In this episode of Get Real Wealthy Season 2, Quentin tries to demystify the differences between what’s happening in the residential market and the commercial market.
Quentin says that in the residential market, you have one to four-unit properties, and they are based on what’s called the comparative model. For instance, if the house next door from you sells for $700,000, your house is most likely close to the value of $700,000. He adds that in the current market across Canada, we’re seeing differences. He adds “let’s use the GTA, for example, and where we’re seeing is a 20 to 25% decrease in prices over the last few months. Now, you always have to ask compared to what. So if you compare that price drop to the beginning of January, or let’s say March this year, you see that 20 or 25% drop, if you compare that between this year and last year, you see a slight increase.”
He says that what’s happening now is there’s a lot of supply on the market versus demand. Now, the commercial market is very different. The way that you evaluate a commercial portfolio is based on the net operating income, and the net operating income is your income minus your expenses. Then you divide that by the cap rate, and the cap rate hasn’t changed much in the last year, but there have been slight variations. He further adds that if you’re a new apartment building investor you may overpay for something just to own it, whereas an experienced operator selling an apartment building would just pull it off the market if they’re not willing to sell it at a particular price.
Quentin says that the competition is very different between one to four residential, and multifamily apartment buildings. He concludes by adding “You’re buying a business when you’re buying commercial property, whereas when you’re buying a one to four-unit property, and you are an investor, you treat it like a business, but it is evaluated very differently.”
Important Links and Resources
Quentin D’Souza is the Chief Education Officer of the Durham Real Estate Investor Club. Author of The Action Taker's Real Estate Investing Planner, The Property Management Toolbox: A How-To Guide for Ontario Real Estate Investors and Landlords, The Filling Vacancies Toolbox: A Step-By-Step Guide for Ontario Real Estate Investors and Landlords for Renting Out Residential Real Estate, and The Ultimate Wealth Strategy: Your Complete Guide to Buying, Fixing, Refinancing, and Renting Real Estate.