Buying an income property for rental purposes is still one of the best investments, and it can eventually bring you financial freedom if you repeat the process.
Of course, owning such a property is not enough to break the bank. You need to do the calculations and verifications necessary to ensure that your property is profitable, and that you do not have any surprises, at least financial ones.
Here are a few things to calculate and to check before you make an offer or before you purchase a property to ensure that you are paying the right price for it:
- Income: You must make sure that all or most of the units are occupied, so you can pay for recurring expenses. Thus, you should be aware of the vacancy rate of the neighbourhood you are buying into to plan for your first years of ownership. You can find this information on the CMHC website. You could also demand to see the leases and make sure that the rent is paid by checking the account statements. An interesting financial ratio to calculate is the Gross Income Multiplier (GIM) that divides the property’s sale price by its gross annual rental income to determine the rough value of an investment property. Usually, investors aim for 10-12 times the gross income.
- Expenses: You should make sure that none of the recurring expenses are abnormally high or low by checking the recent invoices. The seller might hide that their electricity bill or the cost of their insurance policy is twice as high as what they declared; this would impact your profitability. These abnormal expenses demand more vigilant verifications to avoid any unpleasant surprises. You should also be aware of which utilities are paid by the landlord and the tenant. If the electricity bill in the property description is low, it might be because the tenants pay for it. As for fixed expenditures for renovations or major maintenance, you need to make sure that you have the budget to pay for them, according to their severity and their priority. Try to determine the ones to come for the next five years of ownership.
- Financing: The percentage of your down payment will depend on the type of financing and the type of property you wish to purchase. This will influence your forecast, the property’s profitability, and the interest rate that your financial institution will offer you. You can consult a mortgage broker to help you start this process.
- Acquisition Costs: There are many acquisition costs when purchasing a property that you should take into account in your analysis. They depend on the property’s market value, the down payment, and the analysis you will perform. Among them, you have the tax on the mortgage loan insurance (Quebec, Ontario, and Saskatchewan), the attorney’s fee, the inspection fees, the land transfer tax, etc.
- The Property’s Condition: You should not overlook this element. The property might be profitable on paper, but its physical condition is just as important to have some peace of mind and to not have to spend hundreds if not thousands of dollars during your managing journey. A professional inspection usually costs between $500 and $700, but it can save you a lot of money and allow you to renegotiate the price or withdraw your offer altogether.
- The Price of the Property: According to your calculations and the verifications of comparable properties in the neighbourhood (you can also hire a certified appraiser), you can determine the average price that you should pay to ensure the property’s profitability. There are many elements to take into account, which is why you should consult professionals or use tools to assist you in the process.
In short, there are many elements to analyse before you officially commit to a real estate investment. You could create a list of the things to check, so you do not forget anything. Magex Technologies has an income property profitability analysis software that generates a complete and professional report that you can show your potential investors or lenders. Zoom-Imm is available for monthly or annual subscriptions and can become a profitable investment in itself!