I’ve made more than one error when purchasing a multiplex. I’ve even made the same error more than once! Below are a few points to take into consideration before signing your first purchase offer for a multiplex (that is, a building ranging in size from duplex to quadruplex).
Before purchasing a building, I recommend you become familiar with the area you have chosen. I sometimes see investors who purchase a property in a town in which they have never set foot. Be careful, this is risky! Real estate is very local. If you look at a building in a rural area with the eyes of an investor from Québec City or Montréal, or vice versa, you will likely make mistakes.
2 Physical condition
It is imperative to have a professional complete an inspection. Accompany the inspector. You will learn a great deal about the building. Once you have the report, determine the cost of any work that needs to be done. If needed, ask a contractor to help you, even if it means having to pay for an estimate. The quadruplex you found for $280,000 might not actually be such a bargain once you have estimated the short- and long-term costs of the required work.
I have often underestimated the cost of such work. Always negotiate the purchase price with this in mind. Since small multiplexes often generate a rather weak cash flow, in many cases the annual cash flow is insufficient to finance this work during the first few years. Make sure you plan for this from the get-go.
3 Actual and potential income
Real estate brokers like to indicate a property’s “potential” income. However, as the buyer, you need to look at the actual income in order to determine the fair price of the multiplex. You should not pay top dollar for a building whose units are rented at half their market value. Moreover, certain owners seem to underestimate the possible rental value. The arrival of new tenants could be an opportunity to increase your income.
4 Current operating expenses
There is little wiggle room when it comes to municipal and school taxes. However, if you do your homework and contact several providers, you can sometimes save hundreds of dollars on your premium just by switching to another insurance company. I recently analyzed a triplex whose insurance premium was $4,200, simply due to the negligence of the former owner who did not want to renegotiate with his insurance provider. For the same building, I obtained a quote of $2,800!
Also verify the accuracy of the listed electricity costs. I have repeatedly seen amounts on brokers’ description pages that are absolutely incorrect. Ask for bills or contact the power company directly.
5 Energy efficiency
For the comfort of occupants, for their wallet, or to control your own costs if the owner covers electricity and heating bills, find out about the building’s energy efficiency. An inspector can help you with this.
Verify sources of heat loss such as dilapidated doors and windows, cold air coming through electrical outlets or through floor or window mouldings, absent or insufficient insulation in the basement and roof or a malfunctioning furnace. Keep in mind that programmable electronic thermostats reduce heating costs. Énergir offers grants to help improve the heating efficiency of multi-tenant properties.
6 Non-conformities known by public services
Call your town’s urban planning and fire departments. They can inform you about any non-conformities they are aware of, for example, the absence of a second emergency exit for the third-floor unit. Such non-conformities can easily cost you a few thousand dollars.
7 Red flags (risk of contamination, etc.)
Banks do not generally demand an environmental assessment for small multiplexes, but always watch for signs. If a fuel oil tank is buried in the ground or if an old tank has ever leaked, decontaminating the soil can be very expensive. In the same way, the soil around a multiplex located near a gas station may be contaminated. Was the multiplex built on a former dump?
The list may get longer depending on, for example, the quality of the neighbourhood and whether or not the multiplex was managed efficiently by its current owner. It is your responsibility to discover as many factors as possible before purchasing a property.