Introduction: The Sixplex Dream vs. The Financing Nightmare
The buzz around Toronto's new sixplex zoning rules is hard to miss. For real estate investors and small-scale developers, the city's move to permit six-unit buildings represents a significant opportunity to build much-needed "missing middle" housing. But while most of the conversation has centered on zoning changes, a far bigger obstacle looms for anyone looking to break ground: financing. Securing a mortgage for a multi-unit construction project is a complex and capital-intensive challenge that stops many promising projects before they even start.
However, the real story isn't just about zoning. A little-known federal program has fundamentally re-engineered the economics of these projects, making the six-unit multiplex the single most potent investment vehicle for small-scale development in Toronto today.
1. Why Six is the Magic Number: Unlocking a New Class of Financing
Building a sixplex, as opposed to a triplex or fourplex, fundamentally changes the financing landscape. The decision to add that fifth and sixth unit isn't just an incremental increase in density; it's a strategic move that unlocks an entirely different and more powerful class of financial tools.
Properties with five or more units are considered commercial residential projects by lenders. This critical distinction makes them eligible for the Canada Mortgage and Housing Corporation (CMHC) MLI Select insurance program. A fourplex, by definition, does not qualify for this program. This single detail positions the sixplex as a superior investment choice, granting access to financing terms that are simply unavailable for smaller multiplexes. This transition moves an investor from the world of conventional residential mortgages into the realm of sophisticated commercial financing, opening up a toolkit designed for professional-grade development.
2. Supercharged Mortgages: The Unbelievable Terms of CMHC's MLI Select
The CMHC MLI Select program offers highly attractive loan terms that provide a massive advantage over conventional bank loans. Designed to encourage the development of affordable, accessible, and energy-efficient rental housing, the program rewards builders who commit to these social goals with unparalleled financing conditions.
The strategic gulf between these financing options is stark:
These terms are earned by designing a project that meets specific criteria in areas like affordability, energy efficiency, or accessibility. The higher a project scores on these metrics, the better the financing terms become, dramatically reducing the amount of upfront capital an investor needs to contribute.
3. The Bottom Line: How MLI Select Turbocharges Your Cash Flow
The exceptional financing terms offered by MLI Select have a direct and powerful impact on a project's bottom line. By extending the amortization period to as long as 50 years, the program makes monthly mortgage payments significantly lower, which in turn boosts cash flow and overall profitability.
Let's use a hypothetical example grounded in the Toronto market:
A sixplex with 6 units averaging 2,200 per month in rent generates 158,400 in gross annual income.
After accounting for property taxes, insurance, and maintenance, the Net Operating Income (NOI) is estimated to be around $120,000 per year.
Lenders use a metric called the Debt Coverage Ratio (DCR)—the ratio of NOI to annual mortgage payments—to assess risk. A healthy DCR is typically above 1.2, meaning the property's income is at least 20% higher than its debt obligations. With a conventional 25-year mortgage, the high monthly payments could consume most of the NOI, making it difficult to achieve a strong DCR.
However, a 50-year amortization made possible by MLI Select makes the resulting mortgage payments exceptionally small relative to the income generated. This dramatically improves cash flow and makes achieving a healthy DCR much easier, turning a marginal project into a financially robust one. The impact on investor returns is profound.
"With typical 25 % equity and mortgage pay-down factored in, that 6 % cap translates into roughly 12-14 % returns on equity, before accounting for any long-term appreciation. Extended 40- or 50-year amortizations further boost cash-on-cash yields by lowering annual debt service."
4. The Fine Print: The Mandatory Bonding Requirement You Can't Ignore
While the benefits of MLI Select are clear, accessing them comes with a critical, non-negotiable requirement that often surprises first-time multi-unit builders: contract surety bonding. This is a crucial hurdle that separates serious, well-prepared developers from amateurs.
CMHC requires all projects financed under the MLI Select program to carry two specific types of bonds:
Performance Bond: Covering 50% of the total construction contract value.
Labour & Material Payment Bond: Covering 50% of the total construction contract value.
In simple terms, a Performance Bond is a financial guarantee that the project will be completed as contracted, protecting the lender from builder default. A Labour & Material Payment Bond ensures that all subcontractors and suppliers are paid, preventing construction liens from derailing the project. For the lender, this de-risks the project; for the investor, it enforces a level of professional discipline essential for success. This is a mandatory step that must be completed before CMHC will authorize the release of any construction funds, making it an essential part of early-stage financial planning.
5. The Financial Cherry on Top: How Toronto Sweetened the Sixplex Deal
Beyond the federal financing advantages, Toronto City Council has provided another powerful financial incentive that makes the sixplex uniquely attractive.
Previously, developers faced a significant financial penalty: while the first four units in a multiplex were exempt from Development Charges, adding a fifth unit triggered these fees for all units in the project. This created a powerful disincentive to build beyond a fourplex.
However, in a game-changing move, Toronto City Council voted to waive these charges for all units in a sixplex, completely removing the previous financial barrier and making the jump from four to six units dramatically more profitable. This waiver is not merely an added benefit; it's the critical key that makes the powerful CMHC MLI Select financing truly viable. By eliminating a six-figure upfront cost, it allows developers to preserve capital and more easily meet the equity requirements for the high-leverage CMHC loan.
Conclusion: A New Era for the Small-Scale Developer
The convergence of progressive municipal policy and powerful federal financing has created a rare and potent opportunity in Toronto's real estate market. The combination of new as-of-right zoning, the complete waiver of development charges, and—most importantly—the transformative financing terms of CMHC's MLI Select program has aligned to make the sixplex a uniquely strategic asset class. This policy alignment forges a new investment paradigm, positioning the sixplex to generate superior returns while simultaneously addressing Toronto's housing gap.
With these powerful financial tools now leveling the playing field, could the humble sixplex become the defining investment of Toronto's next chapter of growth?
