Montreal Real Estate Blog » Investment

Buying an Income Property to Live in

Deya Bautista — Mon, 08 Jun 2009 12:24:32 +0000

There is a fundamental difference between buying a property solely for investment purposes and buying it to live in it.
We all want to live rent-free. Having the revenues cover all of the expenses, including the unit we occupy. And while all of this is feasible, it is important to mention that certain factors affect this outcome: size of the building, revenues, etc. So let’s take a look at what we can expect when searching for a income property.

Buying a property as an investment alone

Your home is else where, but you want to buy as an investment. This is all a numbers game: a property that generates enough revenues to cover all the expenses and then some. The bigger the property (with larger units) the bigger the revenues, in this case you can expect to have expenses paid, plus a little extra at the end of the year. But this does not always occur with smaller properties such as duplexes or triplexes.

Buying an income property to live in it

You’re contemplating to buy, say, a triplex and you’re planing to live in it, your main concern does not go so much in:
After all expenses are paid; How much does this property gives at the end of the year? Chances are with smaller properties they would cover only the expenses.

If you’re living in it, and you only have one unit with tenants, it’s highly unlikely you’ll be making a surplus of money at the end of the year, much less going on vacation with property revenues.
Instead, ask yourself: How much does “your” portion of the mortgage represent?

For example:

Let’s say you’ve found a lovely triplex with 2 bedrooms on each unit, the asking price is $450,000. One unit is vacant and the two other units are rented at $850 (tenants pay their own utilities). Revenues of ($850×2) $1,700 a month OR $20,4000 (gross) a year.
Taxes, Insurance and other expenses a year = $4500. So the net revenues are: $15,900/year.

Your down payment is 20%, which translates into $90,000. Giving you a mortgage of $360,000 amortized over 35 years at 3.5%, your monthly payment is $1,482.58 OR $17,791.01 a year.

So far the revenues from the two units alone ($15,900) are not going to cover the mortgage ($17,791.01). BUT remember that we have not consider YOUR unit into the equation.

We know we’re missing 1891.01 at the end of the year to meet our costs. And that’s what your portion of the mortgage represents!.
After all the calculations, in this particular example, it will cost you $157.58 a month OR $1,891.01 a year, to live in this property. (Taken from $15, 900 – $17,791.01 = -1891.01)

How much are your comfortable with paying each month?

This is one of the questions I often ask to first time income property buyers. Having that amount in mind, and the max purchase price given by the lender, you can begin to do a search for a good property match.

Of course, we don’t always find such great properties with high revenues priced at the right amount. The condition of the building has a lot to do with your offer, and let’s not forget: your down-payment will affect the monthly and yearly mortgage expenses, and with that, the amount of money you will pay to live in your unit.

A while back, I wrote an article on Repossessing your income property, where it was discussed the terms and conditions when taking possession of one of the units, it’s full of useful information. I invite you to read it!

Posted By: Deya Bautista - Real Estate Broker working as part of the McGill Immobilier team. Specializing in high end condos in downtown and Old Montreal. For buying or selling contact Deya at: 514.917.7889 http://montrealrealestateblog.com/

Making an Offer to Purchase

Deya Bautista — Fri, 15 Jun 2007 10:00:46 +0000

Once you have found the home you would like to purchase, you need to present the vendor with an Offer to Purchase or an Agreement of Purchase and Sale. As your home is probably your biggest investment, it would be wise to work with your real estate agent and/or a lawyer/notary in preparing your offer. Remember that the Offer to Purchase or Agreement of Purchase and Sale is a legal document and should be carefully prepared.

Any offer or agreement will typically include:

• Your legal name, the name of the vendor and the legal civic address of the property.
• The purchase price offered.
• The chattels that will be included in the purchase price (e.g.: window coverings, appliances or a satellite dish). Whatever items in or around the home that you think are included in the sale should be specifically stated in your offer.
• The amount of deposit.
• The closing day (date you take possession of the home)–usually 30 to 60 days from the date of agreement. It can also be 90 days or longer.
• Request for a current land survey of the property.
• Date when the offer becomes null and void.
• Any other conditions that go with the offer, including property inspection and approval of mortgage financing.

The process of making an offer, receiving a counteroffer and then revising it again is not uncommon. The whole process can seem like a roller coaster ride – exciting, but stressful. It’s all part of making the deal work best for you and the vendor.

