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

Matt Crowley

Senior Forum Member
Registered
Dec 14, 2013
890
402
63
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

Senior Forum Member
REIN Member
Sep 1, 2010
702
446
63
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

Senior Forum Member
Registered
Dec 14, 2013
890
402
63
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.
 
Likes: Rickson9

ThomasBeyer

Senior Forum Member
REIN Member
#5
Buying many individual condos in one building and doing a re-conversion is a huge piece of work, huge .. plus tough to finance and needs a substantial discount to a whole building due to these issues, possibly involving court orders and evictions and often substantial capital upgrades.
 
Last edited:

Matt Crowley

Senior Forum Member
Registered
Dec 14, 2013
890
402
63
Calgary
#6
Check this out... being marketed as a condo "reversion". This is exactly what my point is on how the market has turned. 10 years ago, this would be a condo conversion. Now selling each of the pieces individually is less than selling the whole. I think a big part of the disconnect is CMHC financing for investment product vs. CMHC financing for personal mortgages.


Link to listing: https://mcleodrealty.com/listing-de...1-10141-154-street-edmonton-t5p-2h2.84881173/

1553888269882.png
 
Likes: Rickson9

kfort

Senior Forum Member
REIN Member
Sep 1, 2010
1,543
297
83
#7
These will be hitting Saskatoon very very soon. Condos to be had at $80/door... same in a multi at $100+

And about 1500 units that I can think of off the top of my head that could/ should be done tomorrow.


Sent from my iPhone using myREINspace
 

Willyboy

Inspired Forum Member
Registered
Aug 19, 2016
104
24
18
#8
The problem in multifamily is how the system is set up. The way it is currently st up is that you will eventually after a very very long wait of probably at least 10 years get most of your profit when you sell or sometimes if you refinance down the road from mortgage pay down and appreciation but very little if any from instant cash flow which in my opinion should be the opposite i.e. it would have been way better and healthier if most of the profit is realized mainly from cash flow and to a lesser extent from mortgage pay down and less and less from appreciation.

Why?

Because multifamily is considered a commercial type of investment and as such it should be treated like say a restaurant although not necessarily exactly the same way but at least you should enjoy the profit as soon as you do business and not after 20 years. Imagine for a second you have a restaurant and it is full of clients every day but you're not making any money or very little and to realize any gains you will have to wait 10 or 20 years! This is not business.

Also because life is most enjoyed at the beginning of investment. Why should I wait for 10 or more years to get that enjoyment?

And as proof to what I'm saying, had apartment building prices in Alberta been say 50% less than what they are today but rents only say 20% less than what they are today many of the owners wouldn't have experienced negative cash flow or possibly had to sell in the last 4 years and the market would have been way healthier and happier.

Single family homes on the other hand cannot cash flow positive and this is totally understandable because this type of housing is not meant originally for investment so it makes sense to be cash flow negative if you treat it as an investment and that's up to you but for multifamily I find no excuse to break even or cash flow positive just a tiny bit which doesn't make sense.

I've been looking at multifamily proformas lately in different cities and some of them are ridiculous with return on investment from cash flow and mortgage pay down combined about 3-5%, CAP rates of under 4 and interest rate of over 4%. So imagine the return combined or the CAP rate is less than the interest rate. ROI excluding appreciation should have never been less than 15-20%.

So to sum it up I would be willing to wait 20 years if I bought a single family home to make profits but not if I bought an apartment building.
 
Likes: Rickson9

ThomasBeyer

Senior Forum Member
REIN Member
#9
The problem in multifamily is how the system is set up. The way it is currently st up is that you will eventually after a very very long wait of probably at least 10 years get most of your profit when you sell or sometimes if you refinance down the road from mortgage pay down and appreciation but very little if any from instant cash flow which in my opinion should be the opposite i.e. it would have been way better and healthier if most of the profit is realized mainly from cash flow and to a lesser extent from mortgage pay down and less and less from appreciation.

Why?

