Montreal duplex: minimum cash return before counting on appreciation?

[harbor.lucky]

The Montreal duplex only makes sense to me if it produces an acceptable cash return without assuming prices will rise. Its current yield is modest beside properties in cheaper markets, although the local employment and transport picture appears stronger and the alternatives may be harder to resell.

I am inclined to calculate the duplex after financing, property tax, insurance, management, maintenance, vacancy and likely tenant turnover. Appreciation would then be upside rather than something needed to rescue the purchase. What documents or operating figures would you use to set that minimum, and how would you weigh the stronger location against the extra cash available elsewhere? I am looking for a decision test, not one percentage for every market.

 

[thread.right]

I’d give priority to net cash flow because it is the part you can test against today’s numbers. Run the duplex with a realistic vacancy allowance and management cost even if you expect to manage it yourself. Then stress the financing cost and one substantial repair. If it stays acceptable, the employment and transport case can break a tie; it shouldn’t rescue a deal that fails without appreciation.

 

[WildPorch]

What does “modest” mean here: positive after all those reserves, or positive only before maintenance and management? Also, how dependent is the result on the current financing terms? Those two facts would change my answer more than the market comparison.

I wouldn’t automatically favour cash flow, though. A higher headline yield can disappear through vacancy and tenant turnover, particularly if the cheaper property is harder to exit.

 

[hana.slate]

I’d separate the decision into two passes. First, calculate the duplex with no appreciation at all and include vacancy, turnover, management, insurance, tax and a maintenance reserve. Reject it if that result would make ownership uncomfortable. Second, compare the remaining acceptable options on transport, employment and likely liquidity.

The caveat is that reserves are uneven: a duplex can look fine annually and still require cash at the wrong moment. I’d also rerun the figures at less favourable financing terms before assigning any value to growth.