Tag: Terminology

Foch says that, for real estate investors in Canada, it’s much better to look beyond the nice round number of a house price and look at what your return on investment can look like from an income perspective. “You can think about a property in terms of price, but you can also think about it in terms of price to income and that’s what a cap rate or a gross rent multiplier would do,” he says. (An investment property’s cap, or capitalization, rate is the net operating income it produces divided by the property’s value.) This way, you can use a more representative inclusive metric when you are trying to select a property to purchase. 

How does an assignment sale work?

An “assignment sale” is when an initial buyer signs a contract that allows the first buyer to sell the property prior to the closing date. This is uncommon in commercial real estate, but can happen with new builds of condominiums. Artenosi says that, in previous development builds he’s worked on, he’s declined to allow this sort of sales as it creates unwanted competition. He thinks new investors should look at less risky options when they are first starting out. 

“I think it’s a very speculative concept, buying someone else’s agreement, and you would probably also have financing concerns when you’re doing that as well. If you’re buying an assignment agreement, and you have to get an appraisal to finance it, the appraiser is going to know that it’s sold for $200,000 less.”

Investing in a legal apartment

A “legal apartment” is a suite that you can rent to tenants and that meets all housing and zoning requirements. Artenosi has helped investors buy and renovate homes early in his career in order to have income-generating legal apartments, which not only helped his clients but helped him develop and broaden his business. 

“That small basement apartment that I helped this new buyer retrofit, renovate and finance, that led to my building $30 million and $40 million condo development sites. That skill set evolves,” he says. “You become much more comfortable in the area of leverage and risk. And, that skill set will lead to bigger and bigger deals.”

Are we in a housing bubble? 

The term “housing bubble” is a perennially trendy one. The simplest definition is when the market rises to levels that experts believe are unreasonable and unsustainable. This is usually fueled by speculation in a market that is growing at a rapid pace. In Canada, the markets where housing bubbles are most often discussed are Vancouver and Toronto. (Read: Toronto housing bubble: Is it ready to pop?)

Appraised versus assessed value 

The “assessed value” of a property is what a local municipality uses for the purposes of calculating your tax, a value that is calculated by provincial assessment authoritieshas deemed as its value for tax purposes. The “appraised value” is based on previous sales over a shorter time period, usually six months. It is much more focused on what an owner can get for their property. Michael Davidson, a commercial specialist with RE/MAX Canada says that the data from both perspectives can be helpful for a new investor, even if neither are absolute. 

“They are both good to have for the completely uninformed outsider unfamiliar with the local market and to help provide at the very least a range of value that wouldn’t be less than what it’s worth to a buyer,” Davidson says. “One thing that is generally known [in the industry] is [that] the value of a property is only what someone is willing to pay for it. Many people don’t know that.”