3 Reasons Why It’s Better To Sever And Build

As small-scale infill developers, our primary strategy is to buy property with an existing building, sever the lot and build, rather than purchasing raw land to build on. We then seek to improve the condition of the existing property, rather than tear it down and rebuild. This would apply to both residential or commercial properties.

There are 3 main reasons for this approach, and these are items that are very important for most real estate investors who are starting to get into small-scale infill development for the first time.

Let discuss these 3 reasons:

1. Standard Financing - It is much easier to obtain financing for an existing property than it is to obtain financing for raw land. Once you sever the lot, you would need to "partially discharge" the mortgage for lost value in the land. In many cases, you may be able to make up some of this value by improving the condition of the existing property. Financing is also one of the reasons why we don't like to demolish the existing property, as the lender would not typically allow that under their policies. Therefore retaining the existing property for financing is most viable.

2. Sustaining Value - A property's value consists of both the building and the land. In many of the markets where we engage in small-scale infill developments, the land value is only approximately 25% to 40% of the property's value. By demolishing a building, we effectively destroy 60 to 75% of the property's value immediately before any development is completed. For a profitable project, we then need to recover these losses in the development and construction. This is not to say that it never makes sense to tear down a house and rebuild more units. But you will need to justify it typically with higher density, which can be difficult. For those starting out, it makes sense to keep the existing property as a means of sustaining a properties value.

3. Income During Approvals - The approval process for a development can take between 6 months to a year, and possibly even longer. If you are trying to get approvals for a new project, this can significantly eat into your cash flow situation. If you have a house on the property, even if it is moderately producing negative cash flow (ie. higher expenses compared to income), it is much more favourable than if it was only extracting funds and not producing any revenue. This scenario can make things challenging for the investor.

This is not to say that you can never buy raw land or demolish a property. However, for those starting out in infill development, it is a much better strategy to purchase property with an existing house. They should then try to improve its condition, sever the land, and build on the newly severed property.

There are a host of other reasons why keeping the existing house makes a lot sense. These are just 3 that we keep top of mind.

These topics will be discussed in detail in our upcoming training program on May 23/24. If interested, you can sign up at www.InfillDevelopments.com/training.

Our Process For Turning One Lot Into Three Lots

Let us share with you our recent success of being approved by the City of St.Catharines to add 2 additional residential lots to an existing single family lot, with the potential to add 5 additional housing units within walking distance to a GO train station with daily service to Toronto.

Unfortunately the successful outcome of this approval was not a straight line. There were numerous stages to the process, and as a matter of fact, it ended up being perhaps the longest it could have been in a residential infill development application. So let us share with you what our steps were.

We’re going to just summarize it here, but if you’re interested in learning more about this project, and others we have or are currently working on, come to our site tour on Sunday February 23rd at 10am to our newly completed semi-detached homes in Hamilton. To sign up for that, head over to www.InfillDevelopments.com/sitetour and sign up! We’ll be sharing lessons learned from this project and others so that you can take advantage of similar opportunities with the benefit of some of our experience.

BACKGROUND OF THIS PROJECT:

Existing Property: Large single family corner lot sized 70’ x 105’ with an existing 1000 SF bungalow on a crawl space.

Proposed Property: 2 additional lots (3 in total), with semi-detached home with second suite in each (and possibly a second suite on existing house - bringing it from 1 housing unit to possibly 6 in total).

Sometimes you have to be creative for the best design. One of our new lots is an L shape.

You may be aware that doing a severance to a property is not “by-right” (meaning it is not something you can do without special permission from the city). You have to apply for minor variances and consent applications to do a land severance. 

However, we had to first comply with the design requirements of the city’s Design Review Panel, which is a new part of the development process in St.Catharines. 

Unfortunately we failed our first attempt, and had to go back to the drawing board to do a re-design. This came at a cost of both time and money. When we finally redesigned the project to their satisfaction, we were okay to move to the next step, which are the minor variances and consent applications for land severance at the Committee of Adjustments hearing.

At our Committee of Adjustments hearing months later, they ultimately rejected our application 3 votes NO and 2 votes YES. 

