How to plan for the purchase of a multi-unit building or multiplex

Recently, a reader wrote to me about her triplex: “It’s more expensive than I initially thought.” Purchasing a multiplex involves several factors that you’d best not underestimate.

Basically, buying a multiplex is like buying a small business. It’s nice to have recurring revenues every month, but the expenses may come as a shock to those who were overly optimistic at the time of purchase.

Let’s take a look at some typical expenses related to purchasing and owning a multiplex (duplex to fourplex) in the long term.

Acquisition and pre-purchase costs

First, the down payment, likely the most significant financial factor for the buyer. With conventional financing, the down payment is 20% of the price paid. If the buyer is planning to live in one of the dwellings, the minimum down payment required from the investor is 5% for a duplex and 10% for a triplex or fourplex, on the condition of having financing insured by a CMHC-type mortgage insurer.

A pre-purchase inspection is strongly recommended. Budget at least $500 for the inspection. I prefer using an inspector who is also a structural engineer. At the very least, make sure that the inspector belongs to a building inspectors association.

The notary fees for a small multiplex can cost you between $1,000 and $1,300.

The land transfer tax will arrive in your mailbox a few weeks after you make the purchase. The amount of this tax varies depending on the city and the value of the property or the price paid for it. This “welcome” tax is several thousand dollars and must be paid in one lump sum. Welcome home!

Operating expenses

Naturally, you will be paying municipal and school taxes, in the amount of several thousand dollars per year. Ask the sellers for a copy of their most recent statements.

Insurance is a mandatory expense. Don’t rely on the amount paid by the former owners. I would recommend that you get several quotes. Variations between insurers are sometimes significant.

As for heating and hydro bills, these can surprise you in many ways! My advice is not to pin your hopes on the amount mentioned by the sellers, but to check for yourself. I have often witnessed quoted amounts that drastically underestimate the actual amounts. I once stopped a transaction because of such a discovery. You can get an annual estimate on the Hydro-Québec site. For gas and oil heating, insist on seeing the bills for the past two years, as they can fluctuate considerably depending on how harsh the winters were.

Other operating expenses may be expected from time to time: legal, administrative, banking, bad debts.

Regular maintenance costs and major renovations

It’s here that many first-timers wear rose-coloured glasses, especially with regard to older multiplexes. Even I’ve learned some painful lessons.

When carrying out financial analyses before purchase, the CMHC recommends that you allow for $500 per dwelling, per year. Banks also often use this number, which is an average. In reality, be prepared for it to cost you more than that! The first few years generally require a greater investment in updates (roof, masonry, windows, bathrooms, kitchen), especially if the former owner neglected maintenance work.

An underestimated cost: taxes!

Suppose that the income from the property entirely covers the mortgage and the operating and maintenance costs, with a small profit at the end of the year. Where many people find reality catching up with them is the realization that the portion of the monthly payment put toward repaying the loan capital is not tax deductible. The property’s surplus cash flow is low or non-existent, and the net taxable revenues are higher than the surplus cash flow. There isn’t even enough surplus to pay the tax bill. Speak with your accountant about this in order to avoid surprises at the end of the year.

In conclusion, there are many reasons to purchase a multiplex. But don’t fall into the trap of being too optimistic when you calculate the expenses related to purchasing and owning a rental property. Your real estate and financial success depend on it!