Montreal, Quebec · Member since 2018 · 17 posts · 3 votes
Hi everyone,
My job allows me to work with clients that have real estate investment portfolios and work with real estate agents and after talking to many of them I concluded that it seems that the rule of thumb for buying multi-unit properties is to try to pay less than 10x yearly revenue. I imagine there will be different rules depending on the market. In my case, i'm in the Montreal, Quebec area or the province of Quebec in Canada.
In my market, it's practically impossible to find something that is less than 14-16x annual revenue, which seems ridiculous to me. I have my parents and older clients telling me they use to pay 5-7x revenue... So in theory, excluding, taxes, renovations, and other costs, it would take on average 15 years to pay it and probably more than 20 years if you include all the costs. This seems kind of high to me.
Real Estate Investor · Montreal, Quebec · Member since 2015 · 95 posts · 42 votes
8y
Hi Pascal and welcome to BP,
There are lots of rules of thumb out there that are very helpful, from my experience, i think ultimately, you need to define your own rule of thumb, i.e. how much are you looking at your property to cash flow and what return expectations do you have. The GIM (Gross income multiplier) you're referring to 14 to 16 is normal in Montreal. i recently closed on a 4plex at 13 GIM. at the end of the day, 13 is not really what i based my purchase on, it was full financial breakdown that helped me make the decision including full expenses, vacancy rates, mgt fees, etc...
You'll also run into 1% rule, 2% rule or 50% rule mainly here on BP and again i'm speaking only from my experience, i highly doubt you can find any 1 and 2% properties on the island.
Real Estate Investor · Montreal, Quebec · Member since 2015 · 95 posts · 42 votes
8y
Hi Pascal and welcome to BP,
There are lots of rules of thumb out there that are very helpful, from my experience, i think ultimately, you need to define your own rule of thumb, i.e. how much are you looking at your property to cash flow and what return expectations do you have. The GIM (Gross income multiplier) you're referring to 14 to 16 is normal in Montreal. i recently closed on a 4plex at 13 GIM. at the end of the day, 13 is not really what i based my purchase on, it was full financial breakdown that helped me make the decision including full expenses, vacancy rates, mgt fees, etc...
You'll also run into 1% rule, 2% rule or 50% rule mainly here on BP and again i'm speaking only from my experience, i highly doubt you can find any 1 and 2% properties on the island.
Montreal, Quebec · Member since 2018 · 17 posts · 3 votes
8y
Hi Mazin,
Thanks for your feedback. I greatly appreciate it. I wasn't expecting someone from Montreal to answer me so that's awesome, but I am thinking of moving off island in a year or two, so my investment properties would be more on the south shore or north shore of Montreal.
Did you ever buy properties in those areas? Do you think we can get something under 13 GIM? I like to have an unbiased opinion on this, thus my reason for asking you. Because real estate brokers probably work with different numbers compared to a property investor such as yourself.
By the way, 13 GIM is actually quite amazing for Montreal. Just spoke recently to my real estate broker friend and he never seeds anything under 15 in Montreal.
Real Estate Investor · Montreal, Quebec · Member since 2015 · 95 posts · 42 votes
8y
@Pascal Lapointe, apologies for not clarifying that my 4plex is in Vieux Longueuil, but again i really don't think GIM is a good way of evaluating your opportunities. You have to do your numbers. Once you go through this exercise a couple of times, you'll start seeing what works for you. A low GIM does not make a deal a good deal.
I'm sure others will comment as well, i'm curious to hear their input as well.
The other thing to keep in mind is what kind of invest are you, if you want good deals, you'll be able to find low GIM deals even on the island but you gotta complete a rehab project. If you're looking for properties that are rent ready, then it's a different story.
Montreal, Quebec · Member since 2018 · 17 posts · 3 votes
8y
@Mazen Al Ashkar Good to know. I'm still unsure of what type of investor I am. I think I wouldn't mind small scale projects but definitely nothing huge where it would require a significant investment.
I will continue to research ways of evaluating income properties.
Investor · The Americas and Europe · Member since 2016 · 1k+ posts · 1k+ votes
8y
Pascal, you have to find motivated sellers and try to arrange deals with little or no money down. If you can do that and positively cash flow you'll do well over the long term, regardless of the GIM.
Real Estate Agent · Kitchener-Waterloo-Cambridge, Ontario · Member since 2013 · 408 posts · 90 votes
8y
@Pascal Lapointe Kijiji is honestly your best bet in Ontario, specifically if the market is not way over heated. Find the stubborn sellers who won't list, generally they aren't educated and you can swing a better deal. VTB or super long closings to let appreciation add value etc
Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
8y
I fail to see the use of the gross income multiplier metric. If the gross income multiplier is 2 because the gross income is 50k and they are asking 100k, the property can still be horrible if the annual expenses are 60k.
If you're in large assets, then cap rate makes more sense. That example would have a negative cap, and obviously would need consideration for what to do.
That brings up the more important point. It rarely matters what the asset is doing NOW but rather what the asset's potential is. Look at the cost of unlocking that potential. If the above example can be improved for an additional 50k but brings the gross income to $500k, suddenly you have a spectacular deal. Refinance your money out and do it again.
Burlington, Ontario · Member since 2017 · 11 posts · 3 votes
8y
I agree with everything Matt says. Cap rate is a much better metric than GIM (or it's inverse 1% rule/2% rule).
IMO, the "usefulness" of these rules depends on where in your lead screening you are and if you have a large list to analyze. Here in Ontario, the market supply is a tad smaller than many US markets we hear about. In those US markets, you may want to use GIM/1% rule as a 1st filter in a lead funnel to be efficient, then use cap rate, etc. later on.
