Multi family property investing might seem like the best way to almost guarantee a constant cash flow. Sounds great right? Well, not all properties are equal. In this post, we will help you learn how to evaluate so you can know if a multi family property is worth it!
When you are making an investment in a multi family property, you must look at not only the price but the value too. Price is what you pay and the value is what you can expect to receive from the property. A building with many units immediately offers more value than a single home because you have a lower risk of vacancies.
However, there are costs that occur when maintaining many units. Here are the numbers you need to know when making a multi family investment!
How To Know If A Multi Family Property Is Worth It In Toronto
What Are The Operating Expenses?
How much will it cost you to maintain the property? This includes cleaning, landscaping, and general upkeep. Since multi family properties tend to have higher turnover than a single-family home, you might be paying more for cleaning, carpets, and paint. A good way to estimate costs when you are considering purchasing a multi family investment is the 50% rule. This rule takes your income, divides it in two and uses that number as your expense estimate.
Don’t forget to keep a reserve for repairs on bigger ticket items. Water heater, dishwasher, a/c units… while these things should have a good amount of life in them, you need to be prepared for when something breaks.
Purchasing a multi family property will require you wear a lot of hats. The maintenance man, landlord, property manager, sales pro. If you need assistance in any of these areas, make sure those costs are added to your operating budget.
Net Operating Income or NOI
This is the annual income you can expect to make once you have deducted your operating expenses. You should also deduct your mortgage or any loans you have against the property. You will need to know the average vacancy rate in order to determine how long it will take you to recoup your investment.
To really understand what you should expect in returns, you need to look at the cap rate of the property. To get this number, take your NOI and divide it by the cost of the property. A high cap rate will be riskier but have will have the potential for greater returns. A lower rate will cost more, be safer and have lower returns. According to the CBRE, the average cap rate for low rise multi family properties in Toronto in Q3-2021 was between 3%-4%.
The goal is to always increase the NOI. Make it a regular practice to raise rents annually according to the Ontario rent increase guidelines. The province dictates the maximum amount a landlord can increase most tenants’ rent a year without the approval of the Landlord and Tenant Board. When a tenant vacates, cosmetic upgrades like appliances, paint, landscaping, and revived fixtures can help give a worn rental, new life, boosting your income potential for the next tenant. Adding in new sorts of revenue can also help you boost your NOI. Consider adding fees for parking, laundry, and NSF fees. These are all valid costs that can boost your income substantially. But be careful! Fees for things like pets, late payments, or penalties are not permitted in Ontario.