Because multifamily is considered a commercial type of investment and as such it should be treated like say a restaurant although not necessarily exactly the same way but at least you should enjoy the profit as soon as you do business and not after 20 years. Imagine for a second you have a restaurant and it is full of clients every day but you're not making any money or very little and to realize any gains you will have to wait 10 or 20 years! This is not business.

Also because life is most enjoyed at the beginning of investment. Why should I wait for 10 or more years to get that enjoyment?

And as proof to what I'm saying, had apartment building prices in Alberta been say 50% less than what they are today but rents only say 20% less than what they are today many of the owners wouldn't have experienced negative cash flow or possibly had to sell in the last 4 years and the market would have been way healthier and happier.

Single family homes on the other hand cannot cash flow positive and this is totally understandable because this type of housing is not meant originally for investment so it makes sense to be cash flow negative if you treat it as an investment and that's up to you but for multifamily I find no excuse to break even or cash flow positive just a tiny bit which doesn't make sense.

I've been looking at multifamily proformas lately in different cities and some of them are ridiculous with return on investment from cash flow and mortgage pay down combined about 3-5%, CAP rates of under 4 and interest rate of over 4%. So imagine the return combined or the CAP rate is less than the interest rate. ROI excluding appreciation should have never been less than 15-20%.

So to sum it up I would be willing to wait 20 years if I bought a single family home to make profits but not if I bought an apartment building.
I beg to differ.

Both assets make great long term investments at the right price, in the right location, with the right leverage and with the right management.

Of course, if you pay too much, have too high a mortgage this likely negative cash flow, the wrong location or crappy management either asset can lose money.

Details matter as does expertise to buy & manage !!


Thomas Beyer, Asset Manager, Investor, Author, Father, Mentor www.prestprop.com
 
Last edited:
Likes: CorySperle

Matt Crowley

Senior Forum Member
Registered
Dec 14, 2013
890
402
63
Calgary
#10
@Willyboy I hear your argument...but the world is moving towards seeing multi-family as a replacement for fixed income investments. To get something that is Class A in a growing market and unreplaceable location with a 4 - 5% unlevered return is attractive to OMERS, AIMCo, CPP, Brookfield, QuadReal. Compressing that down to a 3% cap: I can't get my head around that. What about when the world takes a breath... like right now, for example?

https://business.financialpost.com/...-hit-by-industry-slowdown-and-changing-tastes
 

Willyboy

Inspired Forum Member
Registered
Aug 19, 2016
104
24
18
#11
I was just looking at some proformas here in Edmonton. The thing is in some of the proformas they say actual rent is for example 800 but there's another column as well that says projected rent is 850 or 900 or even more for example which is a very big increase. Really? Projected? My understanding is if the projected rent is already approved and will take effect within a few months then there's no problem but if not then what would you call that? Are rents going back up that high and that fast while we're still in a very slow recovery if any? Another thing is in the listing details it says you can increase rents! who guarantees that? If you are sure rents can be increased why then wouldn't you increase them and after that list the property?
 
Likes: ThomasBeyer

Matt Crowley

Senior Forum Member
Registered
Dec 14, 2013
890
402
63
Calgary
#12
This is totally universal in real estate, not just in multifamily - although I think often multifamily has the most out to lunch rates. It is pretty typical for brokers to say projected / forecasted / stabilized, current rents under market / under managed, ect.
 

ThomasBeyer

Senior Forum Member
REIN Member
#13
I was just looking at some proformas here in Edmonton. The thing is in some of the proformas they say actual rent is for example 800 but there's another column as well that says projected rent is 850 or 900 or even more for example which is a very big increase. Really? Projected? My understanding is if the projected rent is already approved and will take effect within a few months then there's no problem but if not then what would you call that? Are rents going back up that high and that fast while we're still in a very slow recovery if any? Another thing is in the listing details it says you can increase rents! who guarantees that? If you are sure rents can be increased why then wouldn't you increase them and after that list the property?
Never confuse a good marketing brochure with reality. It’s called advertising.

Always do your homework on actual rents, vacancies, cap rates and expenses.

Don’t overpay.


