Finance Your Construction Project: How to Use Your Resources to Maximize the Outcome

I dream of renovating but am not sure if I can afford it.

– Yes, I know what you mean; it’s easy for so many people who have unlimited cash or enough savings to run their project in any way they want!

Really? I am a Home Designer, and I don’t know anyone like that!

Most of the people I came across don’t know much about the construction costs, nor haven’t set a budget for their project. Even better, they have no idea where the money would come from!

Before you start any construction project, it’s essential to get a clear perspective of your budget and how much you can pay for your renovation or custom home building. Better said, to finance your construction project, you need to be prepared to stretch and to know precisely how far you’re ready to go.  

I see many of my clients taking their project and asking a builder to provide them with an idea of the cost. Without a plan or drawing in hand, how could anyone expect the contractor to give an even remotely accurate estimation? 

Allow Me to Show You How to Finance Your Construction Project, and Do Things the Right Way, in Your Best Interest

Firstly, try to have an idea about what you want to do, even a basic one. Secondly, make sure to consult an experienced designer who will understand your needs and properly involve. Share your dreams and ideas of the renovation or custom home with a designer who knows their job well. 

An experienced home designer can offer you a reliable plan to develop based not only on your dream but also the approximate cash availability. Only after that you can decide how to finance your construction project. 

These are some options you can look at:

Savings Account

This is the most reliable way to finance your construction project, as long as you have enough money sitting in your account. The best use you can put it in is your overall life improvement.

Borrowing From Friends or Family

Many of my clients, who want to add a secondary suite to their property for the purpose of creating an extra income, rely on this idea. They borrow from their siblings, children, or parents to build a laneway home or an ADU, and pay them back in installments as the investment starts to pay off.

This way they don’t have to go through getting approval from a financial institutions. But what if you don’t have someone to borrow money from? That where you should get creative!

Finance Your Construction Project Through Shared Accommodation 

If all of the above fails, there are still many additional ways to jump over the financial obstacle. Some people dream of building a single-family home, and they don’t want to live in a condo. Usually, they team up with a friend and buy a duplex or a single-family house with ADU. This way, they can share the cost and still get their own paradise, avoiding significant debt along the way. 

Finance your construction project
Finance your construction project

Just the other day, a client called me to discuss the idea of building a duplex in Vancouver. She had it arranged with a friend to purchase a lot, build a passive house duplex, and share the cost so they can own a great affordable home, each on its own side. After calculating their budget, I told them the money wouldn’t be enough to finish the project in the way they want. But the solution was easy—they can apply for a construction loan, which I will explain next. 

Since each unit would have a secondary suite, the money they could collect from the rental could easily pay for that loan. After several years, the loan will be paid off in full, leaving them with an extra source of income.

Now, I am aware that my readers come from different regions, but most places have collected equity over the years. If the property you own doesn’t have any mortgage, there’s a good chance that the bank will grant a loan or refinance the house. The same applies if the mortgage amount is less than 30% of the house market value. Naturally, as long as you meet their other criteria and credit requirements.

Using the Bank’s Money

If you plan to renovate your house, you can ask your designer to draw the plans and have the contractor write an official cost estimate for you. Next, you have to present your project with the estimated cost and timeline to the financial institution’s representative. Banks love to give loans as it allows them to collect interest. However, for the same reason, they have to make sure that their money is safe, granted to a reliable person. 

If you are planning to build a new house, however, the scenario is a bit different. I had a client who bought a lot and paid a 40% down payment. He also had some cash aside, ready for starting the project. He hired me to design the house and help him to manage the builder and all trades for him. While revising, I found out that he didn’t have enough money to finish the project after all. The next step was to help him apply for a construction mortgage.

We finished the house’s framing, installed the windows and exterior doors, and fixed the roof membrane. This stage of the building is called “luck-up.”

This is where I introduced him to a bank rep and presented the bank with the drawings. We went over the total construction cost, the amount that has been spent to that point, and the estimated value of the house after the finish. The bank sent an appraisal, and I had to present the same documentation to him, now for his approval. After the assessment has been done successfully, the bank granted my client the money he needed to finish his project.
If you think you need help with a similar process call me to discuss further at 604-929-6696.

organic architecture
More budget, more features and benefits

Why Is It Good to Use Banks’ Money to Finance Your Construction Project?

Firstly, you can take advantage of the low-interest rate and use it to upgrade your project further. That is particularly convenient if you have the potential of implementing a rental suite within your project. The income you collect from the rental unit will pay for the mortgage.

I understand some people are afraid of going under any dept. Like another client of mine, who could have been easily approved by the bank for the entire renovation of his house. The only problem? His wife was against any loan or mortgage. So they ended up living in their run-down house for the rest of their lives.

