Some consider investing now, retiring later

Daniel Smyth

July 2011

Last month, I discussed how the market in the Greater Montreal Area was becoming more balanced. The market continues to soften.

Sales transaction numbers in May 2011 were less than in May 2010; the number of properties for sale was higher; average sale time was greater. The average sale price increase was slightly lower.

Buyers have considerably more to choose from this year.

So what is a good investment in this changing market? Well, that depends on your goal and why you are investing. A plex, by far, is the best investment compared with other types of properties (condominium or single-family dwelling).

The average plex transaction price in Montreal is around $495,000, which includes a duplex up to a multiplex. A duplex can cost more than a half million dollars and may only generate $25,000 a year, and that is only if all units are rented. A six-plex in Verdun costs an average of $525,133, and can generate a total of $39,385 per year, which is a better return on the 20-per-cent down payment.

Condos represent a fast-growing market. Prices are attractive to first time home buyers and people looking to downsize or retire. Condo sales represented about 50 per cent of the market in 2011 and they increase in value based on market appreciation. In Lachine, there is lots of new development and property values are expected to rise. The waterfront in Lachine has been a focus for several years, as beautiful parks and reclaimed lands show.

High ceilings, beautiful views: Buyers have considerably more to choose from this year. Photo: Daniel Smyth

As an investment property, a condo may be less profitable. There is only one rent, so it could be more risky if the tenant decides not to pay. And there are expenses, as with all properties, which include mortgage, condominiums fees, municipal and school taxes, property insurance and heat/electricity (if included in the rent). Here is an example of a condominium I have for sale, which is tenant-occupied until August 2012. It is perfect for someone wanting to purchase now and have someone pay on the mortgage until it is time to move in. Let’s assume that someone wants to move in to the condo in a year or more from now. Perhaps they plan to retire in five years and they love the location and building; they would have responsible tenants paying off a portion of the mortgage until it is time to move in. The condominium is 1,200 square feet, which includes a mezzanine ($384,999). It is contained in a luxury concrete building on the waterfront in Lachine. Several of the interior walls were removed, making it into a gorgeous loft. There are lots of large windows and the cathedral ceilings are as high as 17 feet. There are amazing views of Lac St. Louis, René Lévesque Park on the peninsula and the village of Lachine.

The rent for this fabulous property is $1,500 a month and the monthly expenses total about $831. The rent is low is because the owner did not realize the potential of the property and was in a hurry to move to Toronto. This property could generate between $1,800 and $2,000.

After expenses, you are left with $669 a month toward a mortgage payment. For expenses and revenues to balance, one would have to put down $249,614 against a potential sale price of $380,000 at a 3.76-per-cent interest rate amortized over 25 years with a term of four years. Taking a variable rate of 2.2 per cent over the same conditions with a term of five years, one would require a down payment of $230,555.

One could put down less and pay the additional expenses out of pocket for a year or so. Furthermore, all of these expenses are tax deductible. Remember, occupancy is just one year away.