Real estate deals: Montreal 8-plex

Why this income property got 14 offers in 5 days

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City: Montreal

Area: Villeray/Saint-Michel/Parc-Extension, near rue Jean Talon

Address: 6930 Av. Wiseman, Montreal, PQ, H3N 2N2

List Price: $728,000

Sale Price: $753,770 in August 2014 (Sold for 104% of list price)

Days on Market: 41

Number of offers: 14 offers in 5 days

House size: Residential 8-plex; 3 floors; building size: 1,376.30 square feet

Lot size: 2,970.80 square feet

Bedrooms: 12 bedrooms (4 x 1-bdrm suites and 4 x 2-bdrm suites)

Bathrooms: 8 bathrooms

Listing Agent: Bernard Chan, Broker, Royal LePage Champlain

What you need to know
This 8-plex was built in 1960 and contains 4 x 1-bdrm suites and 4 x 2-bdrm suites. Annual revenue, based on current one-year leases, is $54,228 per year. No additional money is made from parking or coin-operated laundry as neither is available in the building. Tenants pay heat, hydro and hot water. Landlord pays water taxes and property taxes. All eight units are currently tenanted with each tenant in a one-year lease, due to expire in either May or June of 2015.

A key feature if any investment property is whether or not there the new owner can make capital improvements to the building that will  lower the operating costs or enable the owner to increase rent (or both). While this 8-plex currently relies on electric baseboard heating—an expensive way to heat, particularly with rising hydro prices—there’s no urgent need for the new owner to spend money for upgrades because currently all the tenants pay their own hydro bills.

Investment Side
Since this is an investment property, the buyer cannot invest less than 20% as a down payment. With a sale price of $753,700, a 20% down payment equates to $150,754—leaving a mortgage of $603,016.

If the buyer opted for a 10-year term on a 25-year amortization, and could secure an interest rate of 4.69%, then the monthly mortgage payment would be $3,402.

Considering the monthly revenue on the building is $4,519, this would leave the new owner with $1,117 per month in income, or $13,404 per year.

Estimating property taxes at $3,000 per year, insurance at $1,250 per year, and water taxes at $300 per year, then the total monthly expenses—including a 3% property management fee, plus a 7% allowance for building maintenance, and 3% allowance for vacancy—and the new owner will spend $944.04 per month, or $11,328.50 per year in operating expenses.

That means:

*Net Operating Income (revenue minus expenses) is $3,574.96 per month

*Mortgage payments are $3,403.82 per month

*This leaves, $171.14 in profit each month.

Since the investor’s cash outlay is $160,754 (this includes down payment, closing costs and deferred maintenance costs), the cap rate on this 8-plex investment is 5.69%, while your return on investment (which is your annual profit divided by your cash outlay) is 1.28%. Increase your down payment to 25% and your ROI increases to 2.32%.

“The 8-plex is located in one of Montreal’s most sought after areas, which is why it got 14 offers over five days and a sale price $25,770 over list price,” says Chan. “A major reason for the interest in this property was that investors find that bank saving’s rates are too low, so most investors with liquid cash are moving to rental properties to get a good return on investment.”

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9 comments on “Real estate deals: Montreal 8-plex

  1. If the return is only 2% (around), why would the investor put it in a dividend stock (i.e. banks, insurance, etc.) which provide more than 2.5% return? Why if some units are not rented out in some years? Then run into losses?

    Reply

    • JoeyLeeka:
      I certainly agree with your logic. When you compare this real estate investment to other options — such as a blue-chip dividend paying stock — then it certainly appears to be a poor choice. However, many investors who opt for a real estate investment are looking for alternatives to stocks and bonds (not replacements…as they already have money invested in the market). It’s often a choice about diversification. Many investors consider Montreal’s real estate market a “value” investment, since it’s been more depressed compared to other municipalities in Canada (primarily due to poor job prospects).

      Reply

  2. I have invested in real estate before and there is no way I would put down over $150 grand and take on $600 grand of debt for a non liquid “asset” that is only generating $117 a month. This building would be difficult to move as opposed to other types of real estate given the limited pool of buyers who have that amount to put down plus it would likely require a commercial mortgage and the insurance “estimate” of $1,250 a year seems low as insurance on a 4 plex where I am is $2400 per year. If you don’t have a tenant paying rent for two months of the year your entire profit is gone. Who ever bought this must be looking for pure appreciation play. Its also in crumbling Montreal where property taxes are going to sky rocket to pay for all the bridges that are falling down.

    Reply

    • Hi Dave_dave123d:
      It sounds like you know your own investment parameters when it comes to investing. Kudos. As for the insurance, it’s a rough estimate based on an older buildings that, obviously, excludes contents and just includes named perils on the building. As for the profit and the lack of rent for two months: This was actually factored in when calculating the 5.69% cap rate and the 1.28% return on investment—both cap rate and ROI would be higher if we didn’t factor in maintenance, vacant tenancy and property management. In fact, if you removed these costs you would actually earn a 6.59% cap rate and 5.49% ROI—obviously much better numbers, but not as prudent.
      Also, property taxes do rise in different areas of a municipality at different rates, but not because of failing infrastructure in the area. To offset failing infrastructure property taxes will rise across the board.

      Reply

  3. Hi Romana – you mention a “profit” if $171.14/month. I am not sure this is quite correct, as a portion of the monthly mortgage payment (~$1050/month in the beginning) goes to paying down the principal for the owner. So in fact, the owner would be making more than suggested – just that some of it would reside in additional equity through a reduction in mortgage principal.