What Exactly Is a Construction Loan

A construction loan is a segment of short-term loans, tailored specifically for use by an individual home builder. Construction loans serve to finance your construction project of either building a new home or renovating the existing one.

Construction loans are not supposed to cover the entire cost of the project. Instead, those are used as a temporary financing bridge that can cover the missing part of the budget during the build time. Typically, after the construction is complete, the homeowner will obtain a longer-term solution. The options include refinancing the existing construction loan and transition to a conventional mortgage.

It may happen, though, that a bank considers your construction project as a risky investment. In that case, you may still get the money, but the interest rate will likely be somewhat higher. Also, such a loan will feature strict terms that you must adhere to, like paying off in entirety by the time the construction is complete.

What A Construction Loan May Include

A construction loan comprises one application and one closing. Those cover the construction phase and the permanent financing.

It can start with the initial loan payment you need to purchase a lot. If you already hold a loan on that property, the first disbursement of the loan will pay off that specific loan before the construction starts.

The bank may make scheduled payments to your builder during the 12-month construction phase. Subsequently, they will offer a transition to a fixed-rate mortgage after that period.

Finance your construction project and build a laneway house
Finance your construction project and build a laneway house

How Can You Use Construction Loans to Finance Your Construction Project

Construction loans provide more flexibility in utilizing your budget to get the most out of it. That may include expansions, hiring better designers, making payments to contractors, or even getting more luxury materials. Even when the initial budget seems sufficient, by upgrading it with a loan, you can get more quality in each segment and get more creative with design solutions.

The Bottom Line

As Robert Kiyosaki says, there is good debt, and there is bad debt. To apply for a loan and mortgage to upgrade your living standard, which gives you better mental and physical health, especially if you can collect rental income, is good debt.
So, do not be afraid to get into a good debt if the end result will give
you a better financial outcome as well as more comfort and mental health.

After all, life is too short and we should live it to the fullest!

By Aryo Falakrou (My Home Designer)

A LANEWAY HOME: Why You Want One

What is a Laneway Home?

Laneway home is a detached, compact, ground-oriented dwelling built in a backyard that subsided to the main house.

Like their name says, these kinds of residences site on properties that have access to a lane (in some municipalities might not have access to a laneway). They can be used for family or rental units but cannot be sold separately or used for short-term rentals.

Laneway housing is not a modern idea; in fact, if you take a closer look at Vancouver’s historic neighborhoods, you will discover it actually dates back as far as the 1890s. Early lane homes were temporary residences for the house owner during the construction of the main dwelling. They also served as secondary housing for staff.       

Nowadays, these accessory buildings keep popping up all over Greater Vancouver, usually in place of garages or carports. Regulations require the laneway home to be situated in the back part of a traditional lot, in the space typically reserved for a garage. The small homes stand at the rear area, close to the lane, which includes a dwelling unit and a parking accessory.

An average laneway house in Vancouver measures around 640 square feet or more. It usually features one and a half stories with one or two bedrooms. 

Maximum sizing for a laneway home is approximately 900 sq ft (1000 sq. ft. in some municipalities); however, that depends on your lot’s size. The general calculation for sizing is that a laneway house can’t exceed 16% of your total lot size, excluding an additional 40 sq ft allowed for storage.

Laneway-type house
Small and Sustainable

Why a Laneway Home?

Besides old purposes, like having a spare house for staff, guests, or extended family, new times brought new demands. Among the most common reasons for building a laneway house is the benefit of an additional (rental) income. The investment of a laneway house is a minimum of $300,000. It is an investment without competition when it comes to value.

Laneway homes typically bring a substantial ROI in rent, as they present a desirable housing option. For instance, these dwellings don’t have shared walls like apartments, and often come with a parking spot, private entry, and patio. In terms of value, having a laneway house can also significantly increase your lot’s resale rate.

Apart from financial benefits, having a laneway home is a solution for everyone who would like to keep aging parents close, but not in the same dwelling. It’s useful for children growing and needing some more private areas, or are all grown-up and need to have their own place, but are just starting a career and can’t easily afford an apartment in Vancouver.

Finally, laneway houses are an excellent opportunity for downsizing. Once your children have moved out, you may discover you don’t need such an abundant space. Transferring to the accessory residence and renting the main house is a smart solution that cuts down the bills. At the same time, that move will secure you a substantial supplemental income.

This growing trend is providing more choice of housing in single-family residential neighborhoods for Vancouver residents. It’s a way to contribute to the city and support affordable sustainability by providing more opportunities for people to settle close to jobs, services, and transit, above all. Laneway housing also makes lanes greener, safer, and more livable. 

Accessory Residence
Backyard Home

Does My Lot Qualify?

In general, if you live in Vancouver and have a single-family house with a back lane, you are probably eligible. Along with some secondary requirements, one of the main conditions for building a laneway house is that they need at least a 16′ distance from the existing object to the laneway. An experienced designer will be able to find a solution and make it work,
or Book Here for consultation.