That was a BIG blow to us!

After some analysis, we decided to appeal the decision by escalating to the LPAT (Local Planning Appeal Tribunal), because we felt strongly that this was a very positive contribution to the city as well as being potetially a very profitable project. 

After months of waiting, we finally got our appeal hearing, where we had the help of legal council to show clear evidence on the benefits of this project.

Long story short, we’re happy to announce that we were recently notified that we got approval to move forward with the project. 

So now the fun begins! 

We’re currently looking at construction options to determine if it may be worthwhile to use a prefab approach or onsite construction.

We’re currently looking at construction options to determine if it may be worthwhile to use a prefab approach or onsite construction.

These properties are located within a 15 minute walk to the GO Train station, which now provides daily service to Union station in downtown Toronto. This project will definitely help to provide additional affordable housing units in a growing city with convenient transit access to the economic center of Canada as well, and should prove to be another profitable infill development project. 

The lesson here is that any success in infill development, or real estate in general is not a straight line. There are bumps along the way, and you don’t alway succeed. But if you keep pushing, you will win more than you lose, which is what you’re after in the long run.

Additionally there were a number of lessons we learned ourselves here that if we had known, would have done things a bit differently, and want to share that with you in our site four or our In-Depth Infill Development Training Course.

If you’re interested in learning more about this and other infill development, make sure to download our FREE guide at www.InfillDevelopments.com and sign up for our upcoming site tour at www.InfillDevelopments.com/sitetour.

The 3 Stages Of Real Estate Wealth Creation

The majority of real estate investors generally purchase property that has already been developed and built, or slated to be constructed. 

Whether they are owning the property long term and renting it out, or improving the property and selling it immediately, they are essentially holding onto the property for some duration.  

Although this has been a great strategy for many investors in years past, this is only 1 piece of the puzzle, and is the last stage of real estate wealth creation. Given the cost of existing real estate, this strategy alone is becoming increasingly difficult, as there are many others competing for the same existing inventory.

There are 2 other stages in real estate, where wealth has already been created for other companies and investors.

We like the think of real estate wealth in 3 different stages, which are:

Stage 1: Land development

Stage 2: Construction

Stage 3: Holding 

So if you’re only utilizing the wealth generation from Stage 3, are you leaving money on the table?

We certainly think so.

Given the current environment of unprecedented population growth, a massive under-supply of housing options, and government policy to intensify our existing neighbourhoods, now is the perfect time to get into Stage 1 and Stage 2 of real estate in the form of infill developments.

Using the infill development strategy, many investors are starting to take advantage of being able to unlock additional value in the tens or hundreds of thousands of dollars. A great example are folks who are purchasing an existing home, improving that property with upgrades and putting in an additional unit. They then further develop the land by severing the lot and building another home with a second suite. 

This also helps to resolve the issue of having to compete with others in the market for housing options, because you are creating your own!

Although there can be challenges, this type of small-scale infill development is encouraged by many municipalities, as they are eager for developers and investors to provide the necessary housing to support our growing population.

This is a strategy that is still relatively new for many investors, and it’s something you want to be ahead of the curve on. 

We certainly recommend that you also take advantage of real estate wealth creation in the first two stages of land development and home building!

The Triple Bottom Line of Infill Development

Some of you may have heard of the phrase, “Triple Bottom Line”. Here’s Wikipedia’s explanation:

“The triple bottom line (or otherwise noted as TBL or 3BL) is an accounting framework with three parts: social, environmental (or ecological) and financial. Some organizations have adopted the TBL framework to evaluate their performance in a broader perspective to create greater business value. Business writer John Elkington claims to have coined the phrase in 1994.”

We really like this idea, but as with many savvy business concepts, it gets marketed the hell out of and eventually loses its effect and appeal, and then becomes unfashionable.

However, this is one we believe should stick around for any business that’s in it for the long haul. It can’t be just about the bottom line anymore. The TBL has to be the bottom line.

Our mandate with infill developments is to adhere to this principle, and here’s our explanation on how we can achieve TBL.

