Last blog we talked about Rental Location and Deferred Maintenance. This week I will explain a little about Market rents, vacancy rates, income and expenses.
Market rents – vacancy rates
With apartment buildings, rents determine value and vacancy rates are often attributed to rents. What do I mean by this? Well, if a building generates an income based upon inflated rents then the value of the property will be artificially high with the risk of higher vacancy rates. Conversely, if a building generates an income based upon low rents, then the building produces less-than-adequate income and the value will be artificially low. You also have to factor in that banks advance mortgage funds based upon an appraisal and that appraisers analyze income and expense data to arrive at fair market value.
Income and Expenses
When you do find a property that meets your criteria, get an operating statement from the seller and also ask for the tenant history. Ask for three years worth of income and expenses. Are the rents at, below or above the market? Canada Mortgage and Housing Corporation publishes housing reports for areas all across the country, which you can purchase. Among other things, these reports identify vacancy rates and average rents for one, two and three bedroom units. Ask your realtor for comparable sales/listings information to help you determine value. Examine the expenses that the property generates very thoroughly. Taxes, insurance and utility figures are easy to verify by getting receipts from the seller. Things that are not so easy to verify are regular maintenance items. Some sellers will have you believe that there is no regular maintenance costs just to bolster their bottom line and get a higher sale price. Do not fall for this. Every building, regardless pf the number of units has regular upkeep. These are a few pointers to help you in your quest for an income-producing apartment building.
I believe as do others, that income-producing real estate is an excellent path to creating wealth. Why? Because someone else is paying your mortgage and you collect the equity down the road when you sell. It is an amazingly simple concept that really works.
Come back for more next week, if you need help or have any questions email us at email@example.com