If the idea of wealth building looms heavy on your mind, you might have mulled over the idea of property investment. Building a condo rental portfolio in the Toronto area housing market can be quite lucrative, but you also have to contend with multiple mortgages and locations. There is a more direct route: The multiplex.
Multiplexes are residential buildings that include duplexes, triplexes, and fourplexes. You get income from the rent of several units, but only buy a single building with a single mortgage. But finding a multiplex can get dicey.
Here we offer our nine top tips to make your hunt for a multiplex a lot less tricky.
Tip #1: Don’t discount less hip neighbourhoods in the Toronto area housing market.
Location impacts both the amount you can charge for rent and the appreciation of your property over time. While you might think you need something in a hip trendy area with tons of cafés, bars and restaurants, areas like Liberty Village aren’t really known for multiplexes! Tenants want a good price and conveniences such as access to transit, good schools, and/or amenities such as big box and grocery stores. Consider Toronto neighbourhoods where multiplexes abound from Mimico to East York and all points north of downtown to find excellent opportunities.
Note: You also have to consider the location and the time to travel back and forth from your home to the property.
Tip #2: Balance location with rental yield.
Rental yield is how much you can earn in rent for your multiplex units. You calculate yield by dividing the amount you invest by the annual rental income it generates. Appreciation of the property is for the long term, while your rental yield tells you what to expect in the short term. So, while we want you to find a good location, if the rental yield is low, it might not be the greatest investment.
Generally speaking, a yield above 4% is a good yield. However, this doesn’t always provide financial stability. To really see value in your investment from a rent standpoint ideally you want a property that provides about 5.5%. This isn’t always doable in Toronto.
Tip #3: Understand your risks by calculating the cap rate.
The capitalization rate, better known as cap rate in the biz, is the ratio between your net operating income and the property asset value. The percentage is found by dividing the operating costs by the current property value. The higher the cap rate, the better. But often higher rates also present higher risks. An example of a risk might be higher tenant turnover issues.
Tip #4: Don’t forget to consider your potential for appreciation.
Where it gets tricky for these types of properties is understanding what’s more important: Yield, cap rate or appreciation potential? Sometimes it makes sense to take a bit of a hit in rent if you can see a bigger return in the long-term. For example, if you’re in a situation where you can take higher risk, you might find appreciation becomes more important than rent.
Tip #5: Revisit those operating costs.
If you have a high rental yield on a building in terrible condition, you have to consider the cost of maintenance. You might find your costs eat into your rental income more than they should. Back to cap rate!
Tip #6: Cost out a property manager for larger buildings.
As a first-time investor and more specifically, a landlord, caution is key when considering the size of the multiplex. For example, those three parking spaces behind the building might seem like a big draw, but they require far more maintenance. Therefore, hiring a property manager is an important consideration. Most charge about 5% of your gross rents and then fees based on the scope of work. So, include property management costs when calculating your cap rate for larger buildings.
Tip #7: Consider your experience and time when looking at costs.
This is a cost vs convenience thing. For example, the handyman investor happily pays a lower price for a multiplex needing repairs. Investors with less DIY talent prefer to pay more for a building in excellent condition. There are also those willing to invest in a multiplex with a lower rental yield if it’s a zero-maintenance kind of deal.
Tip #8: Be aware of the pros vs cons of tenanted units.
Love the idea of buying tenanted multiplexes with trusted tenants who have diligently paid their rent for decades? Sure! This is a plus — unless their rent is well below fair market value. You can’t just indiscriminately raise the rent. As well, they might pay a fair rent, but have a terrible track record for bounced cheques, or being a troublemaker. So, before getting too excited about tenanted units, remember that yield AND do a thorough background check so you don’t inherit bad tenants.
Tip #9: Balance the number of units with the headaches.
The more units you have, the more money you can make. However, more can also go wrong. It’s more space to clean, more appliances to repair or replace, more tenants to complain, more rent cheques to collect and more tenants to find for vacancies.
The Bottom Line
For multiplex investments, it’s all about the bigger picture including:
- How much you pay up front
- The expected total returns from appreciation potential
- The expected operation costs
- Rental income
- Vacancy rates
- Your time
- The scope of property maintenance
Residential real estate in Toronto does offer opportunities, including the multiplex. If you’re looking for a team of Toronto realtors to help build equity fast, the Christine Cowern Team’s got you covered. Give us a call at 416.291.7372 or email us at firstname.lastname@example.org. We’d love to work with you!