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

Rickson9

Senior Forum Member
Registered
Oct 27, 2009
1,171
48
48
#14
Out of touch marketing brochures just makes it easier to retrade

Broker: “Do you have any problems with the price?”

Me: “I love this property! I love this price! If everything in your brochure checks out in due diligence. I have absolutely no problem with the price! Now is there anything you want to tell me before I send my guys in?”
 

Rickson9

Senior Forum Member
Registered
Oct 27, 2009
1,171
48
48
#15
This happened to condos in Phoenix when I was buying down there

Condos fell in price to become cheaper per door than units in apartments

They fell below replacement cost

Older condos were better for cash flow than newer condos. And at that time cash flow (and cash) was king. After things recovered, newer condos offered better cash-out refi as appreciation took off. In either case, new or old condo product buyers did very well, just in different ways (fantastic cash flow with amazing appreciation vs amazing cash flow with fantastic appreciation)

Utilities were a non-factor as condo fees didn’t cover utilities. They were the responsibility of the tenant

The big problem in the US was that condo communities were decimated and left largely vacant. Losing half or more of the revenue from condo fees leaves common areas and amenities in disrepair. Once investors like myself came in, the communities stabilized and are now flourishing

The benefit I saw with buying condos is that I would be able to attract tenants who would otherwise want a larger MF community that offered various amenities like security, pool, BBQ, gym etc., without having to buy a 100 unit product

One significant difference between the US and CAN is that the collapse in the US happened sharp and fast. They hit rock bottom after 3 years. Alberta is melting very slowly in comparison

One of the biggest problems during that period of time was the ability to scale. Banks were NOT lending so getting loans was impossible so the only alternative was to buy product one at a time. And even when the Goldman Sachs of the world got involved, they had to do the same thing - send individual employees as boots on the ground to buy individual product at the courthouse all day long

Having gone through a remarkable RE cycle in the US, I find this particular topic very interesting
 
Last edited:

ThomasBeyer

Senior Forum Member
REIN Member
#16
This happened to condos in Phoenix when I was buying down there

Condos fell in price to become cheaper per door than units in apartments

They fell below replacement cost

Older condos were better for cash flow than newer condos. And at that time cash flow (and cash) was king. After things recovered, newer condos offered better cash-out refi as appreciation took off. In either case, new or old condo product buyers did very well, just in different ways (fantastic cash flow with amazing appreciation vs amazing cash flow with fantastic appreciation)

Utilities were a non-factor as condo fees didn’t cover utilities. They were the responsibility of the tenant

The big problem in the US was that condo communities were decimated and left largely vacant. Losing half or more of the revenue from condo fees leaves common areas and amenities in disrepair. Once investors like myself came in, the communities stabilized and are now flourishing

The benefit I saw with buying condos is that I would be able to attract tenants who would otherwise want a larger MF community that offered various amenities like security, pool, BBQ, gym etc., without having to buy a 100 unit product

One significant difference between the US and CAN is that the collapse in the US happened sharp and fast. They hit rock bottom after 3 years. Alberta is melting very slowly in comparison

One of the biggest problems during that period of time was the ability to scale. Banks were NOT lending so getting loans was impossible so the only alternative was to buy product one at a time. And even when the Goldman Sachs of the world got involved, they had to do the same thing - send individual employees as boots on the ground to buy individual product at the courthouse all day long

Having gone through a remarkable RE cycle in the US, I find this particular topic very interesting
Well observed my young friend.

So is it time to time in AB now ?


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

ChrisDavies

Frequent Forum Member
REIN Member
Feb 18, 2008
1,280
21
38
36
Edmonton
#17
Buying many individual condos in one building and doing a re-conversion is a huge piece of work, huge .. plus tough to finance and needs a substantial discount to a whole building due to these issues, possibly involving court orders and evictions and often substantial capital upgrades.
I've been working on several of these - they're huge work and lots of moving parts. It's MUCH easier if I approach it from the Sellers' side and there's some legislative changes coming into force that will make it easier to do. I'm confident we can continue to help bail out condo owners and get them more money by de-converting.