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Purchasing a Verdun six-plex could be a profitable investment

July, 2010

Residential six-plexes in Verdun continue to be a worthwhile investment.

If one purchased an average six-plex in Verdun in 2000, the investment would have increased 3.88 times by now. Furthermore, the relationship (r2=63.1%) between the revenue that these properties generate and their sold price is positive: The greater the revenue, the greater the sold price. It is also possible to generate between 10 per cent and 12 per cent per year on the initial down payment.

The purpose of this article is to explain typical six-plex costs and revenues to demonstrate profitability in Verdun right now and over the next five to 10 years. The minimum down payment on a $485,000 building is 20 per cent ($97,162).

It must be noted, however, that there is a huge price range in Verdun, from $400,000 to $600,000 for a six-plex. The average cost was used for the purpose of our calculations in this article.

I called a mortgage broker that I often work with, Sutton-Clodem Inc., for an interest-rate quote (4.79 per cent, five-year fixed) for a 25-year mortgage. The monthly payment would be $2,214 ($26,569 annually).

Typical municipal and school taxes average $4,259 annually. Insurance rates vary, but consider $1,500 per year with some maintenance costs, which could be $2,000 per year, depending on the quality of the property purchased.

Also, consider an annual revenue loss of five per cent for vacancies. On average, costs and lost revenues could total $36,286, leaving $2,872 per year left over from revenue generated.

Depending on the one’s income-tax bracket (assume one-third), one could net $1,914 per year. So, at the end of the five-year term, the total net profit could be $55,383, when one considers $9,572 in net revenue, plus the principle $45,811 paid against the mortgage. This amount represents 57 per cent of the initial down payment or about 11.4 per cent per year.

(Heating costs were not included because tenants pay heat and Hydro in most rental units in Verdun.)

There will be initial average costs when purchasing a six-plex: notary ($1,250); inspection ($600); and welcome tax ($6,031). These expenses reduce the profitability to about 9.8 per cent per year, but all of these items are 100-per-cent tax deductible, just like the other expenses discussed.

Revenue properties pay you through revenues, market appreciation and tax benefits. Let’s assume that the mortgage conditions, expenses and revenues do not change for the second term (another five years). The net profitability would be $115,115, which represents 11.8 per cent per year over 10 years.

These calculations do not consider annual increases in rent or expenses. They assume interest rates in the second term are comparable with the first term, that your tax bracket remains constant and that annual increases in revenue and in cost neutralize each other.

However, there may be increases in insurance, municipal and school taxes, and in renovation costs. On the other hand, there are allowable rent increases every year, especially if there are renovations.

Also, don’t forget about the potential benefits of having a vacancy. If the previous rent was below market value, then rent can be increased when the tenant leaves.

As such, it is very important for every owner to be aware of market demand and potential rent for various apartment features.

If one compares the augmentation in the average RRSP or stock price since 2000 to the average six-plex price in Verdun, it is not difficult to understand why the demand for these properties continues to grow year-after-year.

Sales have increased considerably in the past year. Adding to demand are low rates, despite recent positive trends.

But compared with 2000, interest rates are still very low. As long as six-plexs continue to be profitable, the demand to purchase these properties will exist and sellers know this.

There is much more information that goes beyond the scope and design of this article, which include: building size and dimension; desirable features that can increase revenue; revenue expectations for 3½ to 6½ unit sizes; future profitability in the market.

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