1. People

The density created from infill developments enhances community building. This encourages local businesses

and services to thrive from the greater population density, allowing people to walk to many daily amenities.

This in turn creates a desirable neighborhood that further encourages walking, better public transit and

ultimately increase social cohesion and better health. People living in these communities have less need to

drive and are generally healthier and happier.

2. Planet

Infill developments take a fraction of the resources needed to build a new home, compared with a new home in

a new subdivision. There are no new and expensive roads, sewer systems and utilities to construct and

maintain indefinitely. Additionally, homeowners will be able to reduce their travel time and transportation

resources for homes that are already in existing neighborhoods, benefiting the environment even more.

3. Profit

Last but not least is profit. Infill developments help local governments generate greater revenue from

development charges, permit fees, and ultimately tax revenues, all while reducing their burden from urban

sprawl. Despite this, you can still profit well. The reason is because with infill developments, you can essentially

take an existing lot, apply strategic analysis, planning, and execute to create a new parcel of land to build on.

This is typically at a lower cost than buying empty lots on the market.

What we’re looking to do is create a winning outcome for all stakeholders, including homeowners, landlords, tenants, community members, and the local municipality. And it’s clear to us that infill development is part of the solution.

We hope you will join us!

The True Cost Of Homebuilding - It's Not What You Think

The question we get asked most often related to our development projects is “How much does it cost to build per square foot”. This is a tough question because if we’re being frank, the answer is $100-$400 per square foot. 

We never actually say this, because:

1. It’s not helpful for anyone

2. We would sound like jerks

The reason most people would like to know the cost per square foot is because it’s always fun to do a “back of the napkin” analysis, where you plug in the cost of a property, the cost to build based on house size and SF price, and boom! There’s your profit. 

Maybe we’re being a wee bit facetious here, but it’s not far off.

The answer we actually give is “it depends.” And boy, does it depend.

So here are a few things that an investor needs to consider before plugging in a square foot build cost.

1. Are you hiring a builder or are YOU the builder? And if you’re the builder, what value are you adding for your time and energy?

2. The size of property. All things being equal, a 3000 SF home will have a lower per/SF cost than a 2000 SF home because of certain fixed cost.

3. How many units are you building? This is similar to point 2. 10 units should have lower per unit costs than 2 units.

4. What’s your relationship with trades and suppliers? 

5. What are labour and material costs in the city you’re building in?

6. What is the quality of the build? There are usually varying degrees of quality depending on who your target market is.

7. What season are you building in? Winter construction will cost more.

8. And are you just concerned about “hard costs” (i.e. cost of materials and labour for construction), or are you considering “soft costs” before construction begins (i.e. planners, surveyors, house designer/architect, application fees, parkland fees, demolition, legal, engineering, development charges, building permits, and additional miscellaneous fees.

To give you an idea of these “soft costs”, here are some rough numbers for our recent Semi detached development in St.Catharines with legal second suites (4 units in total).

• Planner: $10,000 (Typically $5,000-$7,000)

• Surveyor: $6,000

• House Designer - Stage 1: $2,000 (Basic Layout and Elevations)

• Application Fees (Lot severance): $11,000 (Typically $3,000-$5,000)

• Parkland Dedication: $10,000 (5% of New Lot Value)

• Demolition: $5,000

• Legal: $2,000

• Engineer: $5,000

• House Designer - Stage 2: $5,000

• Development Charges: $15,000 (this can vary wildly depending on the city)

• Building Permit Fees: $4,000 (Based on Sq Ft)

The numbers for your potential project will definitely be different.

So there you have it. The right answer to what the SF price is it depends, and it would be best for any serious investor to do an analysis on all the items mentioned above before trying to determine actual costs to build a home.

The purpose is not to scare you away from development, but rather to encourage you to be realistic. 

The opportunities are out there, but you have to budget accordingly, and you can be on your way to being an infill developer and profiting!

What Is Infill Development & "The Missing Middle"?

You may know that our website is InfillDevelopments.com, and “infill developments” is what we do.

