Real Estate Talk:
COVID-19 and income property

The effect of the pandemic on sales of multi-unit apartment buildings

By Joseph Marovitch

Prior to the pandemic, value for income property in the city, meaning multi-unit apartment buildings, was rising higher and higher. Single home prices were rising quickly, land to build was diminishing, condos were the hot market, and many people rented as an alternative to purchasing.

Since many turned to rentals, income property became a hot market with rising rents, rising cap rates, and rising purchase prices.

Value for income property is based on the return or capitalization rate:

Net operating income / purchase price x 100 = Capitalization rate
E.g.: $50,000 NOI / $1,000,000 purchase price x 100 = 5% return

A capitalization rate of 4.5 or higher would indicate that the property would pay for itself and possibly more.

As the pandemic progressed the economy shut down, tenants were not able to pay their rents. Landlords were, and still are, having a difficult time collecting rents and paying their expenses.

Those who have cash and can weather this storm will come out ahead when the economy recovers. For investors of income property, there is an opportunity to purchase income properties at reduced prices from landlords who may not be able to weather the storm.

Where investors were busy purchasing income property before COVID-19, now the income market has cooled off. Many landlords want to sell but not lose their investment, so they are offering income properties at cap rates of 3 and 3.5 even though collecting rents is a problem. Investors who are few and far between are offering low prices that would indicate cap rates of 6 and 7.

In Montreal and across Quebec, infection rates have risen. If the situation continues to worsen, landlords and tenants will be in a precarious position. The situation is similar to restaurants and retail store owners.

Those who have cash and can weather this storm will come out ahead when the economy recovers. For investors of income property, there is an opportunity to purchase income properties at reduced prices from landlords who may not be able to weather the storm. However, those investors who purchase must also have the funds to hold on until the pandemic passes and the economy recovers.

The alternative is to wait out the situation and, when the situation improves, purchase income property at higher prices.

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Next article: How market evaluations are prepared

State of the market

September has arrived and so has the second wave of COVID-19, causing the government to place restrictions on hours of operation for bars, restaurants, theatres, and crowd gatherings. The downtown real estate market is slowing down even further, though it appears developers are starting to build more condos based on the increase in cranes. Like in the past, there is the assumption that when the crisis passes, condos will be the hot market in the future.

There is an increase in prices as buyers scramble to find homes in the city, but the forecast is for a slowdown. With an increase in infections and hospitalization, the slowdown may become more acute.

While the pandemic is slowing the market, it is also causing real estate to be more precise and deliberate. Buyers are only searching because they must. The days of taking a stroll on Sunday to visit an open house for fun is passed. Sellers are selling because they must. No one wants strangers in their home if they do not have to.

‘There is an increase in prices as buyers scramble to find homes in the city, but the forecast is for a slowdown. With an increase in infections and hospitalization, the slowdown may become more acute.’

Real estate brokers, notaries, and mortgage brokers are also more diligent, precise, and deliberate. There is no time for mistakes as meetings take place on Zoom and signings are electronic.

If a person to person meeting must take place, masks are required, the number of people must be limited, and social distance must be maintained. Property visits must maintain protocols for safety reasons. Only a limited number of people may enter a house with masks and disinfectant while owners vacate for the duration of the visit.

We are in this together and this will pass. We just have to wear masks, wash our hands, maintain social distancing, and call out all those naysayers who are not following protocols and placing everyone else at risk while prolonging this situation.

Have a great week and stay safe!

Let’s not forget that people with cancer are vulnerable too!

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Image: Andrew Burlone

Other articles by Joseph Marovitch