Lifestyle | Should I buy my dad’s triplex share?

Following the death of her mother, Marie-Ève*, 43, inherited half of her parents’ triplex. His father wants to sell the building. Should she buy him back?

The situation

“My parents were divorced and my mother lived in the triplex, of which they were co-owners, says Marie-Ève ​​on the phone. I never lived there, it’s not where I grew up. The building has no sentimental value to me. »

His father does not live in the triplex located in Montreal and wishes to sell it. Marie-Ève ​​therefore has the choice of collecting half of the proceeds from the sale and investing it elsewhere or buying back her father’s share.

“All my friends tell me to buy out my father’s other half and keep the triplex as an investment for my retirement,” she says. My friends say it’s a chance, that real estate is the best investment to make. »

While her father is out of town, Marie-Ève ​​took the opportunity to test her skills as an income property manager.

“The tenants had mice and I was overwhelmed by the events, admits the single mother, who has two children in shared custody. I don’t have much skill in changing faucets. When there are small repairs, I quickly run out of resources. I change a light bulb and that’s about it. »

“My friends tell me that it can be learned, she continues, and I know it, but for the moment, these are not basic skills that I have acquired. »

Marie-Ève ​​questions herself and needs help to make her choice. “Is all this effort worth it? Are there other ways to invest with a similar return? Is this assured profitability in real estate an urban legend? »

Analysis

“I always smile when my clients say that their friends told them that real estate was the best investment there is,” says Antoine Chaume, financial planner and financial security advisor at Lafond+Associés, to whom we submitted the case of Marie-Ève.

Each time, the financial planner pulls out a chart from RBC Global Asset Management showing that over the past 25 years, $300,000 invested in unleveraged real estate has returned 4.7%, compared to 9% in the stock market. This is a national average.

To put investment choices into perspective, Antoine Chaume points out that historically, real estate has generated an average of 2 or 3%, and the stock market, 4 to 7%.

The financial planner also reminds us that owning a plex is like becoming a real estate entrepreneur, even for three units.

“Some people tell me: ‟I am an ultra-busy professional, I have difficulty reconciling work and family, difficulty in picking up the children from daycare on time, if in addition, I have tenants who call me because the toilet is leaking, I won’t be able to handle that.” Before embarking, there is therefore a whole panoply of questions that must be asked. »

Are you manual? Do you want to manage tenants? Banking arrangements? If the answer is yes, real estate becomes an extremely interesting vector for increasing wealth, says the expert.

However, there are still other parameters to consider.

A purchase that pays for itself

Considering the estimated value of the building at $800,000 less the mortgage of $285,000, there remains $515,000. By buying back her father’s share, Marie-Ève ​​must pay him half of it, or $257,500.

The financial planner estimates that she will have a new mortgage of $3,000 per month and monthly rental income of $3,700. However, he will also have to pay taxes, insurance and maintenance of the building. Without including major work that may occur, the planner estimates that she will have to draw $360 per month from her employment income to support the building.

Another disenchanting aspect, according to the planner’s calculations, Marie-Ève ​​will have $3,000 in mortgage payments, of which 56% is principal repayment. This $20,160 will not be deductible from his rental income. She will therefore have to pay tax on these amounts.

“From a purely investment point of view, it doesn’t seem like the Klondike to me,” says Antoine Chaume.

If she chooses to buy this triplex, it is not for the healthy investment generating income each year, but to speculate on a possible increase in value of the building in 10 or 20 years, he argues.

“In summary, the business opportunity is not so good and if it does not have an emotional attachment, it should take its share of the sale and find a better opportunity”, advises the financial planner.

Antoine Chaume observes that outside Montreal, there are more recent constructions with rents that can support the level of expenses.

“If she has a real desire to invest in real estate and she answers the questions mentioned earlier, she should look for a building with five or six units that provides a better return. »

Owner occupied

Marie-Ève ​​does not intend to live in the triplex. This leads Antoine Chaume to formulate this warning. “There is no mathematical basis that legitimizes the purchase of a duplex or a triplex in a central district of Montreal without being an occupying owner, he assures. With current market prices, there is no profitability. »

On the other hand, those who choose to become homeowners make a fairly simple equation, explains the expert. Rather than opting for a $900,000 single-family home, they prefer to pay $1.2 million for a triplex and have two income-generating units. “If you’re ready to live with tenants, it’s mathematically more interesting than paying the mortgage alone for a single-family home. »

What if my dad sells me his cheaper part?

Transactions between related persons must be made at fair market value, reminds the financial planner. “Selling for less is the worst situation you can have, because it creates double taxation. »

“If the value of the building is $1 million rather than $800,000, the father will be taxed on $1 million,” he explains. The daughter, for her part, will be deemed to have acquired the property at $800,000. When she resells it, its acquisition cost will be 1 million and the capital gain will be calculated on this amount and not on its real acquisition cost of $800,000. »

Invest in real estate, but without hassle

If Marie-Ève ​​comes to the conclusion that she does not want to manage a plex, she could invest in real estate, but passively. “Whether in partnership with people who are in real estate, through the stock markets with firms that invest in real estate or with private investments in real estate. There are all kinds of vehicles that give exposure to the real estate market, but without the headaches of building management. »

* Although the case highlighted in this section is real, the first name used is fictitious.

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