Here we look at a recent investment property sale in the local area.
For access to more documentation provided by the Seller's agent of this property or for evaluation of your own property contact Tom McEvoy (firstname.lastname@example.org)
A Look At The Numbers
Year Over Year Stats from Quinte & District Real Estate Board Inc.
Comparing year-to-date results for Multi-Family listings in the region we can see that the number of listings ending due to sale has increased while the number of listings ending due to expiry has decreased. Combining these factors demonstrates a significant year over year change. This may be due to a recent lowering of expectation of cap rates by investors.
Preparing Your Multi-Family Property For Sale To Achieve Maximum Price
There are many reasons why owners of investment properties choose to sell. Often it can be a matter of personal circumstance such as divorce or estate settlement. The property might not be performing up to expectations due to poor third party management, difficult tenants or vacancies. The owner might wish to free up capital for another investment or project. Whatever the reason for the sale, it is desirable to achieve the maximum possible sale price. There are specific steps that can be taken to achieve this goal for your property.
Buyers of income properties are primarily taking an investment analysis approach to evaluating potential purchases. Multi-family real estate is valued through the cap rate equation:
Price = Net Operating Income / Average Regional Cap Rate For Property Type
By examining this equation we see that a small change to Net Income can make a large difference in expected sale price. For example a rent increase of just $50/month on a single unit evaluated at a 5% cap rate results in a $12,000 increase in property valuation.
Methods for increasing your property's Net Income to prepare for sale include:
- If you have not been keeping up with the Ontario rent increase guideline (https://www.ontario.ca/page/rent-increase-guideline) for existing tenants, serving 90 days notice allows you to make this improvement to Net Income.
- If a tenant turnover is occurring consider improvements to the unit in order to increase rent potential. Even without improvements a turnover is an opportunity to increase rent to what the market will bear without being bound by the rent increase guideline.
- Reduction of expenses can be achieved through a shift to suite metering and tenant responsibility for utilities. This is easiest to do during tenant turnover, but there are guidelines for this process with an existing tenant as well.
- There is some grey area between accounting for work done on the property as a capital improvement vs. as a maintenance expense which will affect net income.
- Note that reducing management and maintenance expense may not have the desired effect here. Often investors will calculate these values as a percentage of rental income rather than accepting the numbers from the current owner.
Often income property owners desire to show a lower net income while operating a property for tax purposes and a higher net income at the time of sale to achieve maximum price. Working with these conflicting goals without running afoul of regulations can be challenging.
Preparation of Documentation
To achieve maximum price for your property we want to make sure that we are able to help satisfy the financing requirements for the largest number of potential buyers. This means providing documentation required by lenders. Before marketing the property we should have prepared: income and expense statements, rent rolls, lease agreements, documentation and warranties for HVAC systems, roof and any rental equipment. Lenders for this type of property will typically require an environmental assessment as well. I assist my clients in preparing necessary documentation and obtain confidentiality agreements before sharing them with prospective buyers.
Preparation of Property
It is a good idea to have a general cleanup of the property done before presenting it. Landscaping, garbage removal and cleaning of common areas can all help communicate an impression of quality. Tenants appreciate being given advance notice and they are more likely to have their units presentable for showings if this is done.
The Sale Process
Many potential buyers of multi-family properties are physically located at a large distance from the property. I have found that a prepared virtual tour can be a great asset when marketing to these investors. Depending upon the number of units, providing notice to tenants in order to arrange a showing can be a major undertaking. A virtual tour minimizes tenant disruption while at the same time giving your property visibility to a wider audience. I have sold properties based on the virtual tour alone, without a physical visit from the purchaser.
Selecting the right real estate agent is an important step towards getting the desired outcome from the sale of your property. I focus on responsive communication in order to get potential buyers the information they need and to keep my clients informed during the process.
If you are considering the sale of your multi-family property, I would like to assist you with the application of these and other techniques in order to achieve your desired outcome as your listing agent. Please don't hesitate to contact me in order to discuss your property.