How to Know if an Income Property Is a Good Deal

Buying an income property is one of the most impactful financial decisions an investor can make. A building may look attractive on paper, but only a rigorous, number-based evaluation can determine whether it truly qualifies as a good deal. Here are the key metrics and factors to analyze before purchasing a rental property.

1. Capitalization Rate (Cap Rate)

The cap rate measures the annual return generated by a property before financing. It reflects the pure performance of the building itself.

Formula:

Cap Rate = Net Operating Income (NOI) ÷ Purchase Price

A higher cap rate usually indicates better return relative to the property’s price.
In the Greater Montreal area, cap rates for residential buildings typically range between 4% and 6%, depending on building condition, unit quality, and location.

2. Gross Rent Multiplier (GRM)

The GRM shows how many years of gross rental income it would take to pay off the property if all income was used.

Formula:

GRM = Purchase Price ÷ Gross Annual Rent

A lower GRM means the property generates stronger income relative to its cost.
In many Quebec markets, a GRM between 14 and 17 is considered typical for small to mid-size residential buildings.

3. Cashflow Analysis

Cashflow tells you how much money remains after paying all operating expenses and the mortgage.

Formula:

Cashflow = NOI – Annual Mortgage Payments

• Positive cashflow: the property pays for itself and generates surplus income

• Break-even cashflow: the property pays for itself but produces no profit

• Negative cashflow: the investor must inject additional money every month

Negative cashflow can be acceptable only if the building has strong future upside (rent increases, renovation value-add, or refinancing potential).

4. Lease Structure and Rent Roll Analysis

A property is only as good as its leases. Evaluating the rent roll in detail is essential.

Points to review:

• Are the rents at market level or below?

• Are annual rent increases properly applied?

• Who pays for heating, electricity, hot water?

• Are the tenants stable or is there a high turnover rate?

• Are the leases properly written and compliant with provincial rules?

• Are there additional income opportunities? (parking, pets, storage, hydro allocation)

Properties with below-market rents often have hidden potential and can become excellent investments through rent optimization.

5. Building Age and Capital Expenditures (CAPEX)

Every building has a lifecycle, and older buildings come with higher risks and future costs.

Major components to evaluate:

• Roof

• Windows

• Balconies and exterior staircases

• Brickwork and joint repairs

• Plumbing and main drain

• Electrical panels and wiring

• Heating systems

• Parking lot and asphalt

A good deal on the purchase price can quickly evaporate if $200,000–$300,000 of deferred maintenance is waiting in the next few years.

6. Location and Market Dynamics

Location affects rent levels, vacancy risks, tenant quality, building appreciation, and resale value.

Evaluate the following:

• Public transit access

• Schools, hospitals, and services

• Neighbourhood development plans

• Crime rates

• Median income level

• Demand for rental units in the area

A strong location justifies paying more because long-term stability and appreciation are typically stronger.

7. Practical Case Study: 8-Unit Building in Longueuil

Property Details

• Year built: 1989

• Gross annual income: $188,000

• Operating expenses: $44,000

• Net Operating Income (NOI): $144,000

• Asking price: $3,200,000

7.1. Cap Rate

144,000 ÷ 3,200,000 = 4.5%

Interpretation:
This is within the normal market range but far from an exceptional bargain.

7.2. GRM

3,200,000 ÷ 188,000 = 17.02

Interpretation:
A GRM above 17 indicates a high price relative to the revenues.

7.3. Cashflow (conventional financing)

Assumptions:

• 35% down payment

• 5.4% interest rate

• 25-year amortization

Estimated annual debt service: ≈ $148,000
Cashflow ≈ –$4,000 (negative)

Interpretation:
The property does not cover its mortgage under standard financing conditions.

7.4. How to Improve the Deal and Make It Profitable

1. Negotiate the Purchase Price

Target a minimum cap rate of 5%.

Value at 5% cap rate:
144,000 ÷ 0.05 = $2,880,000

➡️ A realistic negotiation target: $2.75M to $2.90M

2. Increase the Rental Income

If rents are below market:

• Apply annual increases

• Improve turnover strategy

• Add fees for parking, pets, or storage

• Re-sign tenants with updated lease conditions

A 8–10% increase in revenues would raise the NOI above $155,000, instantly improving valuation and cashflow.

3. Use CMHC-Insured Financing

With CMHC:

• Longer amortization (up to 35 years)

• Lower interest rate

Annual mortgage payments could drop to $125,000–$130,000, turning the property into positive cashflow.

4. Reduce Operating Expenses

Optimize:

• Insurance premiums

• Landscaping/snow removal contracts

• Utility allocation to tenants

• Energy-efficient upgrades

Reducing expenses by even $5,000 annually strengthens the NOI and the property valuation.

Conclusion

At the asking price of $3.2M, the property:

• Is not inherently bad

• But is not an immediate financial win

• And is priced above its economic value

It becomes a good deal only if:

• The price is reduced to $2.8M–$2.9M,
  OR

• CMHC financing is used,
  OR

• There is strong potential for rent increases.