Gamble on Business: Grassroots Citizen Developers

Rent is too high in Yellowknife, and it’s a supply problem. How can there be such high incomes waiting for landlords, but only one purpose-built rental development has been added to the Yellowknife rental stock in the last six years?

It seems like such a promising window of opportunity, both for landlords and for renters, but unseen factors keep the two from meeting. Luckily, Yellowknife has some exciting options to solve the problem – and all homeowners can take part.

To understand the big picture, it’s useful to think of the real estate market as the interaction of two separate markets. The first is the space market. Vacancy rates, population growth – the supply and demand for physical space. But to drive an increase in the supply of new rental units, the capital market – supply and demand for real estate investment dollars – is just as important. 

We’ve been waiting for southern money to show up and build new rental housing, with little success. Maybe it’s time to put local money to use and solve our own problem.

If we want to see more affordable rental housing built, we need to increase the supply of money ready to invest in building new rental properties. We’ve been waiting for southern money to show up and build new rental housing, with little success. Maybe it’s time to put local money to use and solve our own problem.

Three years ago, after attending a conference in Vancouver, my business partner Rob Warburton began talking about a concept called Citizen Developer. The idea is elegantly simple. While large developments take a lot of money, planning and time and only happen occasionally, in spurts, individual property owners can add new rental units through the relatively new bylaws allowing laneway housing. If you have a backyard, you can do your part by putting in a mini-home and renting it out.

In fact, if over the past six years, just 0.1 percent of Yellowknife homeowners had added a rental suite each year, Citizen Developers would have added more new rental units to the market (29) than all the major landlords combined (24). It’s the crowd-sourcing approach to building rental stock.

It’s also a great local economic development opportunity for Yellowknifers. Rather than investing all their savings in something like the stock market, Yellowknifers can direct a bit of their savings towards a smart, local investment that improves their city.

However, before we can unleash the potential of our Citizen Developers, we need to solve two issues: development costs and the secondary suite financing problem.

A new bachelor apartment would rent for about $1,250 per month. About one third of that rent would be used to cover operating costs, leaving $833 a month or $10,000 a year in rental income. What return do Yellowknifers need to consider investing in local rental properties? The answer turns out to be about 7.5 percent – we can expect Citizen Developers to become landlords if they can build a laneway house for less than $133,000 ($10,000 divided by 7.5 percent).

This is where the various levels of government can play a key role. What requirements and costs will be placed on our Citizen Developer? Safety, energy efficiency standards, landscaping, neighbourhood fit, aesthetics, water and sewer lines, parking, permitting costs, design, etc. – these requirements are all done with the best intentions, but each extra requirement has a cost.

An extra $10,000 in costs means the landlord now needs to collect an additional $62.50 in rent per month to cover the extra cash outlay. That might not sound like much money, but that’s a 7.5 percent reduction in profits to our Citizen Developer: enough to kill a project.

So the big picture policy question we need to ask ourselves is: what requirements can regulators bend on in exchange for affordable rental housing to the market?

Banks currently don’t finance secondary structures, so our Citizen Developer needs to come up with $133,000 in cash rather than a more manageable $27,000. By reducing the cash requirements for laneway houses, the number of Citizen Developers will explode.

Here the City or GNWT could help as well. The City could begin allowing front/back lot subdivisions and bare-land condos so the secondary suite is on its own financeable land (something the City is considering). The Housing Corporation could provide transferable second mortgages for laneway houses.

I believe there’s an overwhelming interest from Yellowknifers to invest in their own community and help solve the affordable rent issue. Let’s put in the final effort needed to make it happen. Let’s start a grass-roots revival of our rental stock. 

Sam Gamble is a managing director of CloudWorks Adventure Capital, a Yellowknife-based real estate investment company. His column aims to explore the second and third order economic effects of decisions facing the North.

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