Source: CMHC. Subscribe to the Montreal Real Estate Blog

A real estate investment plan

Deya Bautista — Wed, 16 May 2007 15:03:14 +0000

This very complete article was released this morning by the Financial Post. Richard Croft goes on to explain why is real estate a good diversifier in your portfolio: from owning a home to becoming an investor in Real Estate and it’s positives aspects as well as the negative ones.

Richard Croft, Financial Post
Their principal residence is most people’s primary exposure to real estate as an investment vehicle.

“…Real estate is an excellent diversifier within a portfolio, and in the case of real estate investment trusts (REITs), can provide some decent tax-advantaged cash flow to your portfolio. So here’s the question: Is your home a place to live or is it an investment that will at some point be sold to capitalize your retirement years?

If the former, then by all means include real estate in your portfolio. If the latter, then adding real estate to your portfolio would defeat the purpose of optimum portfolio diversification.

Assuming real estate should be in your investment portfolio, the next step is to understand what it brings to the portfolio in terms of performance enhancement and risk reduction.

As an investment, the real value in real estate is its cash flow. If you buy a rental property, for example, you buy it on the basis of some cap rate, which is really just another way of saying the property value is based on some multiple of its cash flow.

Like any other asset, the multiple accorded to that cash flow is determined by the stability of the cash flow. If you are buying a property with a solid, long-term tenant who pays the rent –like a major Canadian bank– the cash flow is stable and the property will fetch a higher valuation.

Another way to look at cash flow is in terms of how real estate is financed. In Canada, you can borrow 75% (sometimes you can borrow even more of the purchase price) of the value of your real estate, usually financed over a 25-year term. If your cash flow is stable, you can use the excess cash flow to pay down the mortgage, and at the end of 25 years, you own the property free and clear.”

Read the complete article at The Financial Post

The Resale Market Is Heading for Another Record Year

Deya Bautista — Tue, 15 May 2007 17:48:17 +0000

Greater Montréal Real Estate Board Statistics

The resale market is heading for another record year with an11% increase of transactions during the first four months of 2007. According to data recorded in the Greater Montréal Real Estate Board’s (GMREB) MLS® system, 21,908 houses changed hands compared to 19,807 transactions between January 1 and April 30, 2006.

“The volume of transactions since the beginning of the year is exceptional,” says Michel Beauséjour, FCA, Chief Executive Officer at the Greater Montréal Real Estate Board. “Economic indicators continue to point in the right direction. Among others, sustained job growth during the first quarter bodes well for the resale market during upcoming months.”

The resale market for condominiums, from January to April 2007, showed an increase of 14% with 4,853 transactions compared to 4,239 for the same period in 2006. We also observe that the average sale price increased by 6%, rising to $204,000 in comparison with $192,000 in 2006.

The resale market for single-family homes also showed an 11% increase, with 14,242 transactions compiled in the GMREB’s MLS® system, against the 12,805 transactions recorded between January and April 2006. The average sale price reached $223,000 this year compared to $210,000 for the first four months of 2006, which represents an increase of 6%.

In the first four months of 2007, the volume of sales reached $4.9 billion, an increase of 19% compared to $4.1 billion recorded for the same period in 2006 in the GMREB’s MLS® system.

From January to April 2007, 39,563 new listings were recorded, representing an increase of 2% compared to the 38,698 new listings counted for the same period in 2006.

As of April 30, 2007, 38,335 residential listings were active in the GMREB’s MLS® system, as
opposed to 36,845 for the same period last year.

Source: CIGM

Dowload the full article

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Females Drive Housing Demand

Deya Bautista — Tue, 15 May 2007 10:00:09 +0000

…And hammer away at renovations

Royal LePage survey finds 25% of women searching for a home are looking for a ‘fixer-upper’ and plan to do the work themselves – Currently, 30 per cent of single, never-before married women own their own home, while 45 per cent of divorced or separated women and 64 per cent of widowed women are homeowners, according to the Royal LePage Female Buyers Report released today.

“The notable upswing in real estate activity among females is not surprising given that women are earning higher salaries than ever before,” said Lisa da Rocha, vice president, marketing, Royal LePage Real Estate Services. “There has been a shift in mindset whereby women have distanced themselves from the traditional notion that you must first find Mr. Right and then together you buy a home. Our findings reveal that 66 per cent of women who intend to purchase would not find the process of buying a home on their own intimidating.

“In Montreal, home buying activity among females has increased significantly over the last three to four years. Activity growth has been supported by the larger number of women in executive and professional careers, which has afforded them the financial freedom to purchase a home on their own. Women of all age groups tend to favour condominiums for their maintenance-free lifestyle, and generally spend an average of $300,000 on such properties. They tend to place the style, design, and security of a property at a high priority, and are not interested in undertaking renovations. The centre of Montreal is a popular neighbourhood for female purchasers who are looking to stay close to the city centre, while Old Montreal offers heritage-style properties in a desirable location.”

