Owning a valuable development property creates more than one possible path.
For some owners, the right decision is building a distinctive custom home for personal use.
For others, especially investors and families holding well-located land, the better long-term strategy may be creating multiple purpose-built rental units and holding the property as an income-producing asset.
That decision should be made before the architectural concept becomes fixed.
Purpose-built rental housing can access a very different financing environment from a conventional custom home, including CMHC-insured multi-unit mortgage programs, longer amortization opportunities and potentially lower equity requirements for qualifying projects.
At the same time, Ontario and Toronto provide development-charge reductions and other incentives that may materially improve project feasibility when the development qualifies.
Peakview Developments can coordinate the construction and design-build side of the project, while mortgage financing can be explored through Lendworth Financial.
Custom Home or Income-Producing Rental Property?
A property that can support a luxury custom residence may sometimes support an entirely different development strategy.
Instead of building one home, an owner may investigate whether planning permissions, lot dimensions, servicing and zoning allow a multi-unit residential project.
The economics are different.
A custom home is generally evaluated around lifestyle, architecture, construction cost and eventual resale value.
A purpose-built rental property is evaluated around unit count, achievable rents, operating expenses, financing, construction cost, long-term debt and stabilized property value.
Neither approach is automatically better.
The important question is whether the property is being evaluated for its full potential before substantial money is committed to design.
Why CMHC Financing Can Change a Rental Development
One of the biggest differences between a custom home and a qualifying purpose-built rental project is the financing that may become available.
CMHC's multi-unit mortgage loan insurance programs are designed for rental projects containing at least five residential units.
For projects that qualify under MLI Select, financing flexibility can increase based on affordability, energy efficiency and accessibility commitments.
Depending on the points achieved and the final underwriting, eligible new-construction projects can potentially access financing of up to 95% loan-to-cost and amortization periods of up to 40, 45 or even 50 years.
Those features can have a significant effect on project economics.
A lower equity requirement can allow a developer to retain more capital for construction, reserves or additional projects, while a longer amortization can reduce monthly debt-service requirements once the property is stabilized.
CMHC insurance does not mean every development automatically receives maximum leverage or a 50-year amortization.
The borrower, property, rental income, construction budget, experience, guarantees and program requirements still need to satisfy the lender and CMHC.
That is why financing should be investigated before the project is designed around assumptions.
MLI Select Starts at Five Units
This is an important distinction for smaller developers.
A duplex, triplex or four-unit investment property does not qualify for MLI Select simply because it is rental housing.
CMHC's multi-unit MLI Select program generally begins at five residential units.
That means a property owner considering redevelopment should understand the proposed unit count early.
Going from four units to five units can move the project into a very different financing category, although zoning, design, servicing and municipal approvals must still support the development.
For qualifying multi-unit projects, the financing strategy can therefore influence the development strategy from the beginning.
Development Charges Can Change the Feasibility of a Project
Construction cost is only one part of a development budget.
Municipal development charges can represent a significant additional expense when creating new residential units.
Ontario currently provides legislated development-charge reductions for qualifying rental housing.
Rental units with three or more bedrooms can receive a 25% reduction, two-bedroom rental units can receive a 20% reduction, and bachelor or one-bedroom rental units can receive a 15% reduction.
That makes unit mix more than a leasing decision.
It can also influence development economics.
Affordable housing that satisfies the applicable statutory requirements may qualify for additional development-charge relief.
These provisions should always be confirmed for the specific municipality and project before relying on them in a development budget.
Toronto Has Additional Purpose-Built Rental Incentives
Toronto has also been actively using incentives to encourage new purpose-built rental housing.
The City's Rental Housing Supply Program has included a Purpose-Built Rental Housing Incentives Stream that can provide development-charge deferrals for approved projects meeting program requirements, including affordability commitments.
That is potentially meaningful for a developer because development charges that would otherwise require substantial capital during the project may, in qualifying circumstances, be deferred.
These programs are application-based, eligibility requirements can change and application windows are not always open.
They should therefore be treated as potential project incentives rather than guaranteed savings.
The important point is that a developer planning rental housing should investigate available municipal programs before finalizing the pro forma.