For official confirmation that your property qualifies for a laneway house, you can look to the New Westminster Official Community Plan and Map online. There you will find permissions for Laneway and Carriage Houses in New Westminster in the Single Detached Residential Small Lot (RS-5) and the Neighbourhood Residential Small Lot (NR-5) Zoning Districts if the property is designated Residential – Detached or Semi-Detached Housing (RD) or Residential – Ground Oriented Infill Housing (RGO).

In order to make a laneway house, your building site must have access to an open lane. The lot must have access by an open or dedicated lane, or on a place served by a street on the front and rear lane. (Each municipality have different regulations, give us a call for confirmation at 604-929-6696)

Additionally, a fire access path must be provided from the road, along the side yard to the accessory building entrance. A minimum separation of 16ft is obligatory between the main house and accessory residence. Separation requirements may be a problem to meet on lots with more extended primary dwellings, attached garages, or rear decks.

Open-Plan Accessory Residence
Practical, Appealing and Valuable

The Average Cost of a Laneway House

You can build a laneway home for approximately $300K (excluding connection fee and GST). The mortgage payment of $300k should cost you below $1500 a month for a 25-year term, and you can rent a laneway home for around $1,600 to $2,000. In other words, this additional income means an almost instant return on the initial investment. (these numbers might vary in a different area)

In case you decide to use the laneway home for yourself and rent the main house, you can expect over $3,000 in monthly revenue.

Vancouver Laneway Home
A one storey Vancouver Laneway Home

Design Package for a Laneway House

A correctly put design package will help you speed up the process and successfully land a laneway house application. In order to apply for Laneway home building permit you need:

  • Survey drawing (average $1600- to $2,500)
  • Architectural drawing (average $13,500 to $19,000)
  • Structural drawing (average $2,900 to $3,900)
  • Energy Adviser Report (average $1,300 to $2,000)
  • Builder’s license and insurance
  • There are times we need arborist report and/or Landscape architect which might cost $1,200 to $3,500

When you are looking for a design package, compare the field prices, and check what each company has included in their services offer. Many companies will quote low initially, and then later keep adding on fees, exceeding the original quote by far. What you want is a company that includes all services in their estimates transparently. 

Elgin Street Smal Laneway Home
Elgin Street Laneway House

How Long Does it Take to Build?

After our initial discussions and agreement, it will take approximately 45 days to have the documents ready. It usually takes up to six months for the city to issue the permit. Construction time depends on the time of the year and the construction company.

Altogether it takes minimum of one year for the full process.

Connecting Everything Together

If you plan to build a new house or a laneway home, know that it requires a connection to sewer, water, electricity, and possibly gas. There are many things you should be aware of right from the start.

Learn the costs of connection fees and permits and calculate them in your budget. Have city services, like BC Hydro and Fortis, check your site and alert to any possible issues that may affect your laneway house’s design or siting. For example, if there’s an older home on the lot, you might have to update some parts of the infrastructure. It’s important to know that in advance.

Later, in the design phase, you will be required to work with BC Hydro to complete an electrical and physical feasibility study. To proceed with construction, you must obtain an electrical permit from the city.

BC Hydro costs will depend on a number of factors, including height, design, and allocation of the future laneway house or location on the property. In most cases, to provide electrical service to a laneway house, BC Hydro will need to add some new equipment or upgrade the existing electrical system.  

Keep in mind that you could be prevented from building a laneway house if you don’t meet BC Hydro’s standard connection guidelines.

Patio Rules and Limitations

A laneway house should have a connection to a private patio in the backyard. Alternatively, you can add a private outdoor space on an upper-level deck facing the lane. All existing trees have to be retained wherever possible. Relaxations for location, massing, and parking standards exist in order to preserve significant trees. According to the Protection of Trees Bylaw, replacement trees are also an acceptable option.

Landscaping is highly encouraged along the edge of the lane, aiming to make the area greener. That applies to green roofs, green walls, and drought-tolerant plantings, and deciduous trees, too. A permeable surface must exist for parking areas. Pedestrian-friendly lighting, in form of porch lights or bollard lights, makes the lane a safe and welcoming public space.

Lanewayhouse
Vancouver Laneway house

Thinking of Building a Laneway Home?

Laneway houses are now approved for building in New Westminster on single-detached dwelling properties, City of North Vancouver and District of North Vancouver. These new housing forms will contribute to the diversity of rental housing offer in the city and will benefit homeowners in many ways.

Owning a laneway home in New Westminster can be a great source of additional rental income. It makes an excellent investment with a higher return than many traditional investments, and great additional features when you go to sell your property. Last but not least, it provides an ideal solution as a home for older children or aging parents.

By Aryo Falakrou (My Home Designer)

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