There are generally two options if you want to get a house in Toronto: buying a move-in ready house, or get a piece of land and build your own.
Building a custom-built house is a fairly common practice in Toronto, where we often see a small detached house go up for sale, and a few months later, a brand new building has been built in its place.
By building your own house, we have the freedom to get what we want, according to our preferences. However, how much does it cost to build a custom-built home in Toronto?
Before we can build a house, obviously we will first need to purchase a land in Toronto, on which we will build. This will mean purchasing a vacant lot, or purchasing a house for its land.
Due to the limited availability of vacant lots in Toronto and the expensive price tag, the best possible option is to purchase a detached house. According to the latest data by the Toronto Real Estate Board, the median price in the second quarter of 2019 is $875,000 for a single detached home. The average number is much higher than that at almost $1.3 million.
So, ideally you are looking for a detached home below $700,000. Assuming you are taking a mortgage with a 20% down payment ($140,000), land transfer tax ( $20,950), and legal fees of around $1,500, then your total initial cost to buy the land is $155,500. This is not counting the mortgage you’d have to pay every month (around $2,000-3,000/month)
If you somehow can get a vacant lot in Toronto, then you wouldn’t need to spend anything to tear down the existing house. If that’s not the case, you’d want to consult with a contractor for this. Ideally, this would also be the contractor who will build your house later on, so you can consult whether to preserve some of the existing structures or frames of the house (which can save a lot of money).
In general, the cost to demolish the existing house will be around $15,000-$40,000. For simplicity sake, we will pick $25,000.
Construction Costs Per Square Foot
The average production cost per square foot in Toronto and the Great Toronto Area (GTA) can range around $100-$400. In general, the cost to build a custom house from scratch per square feet is around $250.
If you are planning to build a luxury house, this cost can go up to $350 or $400 per square foot.
So, assuming you are building a standard custom house of 2,000 sq ft, your total cost will be $400,000.
It’s also important to understand that in home construction, the total cost is usually broken down into two types:
- Hard costs: which is, the fixed costs which is agreed on the trade contract. These costs will not change unless more items are added to the contract. For example, the hard cost to build a roof will be $20,000. Hard costs will also include labour and material costs necessary to finish a project.
- Soft costs: variable costs that can change depending on various situations. The example for this is equipment costs, additional engineering, insurance, and so on.
When you hire a builder/contractor, they would present you with a complete list of hard and soft costs for the building project.
Also, there are various factors that will affect the price per square foot of the custom-built home:
1. Finished/Unfinished basement
Finished basement can significantly increase the cost per square foot. It is also worth noting that the basement is typically not included in the actual square footage of your house. A finished basement,however, can also significantly improve the house’s resale value.
2. Energy-efficient choices
Environmentally-friendly and energy-efficient building choices (insulations, energy-efficient windows, smart lighting and appliances, etc.) can also increase the cost per square feet. There are, however, several benefits to this:
- Tax rebates for green initiatives
- In the long run, you will save money in utility bills, which can offset the initial cost
- Increased resale value, especially if you can get energy-efficient certifications from the house from organizations like LEED or Energy Star
- Obviously, convenience
3. Design style
Complex or luxurious building styles can also increase the initial cost per square feet. However, depending on your choice, this can attract more buyers when it’s time to sell.
4. Material choices, labor costs, construction techniques
High-quality materials will obviously cost more, and depending on different construction methods used by the builder, the labor and engineering costs might also vary.
A deluxe kitchen set can cost significantly more than a standard house, as well as installing a deck or patio on your front lawn.
So, when considering construction costs, you should consider all the above variables.
Building VS Buying a Move-In Ready House
Let’s use the average price for a new detached house as our benchmark here, which is $1,250,000, while for the custom house, we’ll use the above assumption that the initial purchase price is $700,000.
So, based on the calculations above, we have this rough measure of the cost to build a house in Toronto:
- Down payment (20%): $140,000
- Land transfer tax (2%): $20,950
- Legal fees: $1,500
- House demolition: $25,000
- Building costs: $200/sqftx1,500sqft=$300,000
Total initial costs: $487,450
Mortgage (3.5%, 5-year term, 25-year amortization)= $2,795.91/month
How about if we buy the move-in ready house?
- Down payment (20%): $250,000
- Land transfer tax (2%): $40,950
- Legal fees: $1,500
Total initial costs: $292,450
Mortgage (3.5%, 5-year term, 25-year amortization)= $4,992.7/month
As you can see, the initial cost of building a custom house is higher, and that’s assuming you are getting a detached house that is almost 40% lower in price for the land alone. However, the mortgage you’d have to pay monthly is much lower, so you’ll play less in interests—thus, more potential profitability.
This will be a huge factor when we consider resale value.
Resale Value Prediction: Custom Built Home VS Ready Home
The current 5-year price rise forecast for house prices in Toronto is 3.3% annual increase. Let’s assume that you are going to sell the house after 5 years, and calculate your profit.
Obviously, if we build the custom-built house right, the resale value could be much higher than the average. Let’s however, do a pessimistic analysis that only 80% of your building costs will go into the house’s value due to depreciation, so:
New price for custom-built house=$700,000+240,000= $940,000
Price after 5 years (3.3% yearly increase)=$1,105,680
Then, let’s see what you’ve spent on these 5 years:
Initial costs: $487,450
Mortgage after 5 years: $167,754.6
Total costs: $655,204.6
Remaining Mortgage Balance=$465,911.9
Profit=$1,105,680-$465,911.9-$655,204.6= loss of $15,436.5
What about the ready-made house?
Price after 5 years(3.3% yearly increase)=$1,470,319
Initial costs: $292,450
Mortgage after 5 years: $299,562
Total costs: $592,012
Remaining Mortgage Balance=$862,799.82
Profit= $1,470,319-$862,799.82-$592,012= profit of $15.507.18
As you can see, in a relatively short-term period of 5 years, buying and then reselling the ready-made house is more profitable. However, keep in mind that this is a pessimistic calculation, as there can be cases when a custom-built house that is built properly can increase in price dramatically. Choosing the right builder (cost-efficient and good building quality to maintain resale value) will be the key if you want to invest in a custom-built home.
In general, however, you should consider a custom-built home if you want to stay in the property for long-term, so your investments will be about your convenience.