Par Megan Martin - exclusif à The Gazette 2013-09-28

There are a lot of reasons why people decide to invest in real estate. But at the end of the day, a revenue property is an investment like any other, meaning that the return will always dictate its value as a holding.
So how do you determine what the return on your investment will be? And what factors go into that equation? The Gazette sat down with John Deakin, real estate broker at Deakin Realty, to get an understanding of the issue.
“The equation itself is simple; any investor can understand it,” Deakin said. “You take the revenue the property is projected to generate annually, subtract the expenses, which are interest, taxes, insurance and maintenance, and the amount that’s left represents your return on investment.”
Defining and understanding the elements in this equation is more complicated.
“It’s hugely important that people conduct a thorough analysis and breakdown of the costs involved in owning a property before committing to purchase it,” Deakin said. “People need to know if it’s an investment worth pursuing.”
First of all, what is your investment? It’s a common misconception that your investment is the value of the property you’re looking to purchase.
“Your investment is, literally, the amount of money you put down to purchase the property,” Deakin said.
Down payments today depend on the issuing institution and the type of building being purchased. They’re usually required to be between 10 and 40 per cent of the value of the property.
“A 10-per-cent down payment would be for a property such as a triplex, a portion of which is to be owner-occupied, but larger multi-unit dwellings require a larger amount down,” Deakin said. “Coming up with the capital for the down payment often presents a big challenge to investors, especially those getting into real-estate investment for the first time.
“Frequently the vendor of a revenue property will offer terms on a second mortgage or balance of sale; that mortgage may be considered as a portion of the cash down by the lending institution.”
That down payment represents your cash input. But you also have to consider any repairs that need to be done immediately.
“Then amortization would be 25 years, and the interest rate would typically fluctuate quite largely, going as low as 3.25 per cent and as high as 6.25 per cent. This range is just an example; it’s always possible that the rate will travel outside of those figures.”
Calculating operating expenses is the next step in determining what the return on your investment would be.
“Operating expenses entail insurance, taxes and, of course, maintenance,” Deakin said. “Maintenance is a huge component and can also include unforeseen expenses, making cash flow very important.”
Prudent investors would want to get an idea of what would be a reasonable amount to put aside annually so that they’re able to deal with minor or more major expenses when they turn up.
“Trying to purchase a property with a low vacancy rate is important, too,” Deakin said. “Zero is ideal obviously, but up to five per cent is considered low; that’s what you would likely see in a desirable area.”
So you’ve calculated your investment, and your expenses, and now you know what you would be left with at the end of the year. But what does that number mean?
In Montreal, 10 per cent would be considered a solid return on an investment property.
“Ten per cent on any investment is very good; it’s what people aim for,” Deakin said. “Just to give some context, even in the stock market a dividend of three to five per cent is considered great.”
There are ways in which owners can look to increase the value of the property. Increasing rent is one method.
“That’s not to say that you can just increase rent at your leisure,” Deakin said. Approximately two per cent a year is the maximum, “unless you do significant renovations.”
The investor’s attitude is important as well, Deakin said.
“I’ve never purchased a property thinking about how much it’ll increase in value in five or 10 years,” he said. “That’s not the right thing to focus on, because it’s pretty much inevitable that well-maintained properties go up in value over time.”
What investors should concentrate on instead is their cash flow.
“You don’t want to have to feed more money into your investment each month,” Deakin said. “You want your income to cover all expenses and then leave you with a nice return when it’s all said and done.”