Real Estate
By John Loeppky on April 19, 2024
Estimated reading time: 8 minutes
By John Loeppky on April 19, 2024
Estimated reading time: 8 minutes
Understanding industry jargon can make you a better real estate investor.
It’s a cliché that a lot of journalistic articles start with a Merriam-Webster definition. For new real estate investors or curious home buyers, however, getting into the game in Canada might as well require a dictionary with all the terms and intricacies you are expected to know. Here are a few important but often misunderstood real estate terms, with commentary from industry experts, to get you started.
A “benchmark” is a metric that calculates a more representative price for homes in a particular area than a strict average, which can be skewed by a small number of very expensive properties. A benchmark home calculation looks at factors like a specific geographical area or a type of home. But just because the term gets used a lot doesn’t mean it’s particularly helpful, says Canadian investor Daniel Foch. He says that real estate investors need to focus on larger living spaces if they want to have a sustainable portfolio.
“I don’t think that single-family houses are investable anymore,” he says. “If you’re not creating units or if you’re not buying at minimum a duplex, you’re usually not getting a return that will allow you to scale or stay solvent very long. And, so I think the benchmark house is kind of representative of a reality that is slipping away from us in Canada.”
There’s an old real estate adage that “the best time to buy a property was 10 years ago and that the second best time to buy is now.” Terms like “buyers’ market,” “balanced market” and “sellers’ market’ refer to the number of homes for sale (also known as housing inventory) relative to sales taking place.
The more inventory there is, the more advantageous it is to a buyer. If there’s a lack of inventory, then it’s a sellers’ market. A balanced market is one where there is more than six months worth of inventory on the market. It’s all a real estate version of supply and demand.
Dean Artenosi, who both sells and develops property in the greater Toronto area, says that people can get very caught up in these terms and that it can cloud their view of the decision that is right in front of them.
“There are those who have waited for this seller’s market to come. And they’ve been waiting for 20 years,” he says. “And a whole lot happens if it just keeps going up. So, the best time to buy real estate is always now, the present. You need to play the long game.”
A “comparative market analysis” is the process of placing properties in an area where you’re looking to invest side-by-side and judging them on their merits. Real estate agents often do this as a way to determine an appropriate asking price or offer to buy.
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.
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.”
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.”
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?)
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.”
“Rental wage” is the minimum income required in a Canadian market for a working person or couple to afford housing without spending more than 30% of their income on renting their home. According to the most recent (at press time) Rental wages in Canada report from the Canadian Centre for Policy Alternatives, not one Canadian province or territory had a minimum wage that met the respective area’s rental wage standard.
Why is rental wage so important for beginner investors to know? Well, it shows what your prospective renters can afford or are expecting to pay. According to the CCPA’s data, even two minimum wage workers combining their incomes could not afford a one-bedroom apartment comfortably in Toronto or Vancouver. (Read: How much you need to earn to afford a home in Toronto and the GTA)
To conclude, we thought we’d give the floor to our experts in order for them to share some real estate terms that they wish they’d known earlier. Turns out,
For Foch, that term was “debt service coverage ratio,” or DSCR. “It’s the ratio of your net operating income to your mortgage payment,” he says. “Lenders want to see it at a certain percentage. It’s basically a measure of how cash-flow positive your property is. So, 1.25 is typical, [which is] what a commercial lender is going to expect to see on a real estate investment.” This would mean that your net operating income would need to be 25% higher than your mortgage payment.
From Davidson, we have more acronyms: “Two terms that are used from the investment professionals are ‘internal rate of return’—acronym is IRR—and also the ‘cash-on-cash analysis.’ They determine the true rate of return the investor gets after considering the financing.” (CoC is short for cash-on-cash analysis.)
Antenosi may be biased, but he thinks Canada is still one of the best places in the world to invest in real estate. We give the last word to Antenosi who says that, regardless of the terminology being used, he believes that Canada is a great place to invest.
“We’ve got a strong banking system, we have a strong middle class, and we have a population that’s going to grow.”
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