I’ve posted on the topic before, but I’ve been looking at Toronto area multiplexes and have bumped up against the issue of asking price vs. market rent again.
ICX (like mls but for commercial properties) has some nice little properties listed (this link will expire in the near future, don’t feel bad if its dead). The property linked to is a nice 3-plex in North York which brings in $2,075 / Month ($24,900 / year) and the owner is asking $299,500.
A good “back of the envelope” calculation for real estate investors is the GRM (gross rent multiplier). This is basically the price / rent (so a lower ratio is better than a higher ratio). Its a good way to ballpark if a property is worth looking at more closely or not. Some sources claim you should use the monthly rent, some claim you should use the annual rent (it doesn’t matter which you use, as long as you’re consistent).
Capitalization Rate is far more illuminating (its based on the net profit instead of the gross income), but takes a bit more digging to calculate.
My condo, with a monthly rent of $1300 and a purchase price of around $134K (accepted price + renos – not including legal or anything else) would have a GRM of 103 (134000 / 1300). In comparison, this building has a GRM of 144. Given that multiplexes should be MORE lucrative than condos (not far less), this especially pitiful.
High GRMs also are good at telling us when housing prices are getting far above rental rates (which is a good indication of an overly frothy real estate market).
If we turn our eye north, and have a look at this gem in Thunder Bay (its a 6-plex but we can ignore that for the time being), we see that in the true great white north a rent of $4,100 / month (49,200 / year) can be had for $249,000 (twice the income for a lower price). This gives us a GRM of 61, which is far more like it!
“But Mr. Cheap…” you protest, “Toronto is a big city, OF COURSE property costs more here!” Yes. But shouldn’t rents be higher too? GRM lets us see the relationship between the stream of income from a piece of real estate and the purchase price of that stream. Even if its harder to find tenants or to sell the building in the future, the higher income for lower purchase price certainly makes property outside the GTA look attractive (not even mentioning the upcoming increased transfer tax).
Any other towns in Ontario that you guys think give a better GRM than Toronto (or perhaps to belabor the point, any with worse numbers)? What do the numbers look like in Windsor Telly?
{ 24 comments… read them below or add one }
Lots of interesting info – so how do you calculate the capitalization rate for a property you don’t own? Do you have to ask for more details?
Mike
You do, typically you try to get all the expenses from them, determine which they’re lieing about, estimate what your net profit will be and calculate from there. An easier short-cut is to use John T. Reed’s rule of thumb that your expenses (including property management, your time or someone elses) will cost about 45% of the market rate. From this, you can figure your profit will be 55% of the market rate, and therefore your cap rate will be:
0.55*rent / price (so in the case of my condo, it would have a cap rate of 5.3% [1300*0.55/134000]). This isn’t an exact calculation (my net profit is actually a fair bit lower than that – I’ve been getting ~$657 / month rather than $715 /month), since the numbers going in can be a bit funky (how do you determine market rate? how confident are you that you have it right?).
Generally an area has a fairly consistent GRM / Cap Rate, so its handy to compare properties (and its an easy way to justify a low offer on an overpriced property).
Great post. For me, I use the 10% rule for the approximation of if the rental property is worth it or not. For example, if the annual rents of the property is $12,000, then I would be willing to pay up to $120,000 for the property. Of course, that’s a very rough calculation, but effective.
Mr. Cheap, were you able to rent your condo for $1,300 at the time you bought it? I guess your condo would probably sell for a much higher price than you paid (I can’t really picture a condo in Toronto for only 134K, you can barely find something like this in Montreal!).
FB – there are lots of cheap condos in Toronto. They tend to be older buildings and often in areas that are not as good. My mother-in-law bought a 2 bedroom in ok shape for $135k last year. Not the greatest area though.
Mike
It’s funny, I’ve found that “not the greatest area” tends to mean not very trendy. It also means you tend to have lower income neighbours, which means less fancy Jones’ to keep up with.
I love my not-so-great neighbourhood.
Mr. Cheap, the truth is, when we bought our tow rental properties we didn’t run any of the numbers. Admittedly, we knew they were great (in fact, in retrospect, too good to be true for too long). Though we’re really not interested in buying anymore rental properties I will take a look at what the prospect is for properties in Windsor. I did hear recently (from a RE guy) that “they investors are coming to Windsor” so maybe that means the good times are over and Windsor is really not the cheap investment it was.
See? This is why I can’t have my own blog…I never bother to proofread! Sorry for the myriod of typas!
Hey Cheap, I like the “which ones they’re lying about..” comment.
I’ve heard of some sneaky shit from companies. One classic is to give new tenants a large “renovation” budget and then charge them a much higher rent. So on the books it looks like you’re earning X, but the tenants are only paying that number b/c you gave them part of it
From what I’ve heard it’s actually a pretty common scam, so it’s definitely worth performing a deeper investigation whenever you’re buying big lots or commercial space. Caveat emptor and all that, sounds like par for the course I guess.
Condo in Toronto for 134K????
Now where exactly in Toronto is this?
Our GRM is 156, so high, due to obviously the higher paid price for the condo, exactly $100K more than yours
FB – there are lots of cheap condos in Toronto. They tend to be older buildings and often in areas that are not as good. My mother-in-law bought a 2 bedroom in ok shape for $135k last year.
