Dear David,
We’ve owned an investment triplex in Cambridge for the past ten years and are getting ready to sell. The property has two long-term tenants, and a third who will be moving out at the end of this month. We spoke to a Realtor, who estimated our building would sell for between $650,000 – $800,000. Why the huge variation in price? – CONFUSED
DEAR CONFUSED: This is an excellent time to be selling your investment. In the past few years, the market has developed a real appetite for this type of income property. In terms of establishing value, we need to consider your tenant situation. You have two long-term renters, which is something that many landlords wear like a badge of honour. Unfortunately, it’s not great news from a value standpoint.
Rental units are a lot like GICs, in that their value is defined by how much money they are generating. On one hand, you have reliable, long-standing tenants who pay their rent each month, which is terrific. On the other hand, I can almost guarantee that the rent those tenants are paying is well below market value.
Residential rental rates in our area are skyrocketing. Because rent increases in tenanted units are capped by provincial guidelines, it’s not unheard of for long-term tenants to be paying as much as 35 to 50 percent below market value, which can’t help but impact the value of the property. On the bright side, you have one unit that will be vacant soon. This would be a great time to give it a makeover, so it commands maximum rent when it goes back on the market.
There was a time when a “fully rented” building was more desirable than one with empty units, and from a financing perspective, your bank may feel better knowing there is income coming in from every unit on a monthly basis. But at the time of this writing (Fall 2020), the vacancy rate in Waterloo Region is sitting at around 2 percent, and chances are good that any correctly priced rental will have a list of tenants eager to move in.
When your property hits the market, a potential buyer is going to look at what it’s currently earning, as well as what its earning potential will be once the long-term tenants move out. An investor may gamble on whether the tenants will stay for another year or another decade, while an “end user” may choose to speed up the process by moving into one of the under-performing units.
From a valuation perspective, your listing price needs to target the range between what the property is earning today and its full earning potential. Without knowing any specifics about your rents, I agree that the $150,000 spread suggested by your agent seems a bit broad. I would get a second opinion to narrow the differential.
PRO TIP: This is your personal property and you should take every available opportunity to refurbish it. Always implement provincial rent increases as allowed, so your rents align as closely as possible with market values. An experienced Realtor may be able to provide you with options for working with long term tenants in accordance with the Residential Tenancies Act. #AskDavid #Advice