Additional Poll Findings:

Among those who own and rent and intend to purchase a home/condo in the next three years, men and women both rank equally (81%) taking out a mortgage from a bank, however, nine per cent of men said they would rely on their family to pay for their entire home, in comparison to only three per cent of women.
Of women who own, who don’t intend to purchase in the next three years, when asked, “Which one of the following motivations most influenced your decision to purchase your home?” the top three responses included: it makes more sense than renting (36%), want to put my money into a good investment (22%) and pride of ownership (13%).
Among women who are intending to purchase in the next three years, when asked, “Which methods will you use to educate yourself about home purchasing?” the top three responses cited were speaking with a real estate agent (83%), speaking with friends and relatives (78%) and using real estate and financial websites (64%).

Source: Royal LePage Female Buyer Release

Interesting article

Deya Bautista — Mon, 07 May 2007 18:06:45 +0000

Recreational Property Values in Canada ‘Set to Soar’
by Jim Adair
Canada’s two largest real estate companies issued reports about recreational properties this week, and while bargains can still be found for those willing to travel and buy seasonal properties, prices are climbing in most parts of the country.

The 2007 Re/Max Recreational Property Report says starting prices for waterfront properties are more than $500,000 in 31 per cent of the recreational property markets, and that only seven markets offer waterfront properties starting at less than $250,000.

Re/Max says aging baby boomers, which represent about one-third of Canada’s population and control 45 per cent of its wealth, are driving the recreational property market. Some are preparing for their retirement years, while others are looking for a second home in which to spend time with family and friends.

“Baby boomers are investing in the future — both from a lifestyle perspective and an economic standpoint,” says Eldon Ash, regional director at Re/Max of Western Canada. “Tremendous equity gains have been realized in recent years as demand for recreational properties across the country swells. Given the aging of the population, this trend is expected to continue for at least the next five to 10 years as baby boomers move through the cycle.”

A Royal LePage report lists some of the hottest cottage areas in Canada, including the Moore Point area in Ontario, where cottages cost up to $3 million; Chester, N.S., which has top-end properties for $1.5 million; and Okanagan Lake in Kelowna, B.C, where small waterfront condos start at $500,000 and year-round waterfront properties range from $1 million to $5 million.

Royal LePage says the big attraction in Kelowna is the recreational lifestyle and the climate. “For example, in April you can ski in the morning, golf in the afternoon and be cruising in your boat at the early evening — all in the same day,” says the report. Read the rest of the story here

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How Much Can You Borrow?

Deya Bautista — Sat, 05 May 2007 13:19:37 +0000

A home is typically the largest purchase you will make in your lifetime, and for most Canadians this means obtaining a mortgage. The amount of your mortgage will determine the size and location of your new home – not to mention the size of your payments. So how do lending institutions decide how large your mortgage loan can be?

Lending institutions (such as banks, credit unions, trust companies and insurance companies) want to be certain that you are capable of repaying the money you borrow. Consequently, the loan application process is thorough. Lenders consider your income, credit history, debt load, employment history and collateral, including the value of the property you wish to buy.

Although there is some discretion in determining the exact amount, the size of your loan is generally calculated using set formulas – Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS). GDS is the percentage of your gross monthly income (before taxes) required to cover monthly payments on mortgage principal, mortgage interest, property taxes and sometimes heating (often abbreviated as PITH). Your GDS should not exceed 30% to 32% to be eligible for most mortgages. Because many people also owe money to other lenders (car loan, student loan, credit cards, etc.), TDS offers a more accurate estimate of what you can afford. TDS is the percentage of your gross monthly income required to cover PITH plus any other debts. Your TDS should not exceed 40% of your gross monthly income.

There are many other factors that will impact the final mortgage amount. A poor credit history or a spotty employment record, for example, can disqualify you altogether or significantly alter the total. Keep in mind that just because a lender is willing to approve a large mortgage it is no guarantee that you can, in reality, afford the monthly payments.

To truly understand how much you can afford you must examine your other monthly expenses – those not accounted for in the lender’s calculations (such as entertainment, charities, vacations, etc.). Remember that you will also need a lump sum down payment (at least 25% for conventional mortgages and as little as 5% for high-ratio mortgages) and money to cover closing costs.

For more information on mortgages, calculators and online applications, visit http://www.royallepage.ca.