Advice

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How to buy a multifamily property in Montreal
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How to buy a multifamily property in Montreal: A step by step guide

By Mikael,

Montreal’s vibrant real estate market offers opportunities for investing in multifamily real estate for those looking to invest in multi-family properties.
Whether you’re a seasoned investor or a first-time buyer, this simple guide will walk you through the key steps to successfully navigate the process.

1. Location, Location, Location: is an old saying, but still applies in real estate investing

Montreal’s diverse neighborhoods each offer unique advantages. Consider these factors:

a) Proximity to Universities: Properties near McGill University, Concordia University, or the Université de Montréal attract strong rental demand from students year around (especially during the school year),
ensuring consistent occupancy.
b) Public Transportation: Easy access to metro stations and bus routes is a major draw for tenants, increasing your property’s desirability and potential rental income.
c) Downtown Core: Properties in the downtown core command premium rents all the time due to their central location and proximity to amenities, but also come with much higher purchase prices (ie low cap rates).
d) Up-and-Coming Areas: Explore neighborhoods like Rosemont–La Petite-Patrie, Villeray–Saint-Michel–Parc-Extension, Sud-Ouest and Verdun, which offer attractive investment potential with strong growth prospects (yes even today!).

2. Building Condition and Due Diligence:

a) Thorough Inspection: Engage a qualified building inspector to assess the property’s structural integrity, electrical and plumbing systems, and overall condition. This will help you identify potential repair costs after the purchase and negotiate effectively if there are serious issues that are discovered .
b) Environmental Report: Order an environmental assessment to identify any potential contamination issues that could affect the property’s value and pose risks to tenants (this is best done by the seller not the buyer since
the report should belong to the seller, but this is something that varies on a case by case basis).
c) Review Leases and Documents: Carefully examine existing leases, renewal letters, and expense records to understand the property’s net operating income and operating expenses.
d) Unit Sizes: Consider the unit sizes and layouts. Smaller units might be harder to rent in certain markets, while larger units can attract families or those seeking more space ie pay a better rent.
3. Financing and Legal Aspects:

a) Secure Financing: Obtain an opinion for a mortgage from a reputable lender. Explore different financing options and compare interest rates and terms.
b) Legal Representation: Engage a real estate lawyer or your notary to review the purchase agreement, conduct title searches, and ensure a smooth transaction.
c) The multifamily real estate brokers can prepare your offer to purchase, but some buyers prefer to have these offers checked by their lawyer / notary.
4. Negotiation and Closing:

a) Market Research: Conduct thorough research on comparable properties in the area to determine a fair offer price (again the multifamily treal estate broker can provide this information to you).
b) Negotiate Effectively: Be prepared to negotiate with the seller on price, closing date, and other terms during the offer process. These are best negotiated up front before having an offer accepted.
c) Finalize the Purchase: Once an agreement is reached, work with your notary to finalize the purchase and transfer ownership.
5. Property Management:

a) Tenant Screening: Implement a thorough tenant screening process to ensure reliable and responsible tenants.
b) Maintenance and Repairs: Establish a proactive maintenance plan to keep the property in good condition and attract quality tenants (this is a key step, problem tenants are an issue for you and your other tenants).
c) Rent Collection: Develop a clear rent collection policy and system to ensure timely payments (there are many software tools that can help with this step nowadays).
Investing in Montreal’s multi-family market is a rewarding venture for the patient and prudent investor.

By following these simple steps and conducting thorough due diligence, you can increase your chances of success and build a profitable real estate portfolio one property at a time.

Mikael Kurkdjian is a multifamily broker, with Baron Realty , you can reach Mikael at info@baronrealty.ca

For larger buildings, Bill 122 relevant to apartment buildings in Montreal may apply.

 

Sometimes the buildings for sale are true gems. Others may need more work after the purchase.

 

Many similar buildings in the Plateau Mont Royal borough.
CategoriesAdvice

Navigating the Shift in Commercial Real Estate: Multifamily Investing Amid Rising Interest Rates

By Mikael,

In the multifaceted world of commercial real estate, one component that often catches investors off guard is sudden policy changes. In March 2022, the central banks of the Western world adopted an aggressive stance against inflation, hiking short-term policy rates. While the efficacy of this strategy is up for debate, the ripple effect on the bond and mortgage markets was undeniable, leading to an uptick in the 5-year and 10-year bond rates.

