by Robert Finlay
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.