I’m growing increasingly frustrated by what passes for an “investment property” in Toronto these days.

I suppose the definition of “investment property” is so loose that a cardboard box under the Gardiner Expressway could be considered as such, just as long as the homeless man inside pays for its use.

To each, their own….right?

Virtually anything can be an investment property.

www.dictionary.com defines “Investment Property” as:

“A property that is not occupied by the owner, usually purchased to specifically generate profit through rental income and/or capital gains.”

So….an investment property is anything other than your principal residence?

Unless you are a good samaritan and you own a property to allow people to use out of the goodness of your heart – with no financial concerns, right?

What really bothers me today is the term “multiplex” as it is used in the world of investment properties.

I have owned individual condos that I consider “investment properties,” as per the definition above.  They were used to generate rental income and capital gains.

As I said – anything can be an investment property.  The definition is very broad.

But where the lines get extremely blurry is in the world of multi-unit dwellings as they pertain to “investment properties.”  I really believe that people throw around “multiplex” far too often, and most of the “multiplexes” on the market are anything but investment properties…

Let’s see this photo again:

This is a four-unit dwelling on Bayview Avenue just north of Moore. 

This 2-storey, red-brick building contains four separate units each with two bedrooms and a bathroom.  There are four separate hydro meters for the four separate units, there is coin-laundry in the basement, and there are four parking spaces.

THIS is an investment property.

THIS is a true “multiplex.”

The property was built as a multiplex, and thus I would expect the walls to be thick enough to ensure minimal sound transfer.  The walls that divide the rooms within each unit are made of 2×4 and drywall, but the walls that divide each individual unit within the building are made of solid concrete.

The idea behind this property always has been, and always will be, multi-unit.

So what is not a multiplex?

How about this:

THIS is a house.

THIS is not a multiplex.

Oh, it has four fridges, four stoves, and four sinks, but that doesn’t really make a property a “multiplex,” does it?

Well, I guess it does – by the definition.  This is a multi-unit dwelling since multiple people live in multiple units.

But you know what it’s not?

An investment property!

This is a house – a crummy one at that, where somebody has put a kitchen on each floor and hammered up some drywall to separate each floor into distinct “units.”

And that is what sellers are getting away with in today’s market!  Any property with three kitchens is being considered an investment property.  It doesn’t matter what the actual property looks like, or how it functions.  This property above is basically a slum, and I’ve seen some slums in my day!

Imagine walking in to a house on…..Markham Avenue just south of College Street. 

You open the front door and the first thing you see is another door; the seller has made a common-hallway out of the foyer.  That door opens to “unit number one,” and what would ordinarily be the living room has been turned into a bedroom, and there is another wall where the link to the dining room would be.  Keep walking down the cramped hallway, and you’ll find that the dining room is also a bedroom.  But thankfully, the kitchen is still the kitchen.  And in that kitchen is a fat, stinking, shirtless man watching cartoons while his wife stirs a pot with what looks like garbage on the stove.  True story…

This main floor of what used to be a house is now a 2-bedroom apartment with no living space.

So let’s go back to the front of the house and walk up the flight of stairs to what would ordinarily be the second floor of this “house.”  There is another door at the top of the stairs that leads to “unit number two,” and that is all that separates this unit from the one below it.  The thin plywood floor is merely there for appearance and offers no sound insulation so you’d better get to know your neighbours!

Two of the three bedrooms are still used as bedrooms, but the third bedroom at the back has been turned into a really crummy kitchen.  There is a sink that looks like it was taken from a dumpster, and then an awful fridge and an even uglier stove.  The stench of rotting food is overwhelming, and suddenly you long to be downstairs with the fat naked man…

The second floor of what used to be a house is now also a 2-bedroom apartment, also with no living space!

You walk out the door to unit number two, down the stairs, and out the front door of the house, then you walk around to the backyard where you find another half-naked man spraying his underwear with a hose.  I swear – true story!  He smiles at you, since he knows you are a real estate agent (blackberry on hip, leather pad-folio in hands, perma-grin), and motions with his hand towards the concrete stairs that lead down to the basement, or “unit number three.”

“Here, here,” he says, offering to show you his humble abode.  You take one more look at his wet underwear on the ground and politely say, “Thanks, but we’re good.”

How was your first foray into the world of Toronto “Investment Properties?”

This actually happened to me as a client of mine challenged my logic in saying this “three-unit investment property” on Markham Street wasn’t even worth considering.  And the best part was that the neighbours next door were absolutely insane as they had hundreds of dolls, teddy-bears, and other trinkets hanging from their tree branches, and no fewer than FIVE television sets on their front porch, none of which worked.  I’m not making this up, guys!  It was the most amazing, insane thing I’ve ever seen!

Anyways…

Majority of Toronto’s so-called “investment properties” are just like the one I’ve described on Markham Street

Some genius decides to run a few copper pipes up to the second floor and down into the basement, and voila – you’ve got two more kitchens!  Now all you need are people to live on each floor and pay you rent, and you’ve got your very own MULTIPLEX!

Three units means “multi,” right?

What should a multiplex be?

Well, first and foremost, it should be legal, which about 90% of Toronto multiplexes are not.

You’d have to have a fire inspector come in and make sure that everything is up to code.  Each unit must have two separate exits, such as a fire-escape for a second or third-floor unit, and a large at-grade window for the basement unit that is big enough to crawl out of.

Each unit would have its own entrance; ideally it’s own front door from the street.  If not, then there should be large hallways inside the building that represent the “common space” for each tenant to enter his/her own unit.  Ideally there would only be one per floor, that way the only person using the stairs would be the person who lives up there.

You’d like to have concrete walls in between the units, otherwise you may as well all be living together.

Separate hydro meters enable you to to charge your tenants for their own electricity usage, and this is a criteria used by many investors to deem whether or not a property is a true “investment property.”  If it doesn’t have separate hydro meters, then it’s just a house with three kitchens…

An intercom system out front would be nice and would add that apartment/condo style touch.

How about mailboxes?  Units “A, B, and C” instead of just one mailbox for everybody to root through each day.  These are little things, but they make a “multiplex” seem like a building with distinct units rather than a shoddy slum!

And of course, how is the property listed in Land Registry?  How is the property zoned?

You can have an “investment property” that isn’t a true multiplex.  I’m sure the slum on Markham Street was bringing in $1150 for each of the two bedroom “units” and $800 for the basement.  Assuming a 5.5% cap rate, this is probably how the owners arrived a their ridiculous “value” of $675,000 for the slum.  It still sits on the market today…

But do you want to run a slum?  When it comes time to sell, you can really only sell it to another slum-lord..

I know that the rental yield is undoubtedly the most important aspect of any investment property, but surely there must be some value placed on the functionality of the house as it pertains to a multi-unit dwelling!

In the last five years, I’d say that the appreciation has rivaled rental yield for most important criteria, and this is when it pays to have a solid, true, “multi-unit-dwelling” that was built specifically for that purpose, and that purpose only!

Forget about the slums, I don’t care how attractive the income stream is.

Because when the market turns, those slums will become absolutely worthless as an “investment property”…