You are thinking of investing some hard-earned
savings somewhere but are not sure where. You’re unhappy
with the stock market and interest rates don’t favour
savings accounts or GIC’s. Ever consider commercial
investment and in particular a multi-unit residential property?
History’s shown that property always appreciates in
value. So what’s keeping you from proceeding?
HOW MUCH MONEY DO I NEED?
First, decide the capital your are willing to invest.
This determines the value of the property you can afford.
Generally, you need at least 15% of the property value
for a down payment. In some instances, this can go down
to 10%, but 15% is recommended. That means if you have
$150,000 to invest, look for properties valued around
one million dollars.
Financing the property is the next step. A first mortgage
for 65% to 75% of the value of the property is normal.
Financial institutions will arrange mortgages, but speak
with a mortgage broker or real estate representative for
assistance in finding the best deal or alternative sources
of financing. Don’t automatically assume that the
best deal for you is the one with the lowest interest
rate as there are many factors to consider. That still
leaves 10 to 20 percent to finance, and sometimes vendors
are willing to take back a mortgage (VTB) to facilitate
the sale. If not, speak with your mortgage broker or sales
agent for other suggestions. In some cases, CMHC will
facilitate up to 85% financing with better rates, however
some additional costs may be involved.
WHERE DO I FIND A PROPERTY?
The best bet is to work with a real estate professional,
preferably one familiar with commercial real estate. Skyview
Realty Ltd. for example, has specialized in apartment
building sales for about 25 years. Whoever you choose
make sure that they are familiar with the market in that
area. Don’t be afraid to ask them for references
and recent transactions.
WHAT OTHER COSTS SHOULD I CONSIDER?
When you find a property your interested in, go through
the numbers associated with it. The main revenue will
be rent, but may also include laundry, parking, etc. Expenses
will include taxes, insurance, heating, hydro, water,
maintenance, garbage disposal, and other miscellaneous
costs. Remember to determine your financing costs to hold
a first and possibly a second mortgage. All of these income
and expenses have to be confirmed to determine if the
property is going to give you the desired return. Compare
other properties of similar size and condition that recently
sold in that area.
Do you want to manage the property yourself or have someone
do it for you? There are numerous property management
companies that specialize in varying sizes of properties.
There is obviously an expense involved in hiring a property
manager, which will have to be factored into the operating
costs.
WHAT SHOULD I EXPECT AFTER MAKING AN OFFER?
When you finally find a property that you want to put
on offer on is where your real estate agent really earns
his/her commission. Negotiating the Agreement of Purchase
and Sale includes the price and conditions. The offer
should always include a due diligence period to verify
the income and expenses, arrange the financing, inspect
the property by a certified inspector, and have structural,
environmental, and appraisal reports prepared, just to
name a few.
At this point your lawyer is your greatest ally and have
him/her review the offer and all documents presented to
you. It can take a few months from the time you first
submit the offer until you take possession of the property.
Find a lawyer that you are comfortable with and trust,
and familiar with commercial real estate. When buying
a property there are some other costs you may incur. These
include mortgage broker and lender fees, legal fees for
your lawyer and the other financial institution lawyers,
costs to obtain reports and land transfer tax. You will
also be doing adjustments on closing, however you will
get back last month’s rent deposits.
These are the very basic things to look out for when venturing
into this market. Keep in mind that a good lawyer and
sales representative make the whole process smooth and
alleviate problems that occur. Just take your time and
review everything carefully before continuing on. Remember
taking possession does not mean that the hard work is
over-owning a property is a work-in-progress, but can
be very rewarding. There are many on-going things that
you need to keep watch of such as vacant units, plumbing
or electrical problems, and building upgrades to name
a few. Treat the ownership of a property as a business
and be prepared to work at maintaining that business.
You have to know in your heart that this is for you and
proceed only when you feel ready. Good luck.
Article written by Robert Finlay, Sales Associate
Skyview Realty Ltd.
For more information call (416) 444-6545
or e-mail robert@skyviewrealty.com
