Income properties can be divided into two major categories: multiplex dwellings with 2 to 5 units and multi-unit buildings with 6 or more units. For today’s topic, I will specifically focus on this second category.
Assessing the value of multi-unit buildings (6 units or more)
Determining the value of a building is more difficult for multi-unit buildings than for small multiplexes. Compared to the latter, the value given to a multi-unit building depends more on its financial performance, i.e. the property’s income and expenses.
Net income is calculated by taking the total income and subtracting the following:
- A hypothetical amount for vacant units and rental losses (e.g. non-payments)
- Day-to-day operating expenses (taxes, insurance, etc.)
- An average amount per unit for major work (usually $500/unit)
- Expenses for the concierge (even if there is no concierge!)
- Expenses for administration and building management
This harmonized net income is the key to determining a building’s value. A building’s “economic” value is calculated by multiplying the harmonized net income by the sector’s net income multiplier (NIM) for a given type of building (usually determined by a licensed appraiser or a real estate broker specializing in multi-unit buildings). To illustrate, let’s consider the example below.
The harmonized net income of a 28-unit building located in a city on the outskirts of Montréal is $161,280. In this particular area, the South Shore, recently sold properties with 24 to 32 units had an average NIM of 19. The calculated economic value is therefore $3,064,320. For the purposes of this article, I won’t go into the other complex factors that may affect building value and the NIM.
Two physically identical and neighboring multi-unit buildings could therefore have different values if their managers did not optimize income and expenses in the same way.
Three ways to increase the value of multi-unit buildings
1) Make sure your rent corresponds to the market value
This is certainly the aspect over which the investor has the most control, on a recurring basis, year after year. I often see multi-unit owners who increase their rent too little or don’t increase it at all because their tenants are kind and respectful. That’s their choice. But, when the property is sold, that small increase over the years may hurt the seller’s portfolio.
Let’s take the case of the 28-unit building described above. If each unit is rented at even $50 below market value, that amounts to a loss of $16,800 in annual net income. With the same NIM of 19, that means a decrease in economic value of $319,200. That’s not pocket change!
Since 2018, the Zipplex application allows you to see comparable units recently rented for a given area in Québec, using the postal code of or a radius around a building. Take a look before you start renting out your next dwelling.
2) Control your operating expenses
Property managers have limited control over expenditures.
It’s possible, if warranted, to challenge the property assessment every three years. That can help reduce property taxes.
Insurance is an easier budget item to control, even though I scream every time I receive my new premiums. It’s a good idea to negotiate those premiums every year, either by comparing insurers or increasing the amount of the deductible in the event of a claim. If a new buyer manages to lower their premiums by $1,000 compared to the previous owner, that adds up to $19,000 more in economic value, based on the above example.
For buildings heated by the owner, you may consider converting or modifying the heating system, such as by switching from oil to natural gas. Any other actions taken to improve the energy efficiency of the building will have an impact on net income and occupant comfort, such as installing smart thermostats, caulking windows and doors, adding insulation to the basement or replacing old doors and windows.
3) Add a unit or divide a large unit
Large units are sought after and rent fairly quickly, in large cities at least. However, they aren’t the most profitable for an owner. Let’s look at an actual case involving one of my buildings in Joliette in Lanaudière. In this building, a roughly 750-square foot, 4 1/2-room unit rents for $625 per month. On the ground floor, for the same surface area as the previous dwelling, I have two small 375-square foot, 3 1/2-room units, each of which rents for $525 per month. That comes to a total of $1,100. I earn an additional $475 per month for the same surface area. After subtracting a few harmonized expenses, I make about $5,000 more in annual net income. Subdividing large units into smaller units is an option to consider in order to increase the value of multi-unit buildings. Of course, it has to be permitted in your municipality.
A management approach aimed at maintaining and increasing value
I could write a book about all the ways to increase the value of multi-unit buildings. Managers need to find creative ways to maximize income and control expenditures. Some provide Wi-Fi, others rent parking spaces or create shared spaces that encourage tenants to pay more for their properties.
You should carry out an annual assessment of each multi-unit building to find ways to help it reach its full potential.
Real estate investment buff Steve Forget started a blog called Jeune investisseur immobilier (young real estate investor) in 2011 to share his opinions, his wins, and his losses. In addition to owning several rental buildings, Steve is a co-owner of Construction Forsa, a company whose objectives include flipping real estate. For the last 15 years he has worked as a project management consultant on international projects, as well as assisting organizations with designing, planning and monitoring their projects. Increasingly, he will apply these same management concepts to real estate projects in Québec.