Real Estate Talk:
Pricing revenue properties

How to effectively price multi-residential income properties

By Joseph Marovitch

Before the pandemic, Montreal property was hot, and investors were scrambling to purchase as many units as they could find, causing the price per door to rise quickly. Today, real estate investors are holding off until the situation improves. Investors will still consider purchasing apartment buildings if the price is worth the aggravation of not receiving rents and maintaining expenses.

The pandemic is rough on both landlords and tenants, and it does not appear to be easing with the second wave. As businesses close for short or long periods, individual incomes disappear, creating difficult situations in terms of tenants paying rent and landlords paying their bills. Some landlords can manage for a period with accumulated funds, but for others, it is easier to sell the property.

Before the pandemic, Montreal property was hot, and investors were scrambling to purchase as many units as they could find, causing the price per door to rise quickly.

Before the pandemic, on average, there were between 50 and 60 new income properties listed each day. Out of an average of 50 properties listed each day, only 4 or 5 were worth looking into. This is because the price of a property is based on location, condition and the capitalization rate, or rate of return, on invested money.

If the property is in a good location, in good condition and provides a good return, then the buyer would make an offer. The buyer did not have to see the property. They just had to know the property covered expenses and made a profit. If the property provided a good return on paper, the numbers simply had to be verified.

Calculation for a Cap Rate:
Net Operating Expenses / Value of property x 100 = Capitalization rate
Example:
$50,000 NOI / $1,000,000 Purchase price x 100 = 5% return in investment

Most property new to the market with 10 or 20 units (apartments) would offer a cap rate of 2% or 3.5%. Either the broker does not know how to price or the seller is being greedy. A 10-unit multi-residence with a cap rate of 3.5 would cause the purchaser to lose money. This is great if the investor needs a tax write off, but for other buyers, a 2% or 3.5 % return is not enticing unless it is a duplex.

A cap rate of 5% or higher would cause a multiple offer situation all the time. In most cases, the seller would get more than the asking price.

In today’s market, large multi-residential properties are few and far between. For those landlords that have decided to sell their property, the cap rates are very low, and the asking price very high. These properties go nowhere. In most cases, the seller loses months of time trying to get a buyer, then reduces the price raising the cap rate to 4.5 or higher, or they remove the property from the market.

‘In today’s market, large multi-residential properties are few and far between. For those landlords that have decided to sell their property, the cap rates are very low, and the asking price very high.’

If a seller is going to sell a property with 6 or more units, the price should generate a cap rate of 4.5 (if the property has the potential to increase rents) or 5, or higher, to generate more interest and several offers at the same time. As well, if the seller states the property generates a 5% return or more, the seller should be certain of the cap rate by being able to verify it with expense documents and leases.

Note that when a property requires work such as a new roof, new windows or balconies, these issues reduce the cap rate and, therefore, should be considered when pricing the property. Further, these issues should be stated in the seller’s declaration so the buyer cannot use them to reduce the price even further after an offer is submitted.

Should you have questions or comments, please refer to the comments section at the bottom of the page. As well, to view past articles, click here.

Next article: How market evaluations are prepared

State of the market

Downtown Montreal does not appear to be busy but if you look around, you will see several cranes as new condominiums are being built. This is not to say that buyers are buying the condos but, as has occurred to developers in the past, when the situation improves and the economy gets back on its feet, buyers will purchase condos instead of single homes since the expectation is that a repressed market, when reopened, will cause prices to rise significantly.

‘It is a seller’s market in the Laurentians and the demand for lakefront property, away from populated towns, is highest. For those who intend selling their 2nd property up north, now is a good time.’

For now, the hot market is in the Laurentians. Travel is still limited, summer camps may not be operating in the spring, and remaining in Montreal, a red zone, is risky. The only problem is the lack of inventory up north. It is a seller’s market in the Laurentians and the demand for lakefront property, away from populated towns, is highest. For those who intend selling their 2nd property up north, now is a good time.

Have a great week and stay safe.

Let’s not forget that people with cancer are vulnerable too!

You are invited to keep giving to the following organizations since it’s now more important than ever to support cancer research! Click on the logos below to find out how:

Image: Andrew Burlone

Other articles by Joseph Marovitch