Purchasing a revenue property is an excellent way of gaining capital over the long term and of getting passive income. But before you make the leap, consider these aspects to make sure your investment will be profitable and within your capabilities.
What type of building do you want to buy?
There are different types of rental buildings you can buy. Here’s a list of the options available to you. NB: We have excluded condos, cottages and mini homes from the list because they are subject to regulations that vary by municipality.
Single-family house
Row house
Rooming house
Duplex
Triplex
Quadruplex
Buildings with 5 to 7 dwellings
Buildings with 8+ dwellings
Single-family and row houses are the properties that generally require the least amount of maintenance because you’re managing a small number of renters. They only generate one rental income, but the amount may be interesting if the property is located in an in-demand area. This type of real estate is sought after by families with young children, who don’t yet have the means to buy their own home, and by families relocating temporarily for work.
The rents in multi-unit rental buildings can be higher because they require more management. The parking lot has to be cleared of snow, there are multiple kitchens and bathrooms needing upkeep, and relationships with neighbours have to be managed.
That’s why apartments require significant management skills. When components of the building need renovation, the investment will be steeper due to the total number of components involved. For instance, a six-dwelling building has more windows than a single-family house. Fortunately, carrying out work will increase the value of your building.
The more units there are, the more turnover in renters you can expect, especially when your target clientele is students and temporary workers. This is particularly true for rooming houses, which continuously see students and temporary workers coming and going. Posting listings, having people visit the units, doing credit checks and signing leases are tasks that require considerable resources.
Investors must therefore choose the type of revenue building that meets their investment goals and their level of management experience. Larger buildings have a higher potential profitability and will gain more value over time, but they require more oversight than properties with fewer doors.
Tips to make your search easier
Before buying a rental building, create a budget that includes all the associated expenses:
Down payment
Notary fees
Property taxes
Insurance
Management costs
Potential periods of unoccupied units
“It’s crucial to understand the reality of the rental market in the area concerned, to make sure you are planning your transaction suitably and are making an investment that will be profitable for you. So it’s well-advised to become familiar with all the expenses involved in a rental property to make sure the potential revenues will cover them. You should also consider getting specialists to support you in your process, including an investment advisor to create a thorough budget that’s in line with your financial objectives and your investment strategy.”
Jonathan Dion, mortgage representative at Desjardins.
There are several factors to consider when determining your purchasing criteria for a rental property. For instance, there’s the property’s location, the rental demand in the area, the potential rental income, the condition of the property and possible renovations needed, the taxes and expenses for that property, and the financing options available.
It’s also important to have a clear understanding of your investment goals and risk tolerance, and to perform studies and in-depth market analyses before making a decision.
What’s the ideal location?
Location is one of the most important factors to consider when purchasing a rental building, not only in Quebec but anywhere in the world. It can affect the rental revenues, maintenance costs and potential resale value. A prime location, for instance with good schools, a low crime rate and access to public transport, can justify charging higher rents and attracting more desirable tenants.
In order to determine if its location is favorable and that your future tenants will have a good quality of life, look out for these eight things when visiting rental properties.
A survey conducted by Leger for Royal LePage shows that 11% of Canadians (4.4 million people) own real estate for the purpose of renting. Most investors own only 1 building, while one-third of them own 2 or more. And 23% of the Canadians who had not yet invested in a revenue property said they were likely to buy one in the next 5 years. More than half (51%) of current investors plan to buy another revenue property in that same period.
It’s easier to find and keep renters in a popular location. This reduces the periods in which units are not occupied, which maximizes profits. It's essential to analyze the local real estate market and community before investing in a revenue property, to make sure it meets the needs and preferences of potential renters.
Is the purchase profitable?
To calculate the profitability of a rental building, you must first determine the gross annual rental income by multiplying the monthly rent by 12. Then, from that amount, subtract the yearly expenses, like mortgage payments, property taxes, insurance, maintenance costs and management fees.
Divide the result by the total amount of your investment (including the down payment, transaction fees and renovation costs) to get the percentage of rental yield. You can use this percentage to compare the profitability of different income properties and determine whether they’re a worthwhile investment.
Financing the purchase of a multi-unit building
“There are several options available to finance a rental property in Quebec, for instance getting a mortgage from a financial institution or turning to a private lender. It’s also possible to refinance an existing property or use an available mortgage margin as leverage. Ask a mortgage financing specialist for advice on the best financing strategy for your situation.”
Jonathan Dion, mortgage representative at Desjardins.
Anticipate setbacks
As a landlord, you have to plan for unexpected expenses. Carry out regular inspections to identify potential problems. Consider getting owner insurance to protect yourself from potential lawsuits and losses, and make sure all your tenants sign legally compliant leases.
Maintain open communication with tenants to respond to their concerns and sudden problems quickly. And lastly, budget for emergency repairs and other contingencies. Use a wide range of eco-friendly building materials to reduce your building's environmental footprint.
Advice before buying a rental building
Calculating everything accurately is extremely important before buying a building. It lets you determine the potential return on your investment, including its profitability and the cash flow that will be available. Factors such as the property’s purchasing price, rental income, operating expenses and financing costs must all be taken into account.
Here are some tips to avoid wasting time in your search:
Define clear criteria for your ideal rental property, like location, size and price range.
Research the market and the area to identify zones with a high demand and growth potential.
Use online resources and tools, like property search engines and real estate apps.
Fine-tune your options and perform in-depth inspections and due diligence before making an offer.
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