The commercial real estate sector, with its brokers and multi-family investors, felt the shock waves of these changes.

Notably, even with the generally favorable CMHC insured mortgages available to apartment building owners, we still witnessed a significant surge in rates from March 2022 onward. So, how can multifamily investors who are acquiring properties in this shifting landscape safeguard their investments?

Unlocking the Success Matrix in Multifamily Investing

The success matrix for a multifamily investor boils down to an important aspect: the property’s rent potential. Ensuring the targeted property has a considerable upside in current rents is crucial. This not only provides a buffer for potential management missteps but also equips the investor with protection against future interest rate hikes.

Let’s consider a typical urban property, presuming there’s no immediate need for substantial capital improvements. If there’s a 50% upside potential (or more) in the rents and the property is purchased at a fair market value, with a 4.25% capitalization rate and a 4.8% 5-year CMHC insured mortgage rate, the investment’s outlook is extremely positive.

For example, a property with gross revenues of $200,000 and a 40% expense ratio, generates a net operating income of $120,000. If the investor can realize 70% of the rent upside over five years, a property purchased for $2,823,529 in 2023 could be worth $3,811,764 by 2028, assuming a constant 4.25% cap rate. This implies a 35% property value appreciation and an impressive 89% equity appreciation,

given a 57% loan-to-value ratio and a 43% down payment. This is a very plausible scenario within our multifamily investing landscape, even without considering potential inflation effects on rental rates.

The Evolving Landscape of Commercial Real Estate and Multifamily Investing

The commercial real estate sector, particularly multifamily investing, is no stranger to frustrations. The low-interest days during the Covid-19 environment are gone, but opportunities still abound. The current landscape sees a mix of sellers wanting to offload properties and long-term investors hunting for viable deals. The secret to succeeding as a multi-family investor lies in purchasing properties with promising rent upside at fair market prices, and just managing the properties over the long run.

At Baron Realty, we excel in bridging the gap between buyers and sellers of apartment buildings. We deliver top-tier boutique-brokerage services for apartment transactions in the Ontario and Quebec markets.

CategoriesAdvice

The Relationship Between Cap Rate and Upside Potential

By Mikael,

Investing in real estate, especially multifamily properties, can be a rewarding venture over the long run. To make informed decisions, it’s crucial to understand essential concepts like the capitalization rate (cap rate) and the potential for rental income growth. This article aims to shed light on the relationship between cap rate and upside potential, which is often misunderstood in the real estate market as most sellers, investors talk about cap rate without mentioning the upside potential in the rents.

The cap rate a definition

The capitalization rate (cap rate) is defined as a property’s net income divided by the sale price. It’s an important metric used by investors to evaluate potential investments. However, the cap rate alone does not provide a complete picture of an investment’s potential. The potential for rental income growth, or “upside,” also plays a significant role in the decision-making process.

When a buyer or multifamily investor perceives substantial upside potential in a property’s rental income, they may be willing to accept a lower cap rate at the time of purchase. This is because the investor anticipates that the property’s net income will increase once the rental rates are raised, ultimately leading to a higher cap rate and justifying the initial purchase price. Of course, achieving this rental growth often comes with costs, such as renovations, which can be a topic for another discussion.

The cap rate and link with upside potential

On the other hand, if a property has limited upside potential, a potential buyer may require a higher cap rate. This is because the buyer anticipates that the property’s net income will not increase significantly in the future, so they need a higher initial return to justify this investment. Thus, as multifamily property owners and commercial real estate brokers, it’s essential to consider both cap rate and upside potential when evaluating investment opportunities. The cap rate alone is insufficient without understanding the potential for rental income growth.

Conclusion

In summary, the relationship between cap rate and upside potential can be described as follows: the lower the upside potential in rents, the higher the cap rate will be; conversely, the higher the upside potential in rents, the lower the cap rate can be.

Understanding the intricate relationship between cap rate and upside potential is vital for making well-informed decisions in multifamily investing.

Baron Realty specializes in matching buyers and sellers of apartment buildings. The author, Mikael Kurkdjian works in partnership with Ramona Ursu and a team of real estate professionals to bring the best boutique-brokerage services to the apartment transactional space in Ontario and Quebec. mkurkdjian@baronrealty.ca