Alberta condos vs. multifamily: is the sum greater than the parts?

Matt Crowley

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Dec 14, 2013
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Calgary
#1
I'm looking at a small value-add apartment in an inner city neighbourhood in Calgary. As part of the exit sensitivity analysis, I am looking at what renovated condo units are selling for on the market. Before considering condo fees, it looks to me that investment properties are pound-for-pound 10-15% more expensive than comparable individual condo units. It is never possible to exactly compare apples to apples, but with experience comes the ability to see nuance and I'm wondering what some experienced investors out there observe.

My thinking for why condo units are relatively cheaper than per-unit investment property prices:
- 40 year CMHC debt is available for apartments whereas 25 year debt max is available for individual condo purchasers (doesn't really matter whether someone buys the condo for investment or to live in)
- condo fees are generally higher and less predictable in small apartment buildings than a professional manager would reserve and be able to efficiently operate to. Condo fees are essentially utilities + reserve fund. Utilities are a pass though, so no effect. But the reserve fund should be the forecast maintenance plan for the building for the next (~10 years). My expectation, which is not confirmed, is that small condo boards are generally less efficient managers and the special assessment "surprise" and general maintenance mismanagement lowers the price paid for the condos.
- control premium for consolidated parcel + ability to make redevelopment decisions.

Do any investors across the country believe the reverse is true: that investment properties can be bought at a discount to an individual condo unit?

Or perhaps you don't agree with my thinking above. I would be very interested to hear!
 

CorySperle

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Sep 1, 2010
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Edmonton
#3
Just because it's cheaper doesn't mean it's a better investment. There are many folks underwater still who bought apartment converted condos in the Alberta boom of 2007. Tack on reserve fund issues, and incompetent condo boards, all form a case that condo's, especially in older walk ups make horrible investment prospects. They are cheap for a reason.

A good example is in Saskatoon right now where a walk up building can be purchased for about $100,000 a unit. Condo's in similar converted buildings are selling for as low as $60,000 a unit right now, so which is the better investment? I look at Edmonton where I have seen a few cases of buildings being advertised for sale that are stratified into individually owned units, who all want to sell, so something else for consideration. My personal feeling is that well located, reasonable priced, and possibly value add buildings will outperform, and be more sought after than individual 'b class' condos that don't really appeal to owners or renters.
 

Matt Crowley

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Dec 14, 2013
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Calgary
#4
It is interesting though, that such a premium exists in the first place?

A friend of mine was talking about a condo de-conversion in Edmonton at a building called the Lamplighter (Google maps). According to him, it was a condo where the owner bought enough of the units to re-convert to a purpose-built rental. He is is an experienced real estate guy so I'm taking him at his word on it.

I suppose you need to look into cost of capital and number of units you need to consolidate to de-condo convert. The inefficiency is a bit staggering to me at least? I mean are we talking about a hidden $15k - $25k special assessment in the pricing differential.

The second point is: it not interesting how the pendulum has swung? In the 1990s Calgary converted about 30% of its purpose built rental stock into condos - this would only have been done if condo prices had been greater than the sum of the parts on the investment side.

So...

- Are we worse at managing condo reserve funds in 2019 than we were in the 1990s, that we price in a 10-15% management inefficiency?
- is debt buoying the market?
- are condos now significantly underpriced?

Macro swings are extremely interesting. Interested in your thoughts.
 
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