    For my rental portfolio, I refer to the $171.14/month as money in my “pocket” each month and not “profit”. For profit, the amount going to principal needs to be considered as well.

    Having a small or even negative “pocket” amount doesn’t say anything about the profitability of the rental property.

    Also note that ROI goes down with increasing down payment and equity in the property (not up).

    To illustrate this, if the owner was able to put down only $1 of his own money, and mortgage the remaining $753,699, what would his ROI be? First year interest would be ~$35,348, expenses would still be $11,328 for a total of $46,676, against an income of $4519*12 = $54,228, leaving a net annual income of $7552 – or an ROI of 755200% – not a bad return for a $1 investment!

    The other extreme is if the owner owned the entire building outright, his return on investment would be the cap rate presented of 5.69%.

    With rentals, you make the greatest ROI when the bank owns most of the property.

    Reply

    • Tyler,
      You are absolutely right. The owner is making more in “profit” when it comes to accumulating equity in the property. I didn’t include that in my overview, but you make a good point and next time I’ll include a five-year projection that will include what you call “pocket” money as well as accumulated equity in the property.
      As for the ROI, I will go back to my calculations, but the calculations are based on pocket money, not equity.
      You do make some excellent talking points, however, and I will touch on these in future blogs.
      Thanks for taking the time to comment and highlight some very important aspects regarding real estate investment.

      Reply

  4. This article has got its math wrong and is misleading. How do you expect to have 3000$ of taxes on a $753,000 property? With a city tax rate of 0.82% and school taxes of 0.17%, the building would have to be valued at $300,000, which is basically impossible. If you estimate that it is undervalued at $600,000 (79,5% of sale price), taxes would be 6000$ annually, which is 3000$ more than estimated in this article. With only this factored in, you have fallen from +171$ positive cash flow per month to -79$ cash flow per month, with no room for major emergencies. Your 7% for building maintenance sums up to 3795$ per year, which I find terribly low for an old building as large as this one. A few plumber calls, paint and wall repairs, snow removal, summer mowing and it’s gone… what’s left for janitorial duties like cleaning and garbage disposal, and emergencies like a leaking roof or anything else? Even the small stuff will have to be paid for out of pocket. And you have nothing for utilities, like common areas heating and electricity. I’m not saying that this is a bad investment, just that your numbers don’t add up and are misleading. When we get into detailed calulations like these, readers assume everything was factored in, while it clearly has not been. Ask any owner of a Plex and they’ll agree after checking their yearly operating expenses.

    Reply

    • Why this income property got 14 offers in 5 days

      Actually that is a good question, but I feel you looked at it all wrong.

      And I agree with sonncha!

      You wrote about it in a positive light instead of in reality! It should have sold for less and not been so active in a pure investment analysis. In my experience none of the big banks will give 25 years on an investment property, nor would they ask for only 20% percent down on a property like this. And while I read this story I realized that you were a realotor, and spun a story about how investing in rental propertys was good while doing no research on the subject. (this property is in Montreal while you are based in Toronto, looked up your site) Closing cost of only $10,000 while land transfer tax is $8,910. I would like to hire your lawyer on my next real estate venture if they only work for $190.00.
      CAP rate, surely an invention of a realotor to help sell propertys to un-intiated investors. Should be renamed to crap rate as it has no value to in-experienced investors, and even worse when used with in-effective data.

      Now lets do a more accurate analysis based on real world data. note I’m not from Qubec or Montreal and here in Northern Ontario things might be different.

      8 apartments renting for less than $800.00 each a month for a gross of $54,228 per year. (here those would be slums) quick search show market rents in Montreal vary considerable from $465.00 to $2,000.00. Guessing area and ammenities play a large role, and this area is unknown to me or what it’s future hold.(hopefully the investor has this information) You state there is no parking but the building footprint is 1,376sqft and lot size is 2,970sqft so there is something behind the building that will need maintenace. Hopefully it is parking or it will affect any future increase in rents. Residential leases mean nothing in Ontario, maybe the same in Quebec. Hydro is cheap in Quebec, no need for lanlord to change it.

      Income enter mnth rent c1 $4,519 $54,228

      3% Vacancy $1,627 (I would have used 5%, but cheap rent probably could have used 0%)

      Adjusted Gross Income $52,601

      Expenses:
      3.00% Management Fee $1,578 (your percentage, I would have went with 10%)
      taxes $9,000 (comparable to building twenty mins away from this location$15,000.00)
      water $3,500 (Just a guess based on my water bills)
      insurance $5,000 (more realistic)
      hydro $2,400 (common areas heat and lights)
      snow removal $1,500 (something is behind that building)
      7.00% repairs & maintenance $3,796 (10% would have been my choice)
      $26,774

      Adjusted Net Income $25,827

      Assume purchase price $728,000 (asking)
      20.00% Down Payment $145,600 (not sure this is achievable)
      5.00% 1st Mortgage @ years 20 $582,400 $45,925.15 (in November this is what Caisse was charging with 18yr max)
      monthly $3,827.10
      Positive cash flow @ month -$1,674.83
      Positive cash flow @ year -$20,097.99
      Plus principle reduction (year 1) $17,474.80
      Return on investment %/$ -1.80% -$2,623.19

      Reply

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