But do you know really understand what “infill” entails? Let’s take this opportunity to explain it clearly just in case.

Even though the term may seem self-explanatory, there’s really quite a bit to it.

Let’s start with Wikipedia’s definition:

"Infill is the urban planning term for the rededication of land in an urban environment, usually open-space, to new construction." It goes on to say that "Infill has been promoted as an economical use of existing infrastructure and a remedy for urban sprawl."

We feel this is a pretty accurate description, but want to add that it typically involves the development of vacant or underutilized parcels of land within the existing urban areas. Essentially we are “filling the gaps”.

So how did we get here, and why do we think this is a good opportunity for you and us to take advantage of? 

To explain that, we’ll have to get a bit macro.

In North America, urbanization is happening fast. Limited supply of new construction, along with soaring population growth is resulting in extreme unaffordability and a continued rise in property values.

At the same time, governments are facing massive economic and environmental challenges with urban sprawl, and realizes that this type of development is unsustainable in the long term. As a result, many are creating rules which makes intensification a mandate across many cities.

This means the government is encouraging development within the existing infrastructure. 

Most traditional home construction falls at two ends of the spectrum. On one end, you have low-rise single family homes, and on the other end you have mid and high rise condo apartments. 

Unless you’re already a big developer or have deep pockets, it’s unlikely you will be able to do either. 

However, as a smaller investor, you can get involved in a certain type of infill development known as “the missing middle”. This is what we’re mostly involved in, which includes housing such as duplexes, triplexes, townhouses, and even mixed use live/work type spaces.

We need to build more of the “missing middle”

These are the types of development projects that many smaller investors can get venture into.

In addition to the potential for profitability, these projects also contribute to the community in many ways, including providing:

• Efficient use of land and infrastructure

• Increased affordability due to an increased supply of housing

• A diversity of housing options to meet different demographics of people

• Increased vibrancy to an otherwise dilapidated neighbourhood

So that’s a quick explanation of what infill development is. 

We truly feel that infill developments can benefit the community and also be profitable, and encourage you to take the following steps;

1. Find a city you love and want to help improve;

2. Get to know the rules and development costs for that city;

3. Build local professional contacts that can help you (i.e. planners, architects, engineers, surveyors, builders, contractors, etc.); and lastly

4. Find the right property to develop!

We hope to provide more content for you that you can use to get started on this journey as well!

Design Review Panel - An Extra Step In Small Scale Development?

Whenever you take on any small-scale land development, it’s highly unlikely you would be able to accomplish your objective “by-right”, meaning within the existing zoning by-law framework. Restrictions such as building setbacks, height, lot size, etc are common obstacles you would need to push beyond the current rules in order to make your project feasible, typically through minor variances. This is especially true if you plan on doing any lot severances.

The process involves determining what variances would be required, and putting in an application for a hearing at the Committee of Adjustment (CofA), who are a group of local residents appointed by City Council. The city will evaluate first, and make recommendations to the CofA, who will make a final decision on whether or not you have permission to move forward with the project. It is wise to be proactive, and seek the advice of city planners on your project, either on your own or through the assistance of a private planner.

The recommendations by the City is in the form of a City staff report, and is the most important factor influencing the CoA's decision. It is critical that the report is supportive of your proposal for higher chances of success.

The Design Review Panel (DRP) in most cities is an advisory body made up of design professionals to advise City staff on issues related to design which affects the "public realm, including proposed buildings, structures, landscape and associated streetscapes", as described by the City of Vaughan. In most cases, these are focused on larger scale projects.

However, in the City of St. Catharines, where we currently have 2 projects, they have started a pilot DRP program even for small-scale development. They state that the purpose of the DRP is “to advise and assist in reviewing and evaluation applications for residential lot creation”.

Is this a sign that cities will be adding this additional layer of bureaucracy as a result, even on small projects because of various intensification projects sprouting up as a result of our housing shortages?

We don't quite know yet, but we certainly hope not. And we'll be keeping a close eye on these developments in other cities.

In the meantime, this additional step may be coming to a city near you, so in addition to function and financial feasibility, your project should also focus on good design.