Real Estate Talk:
Income property / 1
Income property concept and pricing – understanding the Cap Rate and other considerations
By Joseph Marovitch
Some people invest in the stock market. Some invest in art. I believe in real estate as the best investment. You can invest in a single residence, condominium, duplex, triplex, multi-residential (more than 5 units) income property or commercial building. For the purposes of this article I will be discussing duplexes, triplexes and multi-residential income properties.
Investing in a good piece of real estate is like purchasing a government bond. If the price is right, the condition and location are good and the capitalization rate (Cap Rate) is decent, then you have a property that both grows in value and provides a constant income stream.
Some people invest in the stock market. Some invest in art. I believe in real estate as the best investment.
To price an income property of 6 or more units, you must understand what a Cap Rate is. A capitalization rate indicates the amount of return you receive on your investment. A Cap rate number consists of the following:
1. NOI – The Net Operating Income or profit after expenses, on an annual basis
2. The Purchase price of the property
These two factors are applied to the following formula: NOI / Purchase Price x 100 = CAP RATE
Eg: 10 Apple Rd – 10 units fully rented – NOI: $50,000 – Asking Price: $1,000,000
NOI / PRICE x 100 = CAP RATE
$50,000/ $1,000,000 x 100 = 5
If the cap rate were a 4 for a 10 unit fully rented income property, you would want to reduce the asking price until the cap rate is acceptable at a five or higher.
In Montreal a cap rate can range from 1 to 20 or higher. The higher the cap rate, the higher the net income. Generally, the cap rate number indicates the following:
1 – 2: These numbers do not indicate a property that is generating a profit or even maintaining expenses.
3 – 4: These numbers would indicate a duplex or triplex that are maintaining expenses such as mortgage, taxes and/or electricity but not generating a profit except for the increased value of the property itself as time passes, called capitol gain.
5 or higher: These numbers indicate a property that is maintaining expenses and generating a profit.
‘These properties (duplex and triplex) are an excellent investment in the long term as they grow in value and maintain their own expenses via the tenants.’
Duplex and triplex pricing
We do not price a single unit condo, duplex or triplex the same way we price an income property of six units or more. If you try to price a duplex or triplex based on a cap rate, the property would be worth very little. Therefore, we price these properties much the way we price a home. The price is based on the location, condition and comparable sold and active properties in a similar location. These properties are an excellent investment in the long term as they grow in value and maintain their own expenses via the tenants.
Income property price accuracy
There are two ways to find an income property that is for sale. One is via the Centris system with a broker. The other is via private sale.
The vendor will indicate the income property is for sale, the asking price, gross income, expenses and net income. You will then apply this information to your cap rate formula. Most income property that arrives on the market each day are overpriced, with cap rates of 3 or 4. If these properties are six or more units, they are not worth spending time on.
‘An income property (6 or more units) can be sold quickly in almost any area, if the cap rate is 5 or higher and the vendor accurately indicates all the expenses.’
If the cap rate is 5 or higher, you must verify if all the expenses are indicated and accurate, or is the listing made to look good but is actually a lemon.
An income property (6 or more units) can be sold quickly in almost any area, if the cap rate is 5 or higher and the vendor accurately indicates all the expenses. I say almost any area because the more affluent a neighbourhood, the easier the tenants will be to work with.
In future articles I will be discussing the following:
Income Property – Process to market
Income Property – Conditions with promise to purchase
Income Property – Condition: 1st visit
Income Property – Condition: Inspection
Income Property – Condition: Review of leases and expenses
Income Property – Financing
Income Property – How to increase your real estate portfolio after your first purchase
Income Property – Landlord’s Obligations
Income Property – Tenant’s Obligations
The Régie du logement – Who are they?
How to deal with the Régie from a landlord’s perspective
How to deal with the Régie from a tenant’s perspective
Should you have any real estate questions, feel free to contact me anytime.
Have a great week.
State of the market
According to the RBC research, Montreal is low on the scale for a housing market downturn even though prices continue to rise as supply decreases. RBC claims this is due to Montreal’s strengthening economy. However, the CMHC (Canada Mortgage and Housing Corporation) says to be wary as there is still a degree of vulnerability. Should housing prices continue to rise so high that homes become unaffordable, we could see a bubble burst that would cause a sudden drop in pricing.
All this being stated, the Chinese and other foreign buyers have increased in Montreal property purchases by 10% since last year, according to the CMHC. Some of the reasons stated for this are that restrictions on foreign buyers in Toronto and Vancouver have been imposed to cool down those markets in those areas. Another stated reason is that Montreal appears to have a growing economy with great upcoming opportunities. The fact is that, at this time, Canada is one of the safest and least volatile economies in the world. Who would not want to invest their money here?
Joseph Marovitch has worked in the service industry for over 30 years. His first career was working with families from Westmount and surrounding areas, hosting children between the ages of 6 to 16 as the owner and director of Camp Maromac, a sports and arts sleep away summer camp established in 1968. Using the same strengths caring for the families, such as reliability, integrity, honesty and a deep sense of protecting the interests of those he is responsible to, Joseph applies this to his present real estate broker career.
Should you have questions please feel free to contact Joseph Marovitch at 514 825-8771, or firstname.lastname@example.org