Investing in multi-residential apartment buildings represents a niche market within the commercial real estate industry, particularly in Canada. It’s considered one of the more conservative types of commercial-class investments. Multi-residential properties offer a diverse range of options based on size and location, making them accessible and manageable for many investors. These buildings can vary in size, from small six-unit complexes to large portfolios encompassing hundreds of units. Buyers have a plethora of choices available to accommodate their budget, financing capabilities, and preferences for portfolio management and expansion.
Canadian mortgage insurers allow flexible and attractive financing solutions for these properties, making them extremely attractive with potentially low-down payments required. Plus, with the CMHC financing, mortgage lenders have offered desirable lending rates for many years. We have just seen a period of decreasing interest rates, increased revenue, and a decrease in expenses due to buildings being retrofitted.
Because of this the apartment building industry in the past few years has become recognized by many small, large, and institutional investors alike as a safe and easy investment allowing for hands-on management or third-party management for a more passive investment.
All of this has created a strain on the supply and demand equilibrium in the marketplace. Many investors are finding their biggest challenge when starting has become finding suitable properties for sale.
We have seen cap rates both in the City of Toronto and the outlying areas compress to a level that was never expected back in the 1990s when a good midsize property would have had a cap rate of around 10%. The cap rates in areas like Guelph, Waterloo, Barrie, and locations even further out have compressed to a level that has brought them much closer to the cap rates seen in the City of Toronto and other major Urban Centers.
In the late nineties owners of these types of asset holdings were forced into renovating their properties to attract and maintain a tenant base as renters exited the arena for newly built homes that became extremely attractive with low interest rates and a strong new home construction industry.
At the beginning of 1998 and the introduction of the Tenant Protection Act, landlords were now able to negotiate market rents with any new tenant occupying a vacant suite and the owners of properties who maintained a higher level of maintenance in their buildings saw the rewards of this in lower vacancy rates and higher rents than their competition.
It takes persistence and patience when purchasing income-producing real estate regardless of the amount of knowledge or capital you have at your disposal and many factors must be considered in making the right purchase for you, the investor. Fortunately, when you understand your specific criteria and have a good understanding of how to look at income and expenses, most of this work can be done without ever leaving your home or office.
Your objective is to wade through and reject the properties that do not meet your criteria and press on with persistence to find the right apartment building that will allow you to achieve your desired goals.
You also need to understand the different markets in your desired area and find apartments that are good deals or priced correctly so you can achieve financing within your limits. Many buyers who make offers on properties find out the building doesn’t qualify for the loan-to-value ratio they were anticipating. It is critical to understand the lending institutions and CMHC criteria to avoid this pitfall.
A good Excel program that will calculate cap rates, cash-on-cash returns, return on investment and a host of other numbers is a valuable tool that makes the number-crunching process quick and easy once you understand the lending criteria. See the above proforma tab.
When considering residential investment properties several factors that determine the value of a building include micro and macro markets the building is located in. Cash flow, capitalization rates, return on investment, price per suite, condition, and the value of the building in the eyes of the lender. There are many determining factors of value and many reasons why a building may be right for you.
At some point, you need to determine the strategy to employ and the type of investing you want to do. Most people look at the Net Operating Income, the Cash Flow the building produces as the only way of making money. There are many ways to achieve a return on your investment including forced equity on buildings that may be under-managed and in poor condition with rents below market value. Keep in mind it always takes time and effort to turn a building around.
Small multi-unit properties offer multiple units or “doors” all under one roof compared to purchasing single-family or duplexes and offer a better scale of economy along with a great starting point into larger multi-unit buildings as you increase the size of your portfolio.
Large multi-unit properties allow for economies of scale much greater than smaller buildings with anywhere from sixty to as many as 300 units in a single building/complex. These buildings take more resources and experience but offer a great investment for the ready person.
Multi-unit buildings are a great investment and can bring you substantial amounts of residual income, and in time with the right amount of energy, they can even become a family business. Whether you are looking for a small passive investment or freedom from the normal 9 to 5 routine you can achieve your goals with the right amount of strategy, persistence, and assistance from qualified experts. By having a clear picture of the purchase process, value, rental rates, vacancy rates and repair cost your true investment reality can be well defined.