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How to spot a good investment opportunity?

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Estimated reading time: 4 minutes, 15 seconds.

To determine whether a condo or a duplex is a good investment, you need to figure out whether the property is an asset or a liability. An asset is anything that puts money into your pocket. A liability is anything that takes money out of your pocket. So if you’re planning to buy a home to rent out rather than to live in yourself, your main concern should be whether the passive income generated by the rental price is higher than your mortgage and maintenance costs per month.

Shopping for a good investment deal needs to be approached with a completely different mindset than shopping for your family home. When you shop for a home you’ll be living in yourself, you can allow yourself to “fall in love” with your options- as long as they fall within your budget. The purchase of an investment property, on the other hand, needs to be a purely rational, calculated decision with nothing left to intuition or emotion. This post will take you through the main points you should be researching in detail before you commit to any real estate deal.

As an example, we’ll be using this Downtown condo on Rue Guy, which was just listed for sale this week at $289,000

Bedrooms: 1
Total square feet: 783. 

  1. Compare the price to square foot to the average in the area. 
    The average asking price/sq foot in the Downtown core is $550.
    The asking price per square foot for this condo is $369, a $181 difference.
    A large difference in average square price (anything over $50/sq.ft less) is a good indiction that the property is investment-friendly.
  2. Compare the square footage to the average square footage in similar developments.
    New 1 bedroom developments in the Downtown core average at 600 square feet.
    This condo is 783 square feet, 183 more than average.
    While square footage isn’t everything (sometimes layout can have a greater impact on the spaciousness of a condo than the actual dimensions on paper), buyers and renters usually filter their searches by numerical brackets, so having a 183 square feet more than your neighbours do will ensure that many more people visit your apartment when it’s marketed to rent or sell.
  3. Look at the condo fees
    Many first time investors forget to calculate condo fees in their financial projections, and end up failing to cover their costs with the income their rental property brings in. While it’s nice to own in a building that has a gym, pool, sauna, lounge, and urban chalet, don’t lose sight of the fact that purchasing an income property is a purely financial decision. If the passive income generated by the property won’t cover costs, it’s probably not the best investment out there.
    The condo fees at the condo on Rue Guy are: $100 a month– another indication of a good investment opportunity.
  4. Find out the average rental price in the area
    Before making an investment, it’s crucial to inform yourself on the average rental prices in the area. To calculate profit potential, you’ll have to compare the potential rental income to your monthly costs. The higher the difference between your costs and your income (with costs on the lower end of course), the better the investment.
    For example, the average rental prices for a one bedroom condo in the Downtown core are $1340- $1400 per month.
  5. Consider different mortgage plans
    It may be that the size of your downpayment greatly alters whether your monthly mortgage costs are covered by your rental unit. Consider different plans and different downpayment amounts to find the one that works best for your particular case.
  6. Don’t buy without a parking space.
    Considering Montreal’s harsh weather and congested downtown core, not having a parking space is a deal-breaker for many tenants. If you’re buying as an investment and you plan on renting to professionals rather than students, our personal advice would be not to buy without a garage or parking space.

Hypothetical Calculation for our Condo on Rue Guy:

  • Asking : 289,000$
    (Appliances and parking space included.)
  • Hypothetical price after negotiation : 285,000$
  • Downpayment of 20%:  57,000$
  • Monthly Mortgage Payment =  1021$ (at 2.5% 5 year fixed)
  • Taxes = 2437$/ year = 204$/month
  • Condo fees = 100$/month

TOTAL operating costs are : 1304$/month

Average rental price in the area: $1340-1400 / month

Profit potential: +$40-$100 / month.
And don’t forget yearly appreciation of 2-3% and the fact that you’re paying off your principal every year!

To recap and summarize the process: a home is a good investment if it covers all costs and puts money into your pocket every month rather than taking money out. The costs you need to consider are your monthly mortgage costs, annual taxes, and condo fees (other bills such as hydro and heating are generally paid by the tenant). The income per month is calculated based on the average rental price for a similar unit in your area. Other factors to consider are the average sales price (and how your unit compares), and the availability of a parking space.

 

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