insurance for the landlord does not cover their contents insurance.
Rent Increases are Controlled
The maximal allowable rent increases are controlled by British Columbia, and as of 2022, the maximum you can increase rent is 1.5% and in 2023, the maximum you can increase rent is 2.0%. This definitely does not keep up with inflation and property taxes that have gone up with property prices.
Here are the maximum rent increases in the recent years in the Province of British Columbia.
Are Laneway Houses a Good Investment?
In summary, there are a lot of considerations to think about when putting a coach house or laneway house in your backyard.
At least in the City of Vancouver, there are a lot of regulations in place to build a laneway house and hiring an experienced laneway house designer is a good idea to start (in order to prevent the process from being delayed or even more drawn out).
Hopefully these pros and cons of a laneway house has helped you make the decision of whether you’d like to rent one or whether you would like to build one on your property for some rental income, and help you answer are laneway houses a good investment?
If you’re interested in getting into the real estate market and not having to deal with tenants, check out addy, real estate crowdfunding in Canada.
You might also be interested in:
- Properly review: Buy First Sell Later
What are your thoughts on laneway housing?
GYM is a 40 something millennial writing about personal finance since 2009 and interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for a free dividend yield spreadsheet and the free Young Money Bootcamp PDF.