With revenu properties or 'plex's' (5
properties or more) having increased in value by 5-6% since 2008
and with rents being held under control by the Goverment 'Regie
du Logement' in the neighbourhood of 1-2% per annum, it is only
natural to conclude that rental properties are gradually going
to become less and less interesting to purchase on a the basis
of their CAP rates.
Well recent calculations have shown
that this time has come.
Enter the condo. The much
maligned little sibling of the revenue property. Specifically in
the Downtown market, the condo has increased in value between 1%
and 3% over the past 10 years. Not an amazing return on
investment I hear you say, but the market has changed in
Downtown Montreal. With two consecutive 20% increases in annual
sales, 2018 is the first in many years to begin as a balanced
market (2016 and 2017 were still buyers markets). This situation
persisted through the pandemic until mid-2022 when the market
began to stall following significant interest rate hikes.
The market then stalled and as of early 2026 remains a
buyers market with an over supply of inventory.
This is
the most interesting thing to buy with many opportunities to
purchase a condo at prices that have not been seen in several
years. That, along with lower interest rates, has seen CAP rates
return to around 4-4.5%.
More interesting though is our recent income
comparaison between the plexes and Downtown Condos. There are
good ones and bad ones in both fields, but the rapid increase in
prices for the 'plexes' has eroded their CAP rates because
rental income couldn't keep up (it being held back by the Regie
du Logement).
The Downtown Montreal rental market is
less static and rental prices are allowed to fluctuate more.
This isn't because the law is different but because the city
attracts wealthy people, often from other parts of Canada or
overseas who aren't really interested in a fight with their
landlords to force them to bring the price down for a property
they can afford anyway. Usually they negotiate a bit and and
just carry on... They also stay for much shorter periods (1-3
years usually), unlike those tenants who have been in the same
home for 15 years and are paying a pittance and don't want to
move because they would not be able to find any other rent as
low as what they are paying, so the rules encourage the tenants
to stay and the market loses fluidity.
Why is
this important?
With condo prices having remained much
steadier than the 'plexes' our calculations have revealed that
they are now struggling to generate CAP rates of 4-5% which is
fairly similar to what downtown condos are now yeilding.
The trick is that just like with the Plexes, this isn't just
a matter of heading to Montreal and buying anything. There are
some buidings that have a good CAP rate and others not so much.
Our job is to point you in the right direction and find
those buildings which represent the best ROI (return on
investment).
ROI?
Yes, the return on investment
can be improved drastically by investing less of your money and
by taking a morgage using standard leveraging practices.
Essentially a good CAP rate means that you get good cash
flow, but only if you buy the property outright (cash) with no
mortgage.
A good ROI may not offer a good cash return.
The objective would be to break even. But over a 5 year period,
allowing for mortgage repayments and with a very conservatige
growth prediction of 1% per annum, we are finding that condos
are yielding between 10% and 15% per year on average.
What does that imply?
Interestingly, if you have $300,000
in cash and ready to invest, it is better to purchase three
condos worth $300,000 with a down payment of $100,000 each and
finance the rest with a mortgage rather than buy just one condo
without a mortgage. You will get less cash from them on a
monthly basis but five years down the road you should own
$450,000 in equity in those units from an original investment of
$300,000 (so $150,000 in growth) whereas in the scenario where
you buy outright, even with a higher cash return, your total ROI
would be around $50,000.
So what now?
Because we
work with rentals as well as sales, we are very 'au fait' with
market values for both. The best way to begin is to send us an
email with the amount you would like to invest which could be
the amount you want to pay for a property if you want good
cashflow, or it could be the sums you want to invest in Real
Estate as a whole regardless of how many properties you by and
we can calculate what is the optimal way to get the best ROI for
you.
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CAP RATE
A
CAP rate or Capitalization rate is the net income of an
asset divided by its market value.
So
if a property is worth $300,000 and its rent is
$1,700/mo (or $20,400 per year) and its taxes are
$3,000 per year and condo (strata) fees are $2,500 per
year its net income is ($20,400 - $3,000 - $2,500)
$14,900 which once divded by its market value of
$300,000 is 4.9% (you have to multiply the amount by 100
to get the percentile if the device you use doesn't do
it automatically. |
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Allow
us to evaluate your optimal real estate investment plan
based on the amount you want to invest. |
ROI (RETURN ON
INVESTMENT)
The ROI or return on
investment is a calculation that is usually a long term
projection rather than a snapshot of the present like
the CAP rate.
The return on investment of a
property can be calculated in all sorts of ways but it
is supposed to be the total amount of profit over a
period of time relative to the amount you have invested.
The Return on Investment will be much greater these days
if a mortgage is used to purchase the property. The
amount invested is smaller but since the tenant
effectively pays for everything, the return on
investment is effectively the capital gains (the
increase in the market value of the asset) plus the gain
in equity (the amount paid off the mortgage over the
period of time)
In such cases, cash flow can be poor,
maybe even sometimes negative but over a period of 5
years, we have seen ROI returns of up to 80% on Downtown
Condos.
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