Think invest in a property to derive rental income? Whether commercial or residential property, here is our expert advice to help you make the right choice.
Year after year, real estate is still a safe bet in the eyes of many investors. Leverage is one of the aspects on which we can build, but not only. The rental income of a property can also make you significant money coming and above regular. But to achieve this, it is still necessary to have thoroughly analyzed the returns properties that are available to you. What are the key elements to consider to make sure not to miss the shot?
Location, tenants and commercial leases
The acquisition of a commercial property - office building or building housing shops - provide the investor with income from rents paid by tenants. To evaluate the performance of the property, Michael Williams, Associate Vice President, Commercial Real Estate Finance at National Bank advises to take into account several criteria. "We must first consider the location of the property," he says. Is it well located, if she is in an area that has good potential for development or otherwise in a sector in decline?
Another element to consider: the tenants . "Is it of major tenants, they exploit a trademark or known in the market franchise? Or on the contrary, that the shops whose survival is not assured? "Asks Michael Williams. In which sectors or industries do they work? Is it an area considered more risky by financial institutions, such as restaurants and bars? "You have to ask questions about the business tenants. For example, the advent of movies on the Internet led to the disappearance of DVD rental clubs and many commercial buildings were left empty overnight. "
The lease term linking the tenants is also a key aspect. Suppose you spot a commercial property which no space is vacant. "Surely a good deal! "Can you think. But it may not be the case if most leases are short-term maturity. So you could quickly find yourself with several empty premises if tenants were not renewing their leases also because they have ceased operations or relocated. Therefore, it is imperative to be aware of the leases that have been signed to verify their duration and so see below to ensure the future of your investment.
The distribution tenants should also be considered. If one of them occupies more than 80% of the spaces for rent and the lease is about to expire, you will want to have a plan to replace, even before making the purchase. Remember: many small solid tenants can argue better than a giant with feet of clay!
Commercial property: calculate the performance and risk
The efficiency of a commercial property depends on many factors. However, we must remember that in this area, the financial institution usually requires the borrower a down payment equal to at least 25% of the purchase price. "And that does not mean it will lend 75% of the amount. This is also based on the economic value of the property, "says Williams. Thus, the implementation of requested funds could be much higher than that of a residential building.
In addition, prior to untie the purse strings, the bank will have certain requirements on the coverage of debt. In this regard, it generally will claim that the ratio of debt service to be 125% or 1.25 times the annual mortgage payments (principal plus interest).For example, if your annual mortgage payments (principal plus interest) representing $ 10 000 per year, the financial institution will claim that the building generates annual net income, after expenses, of $ 12 500.
"That's why before finalizing his choice, it is important to do a sensitivity test ( stress test )," recommends M. Williams. In particular is estimated to what level of vacancy rates can still cope with debt service. If you risk bankruptcy when a room is vacant, go your way!
Before jumping steps, make sure also to inspect the property coveted by a professional home inspector. His report will help you identify the problems affecting the building, and might even help you negotiate the price down. This will avoid costly surprises ...
Residential Property: well make its calculations
In terms of good residential real estate, the location of the building and the vacancy rate are among key elements. We must look for properties located close to services and easily accessible. But that's not all. We must also consider the quality of maintenance of the building, which helps to attract and retain good tenants.
The down payment required by the lending institution will generally be at least 25% of the purchase price, but the buyer can also use a mortgage insurer, which normally minimizes the required down payment.
Once these questions tags, can we still hope to increase the efficiency of the building?"You have to question the additional income that can be obtained. For example, if the property is situated in an exclusive geographic area, but it is already very well managed and that rents are optimized, increasing the performance will be more difficult.Residential rents in line with the market level generate less long-term growth potential, "said Caroline Tourigny, Associate Vice President, Real Estate Development Unit at the National Bank.
It will then turn to other options: for example, "improve energy management of the building by making it more efficient, which can increase the net income," says Ms. Tourigny.
But you have to make its calculations and especially keep feet on the ground. "To believe that a residential building will instantly generate a lot of cash is a mistake. It is necessary to remember that the income will be used primarily to repay the mortgage, paying property taxes and to ensure the maintenance of the building, "says Tourigny.Furthermore, if one is not a good handyman, it will probably entrust most repairs to professionals, resulting in more cost. And the greater the number of housing increases, management will ask for time and energy. This aspect should not be overlooked prior to purchase.
Ready to make the leap? Here's one last tip: "Do not put all your eggs in one basket and keep a financial cushion for the unexpected," advises Ms. Tourigny.