The HST Treatment Can Matter Too
Purpose-built rental economics have also been affected by changes to provincial and federal HST rebates for qualifying new rental construction.
For eligible purpose-built rental housing, the combined federal and Ontario measures can effectively eliminate the 13% HST that would otherwise apply to qualifying construction.
Eligibility requirements matter, and tax advice should be obtained for the specific project.
But when combined with rental development-charge reductions and CMHC financing, these incentives can materially change the capital required to build and hold a new rental property.
This is why purpose-built rental development should be evaluated as a complete financial structure rather than simply comparing construction cost per square foot.
Design the Building Around the Financing Strategy
This is where development projects can go wrong.
The architect designs the building first.
The owner obtains pricing second.
The financing is investigated third.
By then, important opportunities may already have been missed.
If CMHC financing is part of the strategy, affordability, accessibility or energy-efficiency commitments may influence how the project should be designed.
If development-charge reductions are important, unit mix may deserve attention.
If municipal incentives require affordable rental units, the financial model should account for those rents from the beginning.
Peakview's design-build approach is valuable in this environment because the building can be developed around both construction realities and the broader financial strategy.
Construction Cost Still Determines Whether the Numbers Work
Strong financing cannot rescue a development that is fundamentally too expensive to build.
A purpose-built rental project needs a realistic construction budget.
Excavation, foundation requirements, structural systems, fire separations, mechanical systems, electrical service, windows, elevators where required, parking, landscaping and interior specifications all affect feasibility.
A rental building also needs to be designed for long-term operation.
Durability, maintenance, tenant turnover and energy consumption matter differently when the owner intends to hold the property for decades.
Peakview can evaluate the construction scope while the financing model is being developed rather than waiting until the drawings are substantially complete.
Lendworth Financial Can Help Structure the Mortgage Side
The builder and the mortgage professional should have different responsibilities.
Peakview manages the construction strategy.
Lendworth Financial can help property owners evaluate the mortgage and capital side of the transaction, including construction financing and potential CMHC-insured multi-unit financing structures through appropriate lending channels.
For developers, that means reviewing the required equity, construction funding, expected stabilized rents, debt-service requirements and exit financing before significant construction commitments are made.
Where CMHC insurance is contemplated, the application ultimately needs to satisfy CMHC requirements and proceed through an approved lending structure.
The earlier that financing conversation begins, the easier it becomes to determine whether the proposed development is financially realistic.
What About the Construction Loan Before CMHC Takeout?
A rental development still needs to be built before it can operate as a stabilized investment property.
That creates another important financing question.
How will land costs, demolition, soft costs and construction draws be funded while the project is being completed?
Depending on the transaction, the construction facility and the eventual long-term insured mortgage may be structured together or involve different stages of financing.
Property owners can review Peakview's construction and renovation financing resources and speak with Lendworth early enough to understand how the construction and takeout financing may work together.
Should You Build One Custom Home or Several Rental Units?
There is no universal answer.
If the property's highest value to you is creating a residence for your family, a custom home may be the obvious choice.
If the objective is long-term income, wealth creation and retaining the land as an investment, purpose-built rental development may deserve serious consideration.
The decision should account for zoning, achievable unit count, construction cost, rents, development charges, CMHC eligibility, equity requirements and long-term property value.
In some cases, the numbers will favour the custom home.
In others, the ability to create five or more rental units and access multi-unit financing may completely change the development strategy.
The mistake is deciding what to build before investigating both possibilities.
Have a Toronto or GTA Property With Development Potential?
Before committing the property to one large home, determine what else the site may support.
Peakview Developments can help evaluate the construction and design-build side of a proposed custom home or multi-unit residential project, while Lendworth Financial can help explore the financing structure.
Start by reviewing our custom home services, design-build approach, construction financing resources and our relationship with Lendworth Financial.
If the goal is to build and hold a purpose-built rental property, the property, unit count, development-charge treatment and CMHC financing strategy should be investigated before the architectural design is finalized.
Call Peakview Developments at 647-988-9555 to discuss the construction potential of your Toronto or GTA property.