Your #1 Source of Montreal Real Estate News

The Majority of Downtown Montreal Condos Are Negative Cash-Flow Investments

CMHC's latest report suggests that 75% of Downtown condos are cash-flow negative. Here's what that means for Montreal investors:

2 2,228

A report published by Canada Mortgage and Housing Corp. (CMHC) estimates that around 75% of high rise condominium rentals in downtown Montreal are cashflow negative.


TL;DR: Most rental condos in Downtown Montreal won’t rent at a price that covers all expenses. We explain why any investor would consider buying a negative cash-flow property, and provide some tips on how landlords can guarantee profitability from a negative-cash flow investment.


Negative cash-flow on an investment suggests the landlord is not collecting enough rent to recoup their expenses – such as monthly mortgage payment, taxes, condo fees, and other bills.

CMHC has predicted that the majority of investors with a 20% downpayment on their rental investment in Montreal are “losing money every month” – on average, expenses in the downtown core exceeded rental income by $385 a month.

The study concludes by noting a number of factors which were not taken into consideration by the report – including whether certain investors had put down more than the minimum of 20% towards their downpayment, or purchased the unit in cash.

How is cash flow calculated?

To estimate cash flow, an investor would use a mortgage calculator to determine expected carrying costs on any given rental investment. Then, they would compare expected carrying costs with expected income, which can be obtained through statistical averages on rental/vacancy, or by consulting with an experienced real estate broker.

Cash flow = total income per month – total expenses per month (including loan payments, taxes, etc)

Let’s take an example:

Median price for 2 bedroom condos on Montreal Island (source: Centris, November 2018): $340,000

Average rental price for a 2 bedroom condo on Montreal Island (source: Padmapper, November 2018): $1,620 

Estimated carrying costs* for a condo costing $340,000: $1,857

  • Interest (current lowest): 3.39%
  • Downpayment of 20%: $68,000
  • Mortgage payment / month: $1342
  • Monthly taxes (average): $265
  • Insurance: $50
  • Condo fees: $200
  • Total: $1,857

*Does not include unexpected costs such as repairs, renovations.

Estimated cash flow / month: -$237 (negative)

Should you ever buy a cash-flow negative investment?

In theory, investors should look for cash flow positive properties. In practice though, a cash-flow positive condo is quite difficult to find on Montreal Island, let alone Downtown Montreal. Cash flow positive opportunities are common in the duplex and multiplex market, but condos typically require out-of-pocket expenses on the part of the investor.

The aim for most investors in the condo segment is to look for opportunities as close to break-even as possible.

Why would an investor consider buying a negative cash-flow investment?

Certain investors are open to a (small) negative cash flow per month, in exchange for the convenience or affordability of a condo investment. In the case of the example provided above (-237$ cashflow), an investor might consider that fact that his or her mortgage is being paid off every month by the tenant, with the exception of $237. In other words, it costs $237 a month to maintain a rental investment in which the owner is accumulating around $800-$1000 of equity a month. And that’s without much of the high cost, hassle or renovations needed to maintain a detached house or multiplex building.

Other investors prioritize long term appreciation over monthly cash flow. For example, if an investor is purchasing a rental condo in an up-and-coming market where sales and rent prices are expected to boom in the coming years, the ROI made from appreciation would justify a temporary out-of-pocket expense.

Lastly, a small proportion of investors benefit from the tax implications of a negative cash flow investments, since negative cash flow is considered a business expense.

How do you improve profitability on a negative-cash flow investment? 

Making sure the negative cash-flow unit becomes profitable in the long run is key to a successful investment.

An investor has two options to improve cash flow on a rental investment: reduce costs, or increase rental value.

Reducing costs can be achieved by putting down a larger downpayment, which will reduce monthly mortgage costs. Shopping around extensively before picking a mortgage lender will also help you cut down your mortgage interest rate.

To increase the rental value of a condo unit, the investor can look into renovating or refurbishing the property. In some cases, it makes financial sense to buy a distressed unit, and renovate it to bring it up to market rental value.

Lastly, it is important for investors considering a cash flow negative property to only consider areas where annual appreciation rates are high, and vacancy rates are low.

For example, in Downtown Montreal where the CMHC report was conducted, the average condo appreciated by 11% over the last four quarters of 2018. The Downtown sector also stood out with one of the lowest vacancy rates among all the sectors of the Montréal metropolitan area, at 1% (source).

How do you find cash-flow positive condominium deals in Montreal?

With a bit of patience, luck and savvy, a positive cash flow condo deal can still be attained on Montreal Island.

Investors should consider emerging markets where purchase prices are still low, but rental value is expected to increase in the next real estate cycle.

The lowest condo prices in Montreal in 2018 were found in:

  • Villeray: Average of $287,500
  • Lasalle: Average of $280,000
  • Lachine: Average of $247,762
  • Hochelaga-Maisonneuve: Average of $235,000

Appreciation rates should also be considered when buying a condo rental investment. The highest annual appreciation rates in Montreal (2018) were in:

  • Town of Mount Royal (22%)
  • Lachine: 12%
  • Rosemont: 7%
  • Villeray: 6%
  • Verdun: 5%
  • Outremont: 4%
  • Downtown Montreal: 4%

Other tips and tricks to find a good condo deal:

  • Ask your broker to set up a property alert for repossessions in your preferred neighbourhood.
  • If you think a property might be listed below market value, get a free instant evaluation of the property’s current worth.
  • Ask your broker to send you his or her own selection of deals listed below market value. Many brokers have access to private listings, which are likely to sell even before they are listed online.
  • Subscribe to a Deal of the Week mailing list, which will email you the single best deals on Montreal’s real estate market each week

This article, The Majority of Downtown Montreal Condos Are Negative Cash-Flow Investments, appeared first on Shupilov News.

 

Want to stay informed on the latest real estate news?

Subscribe to get the latest news delivered straight to your inbox every week

2 Comments
  1. Victoria Rothstein says

    I guess the best thing to do on these Montreal properties is to buy the cash negative condo because that is what is most easily available and then push to turn it cash positive as soon as possible?

    Excuse my ignorance on the subject I know some about REIT investments, far less on actual real estate properties.

    1. Yury Shupilov says

      Hi Victoria, Thank you for your question. The smartest strategy for a condo investor in Montreal would be to look outside the Downtown core / fully developed markets to find a cash flow positive / break-even condo in an emerging market. These deals are not easy to find, but not impossible either – the last paragraph of the article outlines some tips for finding cash flow positive / break-even opportunities in Montreal. If the investor wishes to remain within the Downtown core, then the objective would be to push the investment into positive cash flow or break even as soon as possible…either by increasing the downpayment amount or by purchasing a distressed property and renovating it. All in all it’s important to factor in long term appreciation of the property as well as monthly cash flow: ie, if a condo costs $100 out of the investor’s pocket per month, but appreciates at 6% a year, the overall gain should be taken into consideration.

Leave A Reply

Your email address will not be published.