*This article has been updated: Montreal Real Estate Forecast: Should I Buy A Duplex Or Multiplex In 2019?
If you’ve been following Canadian real estate news over the past few months, chances are you’ve encountered several optimistic outlooks on Montreal’s residential market. In 2017, Montreal recorded the fastest appreciation of property prices across the country, and was recently ranked as the third most promising city to invest in after Toronto and Vancouver. It’s no surprise that the city is attracting a growing number of real estate investors, locally and from other provinces, who are looking to buy rental properties in an affordable yet growing market.
We’ve received many questions from our clients regarding the benefits and risks of the rental property market. Which areas are best for rental investments? Is it better to buy a condo or a revenue property, such as a duplex or multiplex? Is this year a good time to buy? This article sums up our perspective on buying a rental property in Montreal in 2018, based on our professional experience and the most recent market statistics.
Without further ado, here are the points to consider if you’re thinking of buying a rental investment in Montreal in 2018:
How is Montreal’s rental market performing?
Montreal’s rental market remained stable last year, with just over 44% of the population residing in rented accommodation. The average vacancy rate remained low at 1.7%, a 1% decrease at the provincial level. The average rental price of a 2 bedroom condo in the GMA was recorded at $1,180. Other than bachelor condos / studios, all other types of rental condos saw an increase in their average rental price in 2017. Overall, the strength of the labor market and immigration has balanced out an increase in supply this year, keeping the local rental market strong.
What are the types of rental investments I can buy in Montreal?
Real estate investors generally consider three types of residential properties when shopping for a rental investment: condos, single family homes, and revenue properties (duplexes, triplexes, and multiplexes). Each property type requires a different level of management, and comes with its own advantages and disadvantages.
Condos appeal to the casual investor as they offer a low level of maintenance, easy rentability, and predictable, static budgeting. They are also the most affordable property type. If your budget is under $350,000, you will most likely be restricted to purchasing a condo as a rental investment.
Single Family Homes have historically recorded higher appreciation rates over time, and are less subject to fluctuations in market value. They also tend to attract a low-risk, long-term demographic when it comes to their tenants: families, older professionals, and baby boomers.
Revenue Properties will yield the highest revenue on a monthly basis, but also require more hands-on management. Duplexes are an interesting option for investors who wish to live in their rental property, while renting out the other unit to supplement their mortgage costs. When managed properly, triplexes and other multiplexes can bring in positive cash flow, which will allow you to grow and diversify your investment portfolio at a faster pace.
What kind of numbers can I expect on a rental investment?
Your costs and returns will vary based on the type of rental property purchased, the location, and your management style. To estimate ROI on your rental property, you need to understand your costs, the average rental rates and vacancy rates in the area, and the average appreciation rate. Use the following tools to gain an understanding of your expected numbers at any price range:
- Use our mortgage calculator to estimate your average closing costs and carrying costs per month.
- Use this article to find the average appreciation rate in your area of interest. Alternatively, use the conservative average of 3%.
- Use this article to find the average rental price and vacancy rate.
- Then, plug in these values to our rental propert ROI calculator to find the projected returns on your investment.
On a $300,000 condo (2 bedrooms + parking): you can expect a break-even between $1400 and $1500 a month. You can expect a 6% gross cap and anywhere between 3% and 6% appreciation, depending on the location.
On a multiplex (4 doors or more): You can realistically expect a 3.4% – 4% cap rate net. Cap rate is the ratio of Net Operating Income (NOI) to property asset value, and indicates the return on your investment.
What should I look for when choosing a rental investment?
When buying a condo as a rental investment, look out for these key points:
1. Price below market value.
Look for repossessed properties and properties listed below their municipal evaluation. Consider joining a mailing list for investors to receive handpicked deals in high-demand neighbourhoods.
2. Properties that offer positive cash flow, or as close to positive cash flow as possible.
An investment brings ‘positive cash flow’ when the monthly income generated through rent is higher than the total carrying costs, including mortgage costs, bills, taxes, and other expenses.
Use our mortgage calculator to determine your carrying costs, while consulting with your broker about rental averages and vacancy rates, and our rental property ROI calculator to pull up a full report of each condo’s profitability.
3. High Cap Rate (or potential for a high cap rate)
Generally speaking, the higher the cap rate the better. However, in some cases, low cap rates can indicate an opportunity, in that the property may have “upside” (future potential for growth). We always recommend working with an experienced real estate broker (contact us here to schedule a free consultation) to analyze cap rates of each rental property listed for sale, and to determine the maximum cap rate potential along with the current rate.
4. Location, location, location.
Always invest in neighbourhoods where tenants are easy to come by. If your rental caters to students or tourists, stay close to the Downtown Montreal or the Plateau. If you are planning to cater to professionals, buy near the business centre or Old Port. If you plan to rent your property out long term to families, start your search in an area with good schools and community centers, such as Verdun, NDG or Mount Royal (VMR). In 2017, these were the best (overall) Montreal neighborhoods for real estate investments.
5. Other considerations
- Stage your fully furnished rental according to mass market preferences, to secure the best profit margins and occupancy rates.
- Choose amenities and building characteristics that are easy to rent and resell: garage or proximity to a metro station, 2 bedrooms (if possible), lots of natural light and a balcony.
- Prioritize low condo fees over extra amenities such as gyms, pools and lounges.
- Check the co-ownership rules surrounding short and long term rentals
- Don’t forget to consider real estate property taxes!
- Work with an experienced broker. They will provide helpful market knowledge about the rental property market as well as legal and financial guidance, reducing your risks as an investor.