Revenue properties: Invest in your future

Daniel Smyth

June 2009

A growing percentage of my real estate practice has centred on revenue properties, because of the changing needs of my clients. When clients first approach me to help them buy a rental property, the conversation generally begins like this: “Find me a good deal – a duplex or triplex – something small and not too much trouble.” Remember, a “deal” is very specific to individual goals and needs.

Take a duplex or triplex in LaSalle, for example, which costs approximately $345,000 and $415,000, respectively, and generates between $11,000/year and $18,000/year, respectively. Revenues are obviously higher when all units are rented and if there is a “bachelor.” However, if you consider what a triplex in LaSalle costs relative to a 6-plex ($433,000) in Verdun, the investment becomes more interesting when the latter generates an average of $39,000/year. This is a better “deal” as far as “bang for your buck.” However, if you are the type of investor who likes living in 1,000 to 1,200 square feet on the main floor with the possibility of a finished basement, a yard and tenants above you paying on your mortgage, then a duplex or a triplex is a great choice.

Also, the age of the property is important, but renovations are even more critical. A renovated full electric plex with breakers is always more desirable, especially when the tenants pay their own heat. Location is an important factor, too. For example, the design of the city of Verdun places a metro close to just about everyone. Owning a plex near a metro helps to attract and secure tenants. Parking is usually a premium, so tenants without vehicles live near services and public transportation.

What if one or more of the tenants does not pay the rent? Fortunately, this does not happen often, but the risk is highest in a duplex and lowest in a 6-plex. The greater the fractioning of the total revenue generated by the tenants, the lower the risk to the owner for covering the cost of the total mortgage.

Also, you must grow your revenues to increase the return on your investment, but it is always a “work in progress.” What can be renovated? Are the revenues maxed for the area or is there room to grow? A 6-plex with a vacancy can be an attractive purchase because it allows you to increase unreasonably low rent(s) toward market value. Nearly 75 per cent of the estimated sale price of a 6-plex in Verdun is based on the revenues generated, but this relationship is considerably weaker for a duplex or a triplex.

Finally, a rental property pays you in three ways: 1) revenues; 2) property appreciation; and 3) tax benefits. Consider that the average price of a 6-plex in Verdun at the end of 2008 was 5 times greater than that in 1985. The mortgage, heating, maintenance, insurance, and tax costs are all tax deductable, too.

Contact Daniel Smyth at 514-941-3858