October 23rd - 2014

Reaping rewards from rental sales

Many buyers today are looking for investment properties like apartment buildings or vacation homes that they can rent out.

REALTOR shows buyers a commercial building

REALTOR shows buyers a commercial building

Many buyers today are looking for investment properties like apartment buildings or vacation homes that they can rent out.

The residential investment market offers its own rewards and challenges, according to three REALTORS® interviewed by The EDGE newsletter. These experienced real estate professionals from across the province share their insights about this segment of real estate and serving clients who seek to buy rental properties.

Each of the REALTORS® offers a unique perspective. Although circumstances differ from one community to another, the sources all say they enjoy the challenges and rewards of working in the rental sales market.

The sale of investment properties is about numbers rather than emotion, says Jamie Troke, a broker of record in Belleville. “Investment purchasers are much more analytical than people buying their own home,” he observes. “They’re not focused on the colour scheme. They’re looking at the age of the roof and the cap rate.” (The cap rate is the return on an investment property based on the expected income that it will generate -- the ratio between net operating income and the original price paid.) 

Because Troke works in a small market, he deals with various types of rental investment properties. “I’ve sold everything from duplexes to 80-unit apartment buildings,” he says. One challenge in his area is “finding quality properties that are not already picked over. There are fewer transactions and less property turning over here than in a big city.” Since some properties are not even advertised, a strong network of contacts is vital for real estate salespeople, he says.

Closings on these properties can take much more time than a standard residential transaction, notes Troke, who has 20 years of real estate experience. That’s because a much more detailed review of the property is required – an environmental audit, insurance inspection and mechanical system inspection are examples. These kinds of transactions can be complex, he adds. “Because interest rates are at all-time lows, the properties may become over-leveraged,” he says.

His ability to provide in-depth analysis for his clients on all of these factors is the key to his success with investment properties, he says. “The role of the REALTOR® is to smooth the process. We add a great deal of value through our market knowledge and product knowledge.”

Sharon Ellis-Gill is an Ottawa broker who entered the realty business 13 years ago to join forces with her son, who is a real estate salesperson. The residential investment business in the nation’s capital is challenging, especially in the condominium market, notes Ellis-Gill, a former stock broker.

“Condo prices have been down for the past two years and the market has an oversupply,” she says. “Upgrades in new condos make it tougher to move the older ones.” Many young buyers who bought condos as investments hoping to rent them and trade up to larger accommodations are now trapped, she says. “They were riding the wave and some got caught in their first purchase.”

The sale of smaller rental buildings with four to six units is more brisk, she says, especially to first-time buyers who are recent immigrants to Canada. With university expansion in Ottawa, the demand for student housing fuels this segment of the market, she says. “Many of these first-time buyers are not traditional buyers,” says Ellis-Gill. “They’ve saved all their money for this investment and are prepared to offer much more cash up front. They have family members living there before renting it out and they renovate the place.”

Business buildingFirst-time buyers of rental properties should be made aware of a property’s return on investment, she advises. “These buyers don’t always have a full understanding of concepts like the cap rate,” says Ellis-Gill. “They just want to get into the game. It’s important to have a full discussion with them about expenses and return on investment.”

Buyers of own-to-rent property should understand operating costs, the expense of repairs and the status of existing leases, she says. “I warn them that they don’t want to be in the business of evictions. That’s not a good way to start your real estate investment.”

Investors should have more cash than the building’s purchase price, says Ellis-Gill, because unexpected costs often arise. “I tell them they’ll need more money, and sooner than they think. They can’t be short on cash, because if the washer overflows or the stove explodes, there’s another bill to pay.”

A good REALTOR® should also outline potential pitfalls, including issues detailed in the Residential Tenancies Act, says Azizali Kanjee, an owner and broker of record in Oakville. Knowledge of the act is crucial for people buying own-to-rent properties, he says.

“One of the biggest challenges is educating buyers about the act and its implications for their investment,” says Kanjee, an OREA director with 40 years’ experience in real estate. “These buyers need to consider issues such as rent control, how to serve notice, deposits from renters, and what happens when tenants don’t pay. It’s challenging at the best of times.”

Kanjee advises investors to consider hiring a property manager rather than handling renter issues themselves. Managing a property is demanding and time-consuming whether it is a single condo rental or a full apartment building, he says. “Buyers need to realize that this investment is more than a Monday-to-Friday, nine-to-five proposition,” says Kanjee. “The owners can’t always get away from it. I tell them that property managers can find tenants for them, keep them separate from renters and deal with rent tribunal issues -- and if it comes down to it, property managers also know how to evict tenants, based on processes required by the act.”

Financing for an investment property is more complicated than a residential sale, Kanjee adds. “It’s no longer about you. It’s about whether the property can pay for itself. The investor and the bank must evaluate the risk and we as REALTORS® can help the buyers to work that out.” 

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For more information contact

Ontario Real Estate Association

Jean-Adrien Delicano

Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246