I’m lurching towards buying a condo myself, and I gotta tell you, MLS doesn’t seem to agree. I’d really like a 1-bedroom in a non-trendy neighbourhood for not much more than $150 K but it ain’t easy.
Mr. Cheap is proof that they do exist, I guess.
Mr. Cheap’s condo is at Sheppard & Don Mills – coincidentally in the same building that I used to rent a room in almost 20 years ago. I wonder if it’s the same unit?
My mother-in-law bought a 2 bedroom condo last year for $135k at Eglinton & Don Mills – not a great area though.
Mike
Eglington & Don Mills isn’t so bad. The 25 runs pretty regularly to Pape station, so its ALMOST as good as being on the subway line.
NSB & GIV: try north york (C15) and cresent town (E3). You should be able to get a 1 br in cresent town for $100K and $350 / month in condo fees. 1 br rent for around $900 / month there (and ~$1100 / month for 2 bedrooms).
Gates: I’m always suspicious of EXACTLY that ploy when someone seems to be renting a unit for a killer price. Amusingly the tenant is usually RIGHT at the end of their lease too
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Telly: Look at all my hacked together posts and comments. Spelling and grammar are *NOT* requirements
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FB: I bought last Dec. and had it rented out at the end of February ($1300 was the first rent for the first tenants I’ve had in the unit).
MDJ: That’d work too!
A colleague of mine swears by Waterloo. He has two buildings there and is looking for a third. He rents to students by the bedroom. He has issues with bounced cheques every so often, but is pretty happy. They even take care of the gardens for him.
Truth be told I’d like to get into renting to students myself. People complain about the high turn-over and how rough they can be on property, but the steady stream of new tenants seems awfully enticing…
Looking through cheap multiplexes in Ontario, it actually looks like Windsor (Telly country) might be the place to be buying.
Does your colleague live in Waterloo? What have his experiences been like with property management companies if he uses them?
Believe it or not he manages them himself (he’s, ahem, cheap). We’re in TO, he drives out every week or two to check things out and make his presence felt. He can break out spreadsheets from the last three or four years, however long he’s had these houses, showing how late the students pay their rent by nationality. It’s pretty funny.
I don’t know much about rental property, but it sounds like the 6-plex is quite a deal!
How did you go about acquiring your first rental property? Did you purchase your own home first?
Whoa…that’s crazy guinesss (though I’d love to see those spreadsheets).
Five years ago when we bought our properties the cash flow was unreal ($2100 gross monthly on a $140k property). Now, after a few years of little to no growth in RE values, many people in the area around the university converted their homes to student rentals and obviously there’s more to choose from so prices have come down.
If you’re close to the university, rooms rent for ~$300-$400 room, utilities included (this is where the cashflow has decreased over the past few years – kids are generally not willing to pay util.). Five years ago you’d be surprised what passed as a “bedroom” – kids are much more pciky these days.
A former classmate of mine bought up 10-11 rental houses within a few years time of graduating. In the early days, it wasn’t unusual to net $1000/mth per property.
I’ve heard through the grapevine recently that he has since quit his engineering job…
Just out of curiosity, how much do management companies typically charge?
SavingsDiva: Are you asking me or one of the commentors? Tons of details about my first real estate purchase are available on my old site at http://cheapcanuck.wordpress.com (I’m hoping to move the archives over here at some point).
telly: That’s a good cautionary tale for those of us getting into real estate, markets change and rents can go down as well as up…
astro: 10% of gross rent is pretty standard.
astro: I’ve recently found that 10% of gross is actually on the high side, apparently 5% of gross is reasonable compensation for a property management company.
I don’t know much about rental property, but it sounds like the 6-plex is quite a deal!
martbn: The downside is that its in Thunder Bay. I often think a interesting investing strategy would be to identify a cheap area (in terms of rent to price ratio), then go there for a couple of months, get the lay of the land, look at properties, try to find property managers / workers then buy a couple of properties there. Either stay there and manage (if you’re nervous about remote management) or turn the keys over to the locals you’ve hired to run things.
If the area swings around and prices shoot up, sell your properties and repeat this in another down market. If the area doesn’t improve, just keep collecting rent.
The obvious danger would be if the area keeps going downhill and it becomes harder and harder to find people to rent to (and eventually your properties might be worthless) – probably pretty unlikely except in fairly small communities (Thunder Bay isn’t going to turn into a ghost town).
Well we took the plunge and purchased a student rental in Thunder Bay. We flew up there and did a deal. The cost to rent is very cheap (compared to T.O.) and you really have to asses how much money you want to charge.
Most students want everything included (utilities, cable and especially internet). When we took a look at what landlords were charging, most of them were charging the same rate whether it was an apartment in a home or whether it was an apartment in a building. When we did the math we couldn’t go with what most were doing or we’d lose our shirts. So we decided to charge more. The purchase on the property will close in a few days and we already have a tenant. We will see how it works out over the next 12 months.
Cheers,
Diamond Run
DR: Congrats on your purchase! I’ve been interested in student rentals for quite a while, perhaps you’d be willing to write a guest post about your experiences at some point…