By Murtaza Haider and Stephen Moranis

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The self-funding house: A one-stop solution to affordability for owners and renters Back to video

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Canada must build six million new dwellings by 2030 to achieve housing affordability, but reaching this target will require more than doubling the current rate of construction, which seems increasingly unlikely.

But a breakthrough is possible if new homes are designed to accommodate not one, but multiple households, where the new house is built with an accessory dwelling unit (ADU) that can accommodate an owner and a renter household. By extension, a triplex dwelling can accommodate one owner and two renters.

If ADUs are added to existing homes, the potential to accommodate more households in fewer structures increases, lowering the unreachable target of building millions of new homes.

“The opportunity to build new and renovate existing houses with legal (accessory dwelling units), or basement apartments, is a win-win-win-win. Win No. 1 is the homeowner’s affordability as rental income supports the mortgage payment,” Benjamin Tal, CIBC Capital Markets deputy chief economist, said in a recent note.

He added that the other three wins include cheaper rental alternatives, leveraging municipal infrastructure to generate more shelter services and having the secondary units built as per municipal code.

SVN Rock Advisors Inc., real estate veterans, are behind this idea of a self-funding house. In a book with the same title, they explain the concept and the math behind it. They said secondary rental income can lower the income threshold for mortgage qualification by 30 per cent to 60 per cent “depending on the living arrangements chosen by the owner.”

With ADUs, new homeowners, especially first-time homebuyers, become homeowners and landlords from day one. The guaranteed rental income is the missing link for young and low-income households whose homeownership dreams face seemingly insurmountable hurdles, including high mortgage rates, soaring housing prices and onerous regulations such as stress tests.

Redesigning new single-family homes as multiple-family dwellings will also help address the rental housing shortage. An ADU can be rented to a household with a ground-oriented (and spacious) dwelling rather than being forced to choose from a restrictive set of properties comprising mostly high-rise apartments.

Housing choices are limited for young renter families with children who need more space than one- or two-person households. With ADUs, renter households can also access backyards and porches, which are usually missing in apartment-style housing.

The concept of a self-funding house also works for existing homes. A newly built home can come bundled with an ADU, while an existing home can be remodelled to convert the basement into an ADU. In both cases, the math behind it is straightforward.

A new homebuyer will incur the typical mortgage and other household maintenance expenses. But a basement rental ADU can provide a monthly income that will lower the cost of ownership and improve the buyer’s finances to qualify for a mortgage. The house becomes an investment, and the homeowner simultaneously owns a revenue-generating (rental income) business.

The self-funding house is more than a concept. Montreal has plenty of dwellings with ADUs, where owners live on one floor and renters occupy other levels in multiplexes. More than 13 per cent of the city’s dwellings consist of apartments or flats in duplexes, while 57 per cent are apartments in buildings with fewer than five storeys, according to the 2021 census. In contrast, only 14 per cent of Toronto’s dwellings are in buildings with fewer than five storeys.

The accessory dwelling units make Montreal the rental capital of Canada. Almost two-thirds of households rent in Montreal, while less than half are renters in Toronto.

Homebuilders and governments must embrace the concept of the self-funding house to reach its potential. Municipal governments will have to remove barriers that may restrict renting space in traditional single-family housing. The federal government may want to include self-funding house designs in its proposed catalogue of pre-approved home designs. Mortgage lenders will need to acknowledge the rental income potential of houses with ADUs to extend larger loans than to those without ADUs.

But, most importantly, homebuilders will have to embrace the new concept of a dwelling unit designed and built to provide shelter for more than one household. Builders have been complacent with designs that have housed only one family per dwelling in the past. The future, though, requires a break from the past to address housing shortages.

The self-funding house shows one way of extracting more shelter services using the same amount of land and municipal infrastructure. It also promotes diversity by housing renters and owners with diverse incomes and backgrounds in the same neighbourhood.

Murtaza Haider is director of Regionomics Inc., a consultancy specializing in predictive analytics and machine learning. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.