In Outaouais, like various regions in Quebec, the prices of plexes are constantly rising. Investors are not discouraged, however: many of them still want to buy these income properties. Would you like to also be one of those investors? Here are some tips to help you make a profitable purchase.

 

First of all, you need to determine if this type of commitment is for you, because investing in real estate requires a lot more than just putting your money in bonds, funds or stocks. Liking management is a prerequisite, you have to have a lot of patience with tenants and be available to respond to their requests or concerns. If not, then it would be more beneficial for you to meet with a financial adviser and invest elsewhere.

Calculate the Profitability of the Property

The very first step to take to know if a building can generate a good income is to estimate its profitability. It's important not to rely exclusively on the Gross Income Multiplier (GIM), which comes down to the price paid divided by the income. For a more concrete analysis, also consider the expenses using the Net Income Multiplier (NIM).


Net income is determined after subtracting the operating costs of the property (this includes but is not limited to electricity, heating, insurance, maintenance and snow removal, property taxes, management fees or concierge, etc.). Thus, if you spend $450,000 for a building with 4 units and the annual net income goes up to $30,000, you acquire a ratio of 15. In this case, you generate a good return, since the target to strive for sits between 10 and 16.

Determine the Rent Prices

What makes it possible to pay off the mortgage (capitalize) and increase the equity between the value of the property and the balance of said mortgage, is the income generated by the rents.


Therefore, the purchase price must reflect the condition of the building as well as take into account the number of rents. A property with apartments rented at below market amounts does not have the same value as one with leases signed at a higher price. It is necessary to fix the acceptable amount of the rents according to the type of building, its location and its condition, and to put it in relation to the purchase price.

To be able to determine these amounts, do not hesitate: ask the seller questions to find out how many years tenants have lived in the apartment, what is their average duration of residence, and when the last increase was. In short, any relevant question you ask will help you get a better idea of ​​the prices to set for these rents.


You can run scenarios with the actual GIM and the market GIM and use these figures to present an offer to purchase and negotiate. It would not hurt to also compare the sale price to that of similar buildings during the last year (and this always taking into account the price of the rents). A real estate broker can help you in this exercise.

Would You Be an Owner-Occupant?

It would also be necessary to determine whether you would like to reside in one of the accommodations or not. If all the dwellings are already rented, the current expenses related to the building may be subtracted from the income. On the other hand, if you are an owner-occupant, only the expenses for the rental accommodation will be deductible. Upon resale, the part of the building inhabited by the owner is exempt from capital gains tax (i.e., capital gain). Fully leased, the entire capital gain is taxable.

Provide the Required Down Payment

No matter what real estate, you need a minimum amount of cash to buy one. In the case of an income property, the minimum deposit is 20% of the purchase price if all the units are rented. If, on the other hand, you decide to occupy one of the units, mortgage loan insurance (such as that of the Canada Mortgage and Housing Corporation (CMHC) allows you to reduce the deposit to 5% for a duplex and 10% for a triplex or quadruplex.

Consider Related Expenses

It is important to consider the transfer tax, notary fees, the cost of the inspection as well as school and municipal taxes before concluding the transaction. The standard among Canadian mortgage insurers is to calculate an amount equal to 1.5% of the purchase price of the building to be able to cover these costs.


Likewise, to prepare for unforeseen events, many financial institutions recommend anticipating a security fund (i.e., 3.5% of the price paid) in the form of easily accessible savings by using a line of credit or even a savings account.

Re-mortgage to Buy a New Property

Sometimes, when possible, some investors make the decision to re-mortgage one property to finance the purchase of another. If a significant portion of your mortgage has already been paid off, you can use that asset to borrow at a lower rate than a personal loan. The new mortgage can thus reach 80% of the value of the first building - this is the leverage effect. You can make an appointment with your financial advisor and discuss the advantages of such practices depending on your situation and therefore learn more about the specifics.


In short, before jumping at the chance to own an income property, it is imperative to take into consideration the financial and human factors - keep in mind that preparation is key to a good real estate investment.