That said, using GIM in the first place could mistakenly filter out those "unlocking potential" gems! Give and take, I suppose.
Real Estate Investor & Marketing Specialist · Montreal, QC · Member since 2013 · 182 posts · 367 votes
8y
Hey Pascal. The gross income multiplier cannot be used to evaluate if it's a good deal or not since expenses can vary immensely depending on who's paying for heating and electricity cost for instance (tenant or landlord). The net income multiplier is a better indicator, but once again, you cannot trust this number without verifying the numbers first. A lot of brokers will exclude a lot of expenses in their listings in order to make it look better, so you have to consider ALL expenses before you can judge if a deal is good or not. Then, depending on how many units, you will also have to factor in the debt coverage ratio that the bank or CMHC will use in order to properly calculate the maximum amount of financing you will get for a particular property. In other words, before buying a first property, make sure to find a good mentor ;)! Someone who's done it multiple times. Hope this helps.
Montreal, Quebec · Member since 2018 · 17 posts · 3 votes
8y
@Guillaume D. Yeah I think I might have to use several metrics in order to see if the investment itself makes sense. It's crazy how even though I work in investments and insurance, real estate investing is a complete new world to me. It's kind exciting and challenging at the same time!
Do you know of any local REI meetings in the Montreal area? Maybe I would have a good chance of finding a mentor there.
Real Estate Investor & Marketing Specialist · Montreal, QC · Member since 2013 · 182 posts · 367 votes
8y
Of course. Look for these groups hosting monthly events: CIIQ, Immofacile, Mordus de l'immobilier. I will be attending the next CIIQ event on April 3rd.
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
8y
Interesting discussion............your market is an international border away from mine, most people in your area speak French and yet the challenges are pretty much the same-how to get away from those fours, fives and sixes on the cap table! We are 'late' into a rising housing market that has hit much of the area we want to invest in and the high prices affect all investors.
I won't invest if it is more than an hour drive from our house, and so the focus is on getting to know every neighborhood in the area. That also gives me an edge, I get to know where the renters want to live and look for housing in literally 6 block areas. I am small time, I have one twelve unit building and a couple of duplexes. Currently looking for another 12-20 unit building, one that does not have a 4-5-6 cap table attached. I'll find it but the good buildings, the hidden gems are not exactly jumping out. Having joined this site has helped, I also joined a local landlord's association. My barber gave me some really good off market leads, I will try my insurance agent and local banker next and see if networking will pop out that building I want! Good hunting to you all!
Rental Property Investor · Montreal, Qc · Member since 2018 · 12 posts · 6 votes
8y
Investors are in many ways similar to entrepreneurs. You need vision and clarity for your real estate investments more than anything else to spot a great deal. If you solely rely on ratios you will never succeed in business or investing. Instead, you need to see the hidden potential that nobody else is seeing. If you have the vision on how to significantly increase the value of your investment then the ratio's wont matter as much.
Besides, if you bought a property at a 12x multiple and extensive repairs and replacements are immediately needed i.e. roof, brick ties are done, pyrite, contaminated soil, underpinning, cracked sewer main etc. this could take your ratio of 12x to easily above 16x depending on what needs to be done.
Also, right now in Montreal there are properties selling at 12-14x ratios. However, they are mostly in bad neighborhoods. i.e. MTL-Nord, St-Michel (north of met) or a bloc of studio apartments. But the issue here is that your time managing these properties will be much higher as there are greater turnover and overall more issues with management. I learnt this the hard way, I stick with good properties in good areas but create value that nobody sees so I end up getting them for in the range of 10-14x after 6 months to a year of work.
For instance, say a property is listed at a 16x rev. If you are able to increase the NOI of the building by 10K a year, you just created more than 160k in equity in your property. Which would bring your multiple WAY down to 12X. To do this, you need a bit of experience, money and vision on how you can transform your property. This is very possible in Montreal, as I have done it several times now.
Real Estate Investor & Marketing Specialist · Montreal, QC · Member since 2013 · 182 posts · 367 votes
8y
@Chris Ferreira Totally agree. I've done exactly the same thing and I was able to buy 75 doors in the last year and a half in a market that is supposedly way "overpriced" and without using any of my own capital.
Investor · The Americas and Europe · Member since 2016 · 1k+ posts · 1k+ votes
8y
Agreed with @Chris Ferreira. The market in Montreal and Canada in general has become very expensive so you need to find or create deals to make it work and this is what I'm looking at doing.
For really profitable deals, I invest in markets which are much cheaper and have much more room to run, like Portugal and Mexico.
Investor · The Americas and Europe · Member since 2016 · 1k+ posts · 1k+ votes
8y
@Mazen Al Ashkar In Portugal yes at much better conditions than here. Mexico is normally difficult but I get financing through my connections. It really depends on the country.
I fail to see the use of the gross income multiplier metric. If the gross income multiplier is 2 because the gross income is 50k and they are asking 100k, the property can still be horrible if the annual expenses are 60k.
If you're in large assets, then cap rate makes more sense. That example would have a negative cap, and obviously would need consideration for what to do.
That brings up the more important point. It rarely matters what the asset is doing NOW but rather what the asset's potential is. Look at the cost of unlocking that potential. If the above example can be improved for an additional 50k but brings the gross income to $500k, suddenly you have a spectacular deal. Refinance your money out and do it again.
Can anybody explain why I'd care about GIM?
... or CAP rate for that matter {unless you are selling}.
I prefer to underwrite based upon the rate of return {i.e. (M)IRR} with an emphasis on the cash portion of the return ... if a property meets (or exceeds) my hurdle it is worth pursuing, if it does not, then put it back and walk away.