The game of Monopoly is about to end, and it won’t be pretty for the losers, if we are to believe Patrice Gascon, a financial planner from Saint-Jérôme who recently looked into the profitability of plexes, at the demand of its customers.
A monumental interest bill, rents that are too low, ever-higher property taxes: investors who purchased an income property during the pandemic are forced to empty their pockets in 2023 to keep their assets, notes he.
A sad story whose outcome is likely to be a “fire sale” or notices of dizzying rent increases sent to tenants who have not asked for anything.
“We asked ourselves the question: what is the reality of an average plex owner in 2023? », Explains Mr. Gascon, partner at Gestion de Patrimoine Gascon, S.A. La Presse met him at his office in the Laurentians.
A plex is a small income building with two to five units.
Mr. Gascon’s analysis focuses on plex as an investment product. Its conclusions do not apply to the owner-occupant of a triplex, for example, who lives on the ground floor and who rents the other two dwellings to reduce their occupancy costs. In this case, the price of the triplex is based on the price of a single-family house in the same neighborhood.
That wasn’t always the case. Until early 2022, it was easy to make money in real estate. With interest rates sliding, owners grew richer thanks to the appreciation in asset value. The capital gain was added to the cash flow generated from the operation of the building.
“We do not question the enrichment over the last 20 to 25 years thanks to the fall in interest rates. Economically, it was a great way to create forced savings,” recognizes Mr. Gascon. But today, we are experiencing the opposite phenomenon with the surge in the cost of money.
To better illustrate the deterioration in profitability that this type of asset has experienced recently, Mr. Gascon started with a real triplex in the Lower Laurentians and assumed that the buyer kept it for a year before selling it. resell at the beginning of the following year.
The evolution of the price, the interest rate, the variation in the level of rents and that of expenses have all been adjusted according to what we have experienced in recent years.
A triplex owner who paid $550,000 in 2019 and financed at 2.79% would pocket almost $4,000 at the end of the year, without taking into account a reserve for maintenance. In short, the building paid for itself, while benefiting from a significant added value.
Calculations are based on a 75% loan-to-value amortized over 25 years.
In 2023, a complete turnaround following price and interest rate increases. “This person must find $22,000 in their pockets per year to support their block and, we agree, there must be no glitches along the way,” says Émilie Robillard, financial planner at 25 years of experience teaming up with Mr. Gascon.
In the case of a triplex, to make up the annual deficit of $21,624 by increasing rents, the owner must increase them by $600 per month.
The rent increases authorized by the Administrative Housing Tribunal obviously cannot make up for such a deficit. The regulation on setting rents excludes interest expenses from the calculation of annual rent adjustments.
Another avenue, the hasty sale… at a loss, because the buyer will wait for it in the detour.
“Interest rates have risen so quickly that the market is broken. It is zero profitable to buy a triplex for $800,000 with current interest rates,” says Mr. Gascon.
Considering an interest rate of 7.45%, the buyer who agrees to pay $527,000 for the triplex – which represents a 34% discount on the value of $797,000 at the beginning of 2023 – will still have to suffer negative cash flow of $3746 per year.
“If the buyer is expecting an interest rate drop of 1 percentage point in the short term, he can afford to pay $527,000, since if the rate cut occurs, he will reach neutral,” says Gascon.
But what seller is willing to absorb a $270,000 loss? “As a financial planner, I see the smoke,” replies Mr. Gascon, “but we can’t see the fire yet. Reality hasn’t hit yet. » It won’t be long, he believes.
