Welcome!

By registering with us, you'll be able to discuss, share and private message with other members of our community.

SignUp Now!

Rent to price ratios and 4-plex vs SFH

Tom Kenny

New Forum Member
Registered
Joined
Oct 17, 2017
Messages
7
I'm more than halfway through Don Campell's book on the ACRE system and I really like the systematic approach he advocates. Before starting the book I made some effort to discover some price-to-rent ratios for properties in areas of Calgary that I thought might be up-and-coming.

The first thing I'm noticing is that the properties where (gross annual rent / purchase price) * 100 is 10% or more seem be pretty rare indeed. Is this ratio still realistic in a world of < 3% mortgage interest? I suppose I could buy and reno the dilapidated house to get the rents up, but I'd like to start simple if possible.

Secondly I'm wondering if anyone can offer thoughts on the advantages/disadvantages of a 4-plex vs a SFH especially for a first-timer? I'll start with my list:

4-Plex advantages:

- So far my MLS window shopping indicates the ratio above is a bit better for multi-unit structures
- One stop shopping for the time strapped investor
- Maybe easier to find a management company since they get four properties to look after in one location instead of one.
- One or more vacancies leaves you with at least some rental income.

SFH advantages:

- Cheaper to buy and (maybe) easier to finance.
- Easier entry into the landlord business
- Higher ratio of appreciating land to depreciating building
- Market when selling is bigger than 4-plex (could sell retail or to a developer or another investor). Maybe this leads to more appreciation potential than the 4-plex on the same sized lot next door?
- Maybe more room for creativity with renting rooms and garages (though I would want to stay legal at all times)


Any feedback is appreciated.
 

Matt Crowley

0
REIN Member
Joined
Dec 14, 2013
Messages
980
Hey Tom, I really like your approach to this.

To your point about the ratios: there is a time to buy, hold, and sell every asset. Legally suited homes will squeak above this 10% threshold. Keep in mind who the supplier of the information is. Canada is at historically high price to rent ratios on a global scale. Across housing spectrum from SFH to high rises. (Mobile homes excluded).

You are right in your observation about low yields, applies to SFH and 4-plexes. Income yield will be non-existent. This means that 100% of your return is based on a macro bet that the economy improves. When people talk about not being speculators, take a very hard look at their business plan... if they do nothing to improve the asset, can't create a lift on rents, then what plan do they have to make money on the asset? This is a 100% speculation exercise, with no value moat to grow into value.

Pricing for old multifamily units in Calgary is currently starting at $180k for crap. Total crap, needing $20k to bring it to a rentable B. Boardwalk bought a class A 4-story walkup in Auburn for $215k per door. The economics for value-add in Calgary are busted right now. Who would own a crap C- building for $180k per door + $20k in renos when you can build for $200k. This is the reasoning behind the growth of Strategic and others in multi-family in Calgary right now, and why you don't see a value-add play.
 

Thomas Beyer

0
REIN Member
Joined
Aug 30, 2007
Messages
13,881
The main difference is liquidity. Far more buyers for a SFH than a 4-plex. Both will have similar low 4-5% or so yields - also referred to as a CAP rate. The CAP rate is the most commonly used metric in income producing commercial assets incl 4-plexes. It is the gross income minus vacancies minus operating expenses such as utilities, property taxes, insurance, management fees and an allowance for R&M ( repair and maintenance ) divided over the price but before a mortgage. It is the unlevered asset yield into perpetuity.

The GRM ( gross rent multiplier ) you are referring to is around 5-7 usually but never 10 anymore. 10 exists in some smaller US or remote risky Canadian markets only.

Real estate is like a three course meal (TM). It has three profit centers: cash-flow (or the appetizer), mortgage paydown (the main course) and equity appreciation through asset improvements and inflationary rental upside (the dessert).

What is better: Cash-Flow or Maximum ROI ? http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/

Cash-flow does NOT make you rich, but it allows a sustained ownership. Appreciation and mortgage pay down is where you get wealthy. A market with no upside - especially as a young person - ought to be avoided in my opinion. Most markets will provide at least inflationary 2% or so annual value upside.
 

kfort

0
Registered
Joined
Sep 1, 2010
Messages
1,578
I️ love these meat & potato type discussion here as even folks who are more experienced benefit from a refresher.

Definitely have a sift through the link above and fully absorb the statement made about cash flow not making you rich. It will be a very very long time before monthly cash flow will have you basking in the warmth of financial independence. Cash flow does not build wealth, it does help you sleep at night (also important).


Sent from my iPhone using myREINspace
 

Thomas Beyer

0
REIN Member
Joined
Aug 30, 2007
Messages
13,881
Cash flow does not build wealth, it does help you sleep at night (also important).

Indeed & Thank you very much !!

Indeed cash flow does not make you rich directly, but indirectly as it - or even break even cash flow - allows you to ride the inflationary value upside AND the mortgage pay down.


Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com
 

Martin1968

Frequent Forum Member
Registered
Joined
Jan 22, 2017
Messages
235
Very little to add to all the above comments. If you indeed want to 'consume the 3 course meal', the Calgary market is the least tasty, especially from the cash flow perspective. As well as appreciation unless you have deep pockets, go for land value, depending on zoning, tear down and rebuild MF building. Take a lot of dough.
4 plex from 600K in Forrest Lawn to well over a million in the SW and anything in between. And often they do require extra to stand out in order to up rents. Try to make money on that!
Having said all that, still really good money to be made in smaller (but strong) centres appr. 10.000 to 100.000 people. Way lower acquisition cost, rents often at big city level, active re-sale market.
Cheers!
 

Tom Kenny

New Forum Member
Registered
Joined
Oct 17, 2017
Messages
7
First, thanks to all for taking the time.

As a background I am looking into Real Estate as an investment because I got turned on to some of the Rich Dad ideas about using other people's money to get control of assets that provide cash flow.

I also like their idea of being a business owner. Ive never seen myself as being cut out for that (employees, sales, inspiring a team with a vision, etc), but I can see the value in those skills and this ACRE system clearly pushes business owner approaches to Real Estate Investment. I could, with great effort, practice a subset of a business owner's skills to gain all kinds of leverage where it would pay off.

As for other people's money, residential mortgage funding strikes me as being about the closest a member of the Hoi Polloi can get (at reasonable interest rates) to the "new money spigot" that I think will be opened wide for many years to come. Of course none of us can know what will happen next but my view is that the world's monetary system was designed specifically to allow us to paper over problems with new money creation and there are a lot of long-term nails lurking out there in search of a hammer.

So on the one hand Real Estate valuations are damned high, but on the other so are most paper assets like stocks and bonds. Commodities seem cheap, but thats pure speculation since oil and copper themselves don't pay you to hold them.

The wife is on board for the SFH purchase but is also more of the thinking that "Even if you have to feed it, the renter still pays for most of it and in the end you have the asset." So I am trying to push Mr Campbell's view that this will be draining and limiting in various ways, and that by doing the extra work we could get the cash flow anyway. I like Don's example of patiently looking for a stone to skip.

My original question was really, "Is it a matter of patience to find that 10% ratio or am I on the wrong beach/planet altogether?"

I am aware of a recently published REIN document about Alberta's 10 best places for investment so I may check that out next. Red Deer wouldnt be too bad if I could find a decent property manager out there. I did notice some cheap 4-plex properties in very small towns but so far have ignored them on the assumption that I'd have to self-manage.

Thanks again guys.
 
Last edited:

Thomas Beyer

0
REIN Member
Joined
Aug 30, 2007
Messages
13,881
First, thanks to all for taking the time.

...

My original question was really, "Is it a matter of patience to find that 10% ratio or am I on the wrong beach/planet altogether?"


.

Yes this beach is on a yesteryear planet .. or in some rural US or some developing nations with 10%+ interest rates or inflation only. 4-6% CAP rates are the norm these days.

We will see some motivated sellers next year as the new OSFI rules will reduce available mortgages to many by 20% to see deals collapsing all over the place. As such, take your time. Markets aren’t going up really hard right now. REIN is a great incubator to nurture ideas with solid knowledge into action.

When the student is ready, the teacher will appear. You made a wise choice to further your education, your family's networth and your mindset to move from "Ready, set, set, set, set ..." to GO.

Here are some initial REIN posts that I have done over the last 6 1/2 years that you may find a good read.

How to get started http://myreinspace.com/threads/how-to-get-started.4363/
5 ways to make money http://myreinspace.com/threads/5-ways-to-make-money.3318/
50/50 JV - How is this fair ? http://myreinspace.com/threads/50-50-is-this-fair.1983/
LOC vs. mortgage: http://myreinspace.com/threads/what-is-better-a-mortgage-or-a-line-of-credit.2271/
Red, green and blue money - what are the three crucial elements of real estate and JVs: http://myreinspace.com/threads/blue...expert-deserves-to-make-some-money-too.29091/
What is better: Cash-Flow or Maximum ROI ? http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/
 

Tom Kenny

New Forum Member
Registered
Joined
Oct 17, 2017
Messages
7
Thank you Thomas.

I have read a few of those posts already and found them quite illuminating.

For now, I am indeed playing the role of Real Estate Philosopher, but as early as springtime next year I expect to be ready (downpayment-wise) to pull the trigger on something so the timing may prove fortunate.
 

Rickson9

0
Registered
Joined
Oct 27, 2009
Messages
1,210
The first thing I'm noticing is that the properties where (gross annual rent / purchase price) * 100 is 10% or more seem be pretty rare indeed. Is this ratio still realistic in a world of < 3% mortgage interest?

Finding this ratio is irrespective of “in a world of < 3% mortgage interest”.

I’ve been buying property in the US since 2009 and a 10% ratio still holds today.
 
Last edited:
Top Bottom