Apartment building appreciation

Willyboy

Inspired Forum Member
Registered
Aug 19, 2016
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14
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#1
Good morning everybody. I'm just confused about something and need the experts opinion. I've never bought apartment buildings but from my research apparently the long term growth in price happens through two ways if I'm not mistaken. One is to buy an undervalued building and renovate it to increase the rent and add value and the second is through normal market rent increase over the years depending on the economy and the rental market in general.

Now regarding the first method I'm not confused but what is confusing me specially in Edmonton and Calgary is the second method which is the normal market rent increase. So from many posts here and from my looking at listings in Edmonton I noticed the prices didn't come down in the last few years whereas the rents came down substantially maybe 20-30% and the cap rate deteriorated accordingly. So the price didn't come down to match the decrease in rents.

Now what I'm confused about is in the next few or more years when the rents go back up to where they were in 2014 will the price go up knowing that it didn't initially come down along with the rents so it can go back up again? Or it will stay flat until it matches with 2014 rent levels then start going up with the market?
 

ThomasBeyer

Senior Forum Member
REIN Member
#2
Good morning everybody. I'm just confused about something and need the experts opinion. I've never bought apartment buildings but from my research apparently the long term growth in price happens through two ways if I'm not mistaken. One is to buy an undervalued building and renovate it to increase the rent and add value and the second is through normal market rent increase over the years depending on the economy and the rental market in general.

Now regarding the first method I'm not confused but what is confusing me specially in Edmonton and Calgary is the second method which is the normal market rent increase. So from many posts here and from my looking at listings in Edmonton I noticed the prices didn't come down in the last few years whereas the rents came down substantially maybe 20-30% and the cap rate deteriorated accordingly. So the price didn't come down to match the decrease in rents.

Now what I'm confused about is in the next few or more years when the rents go back up to where they were in 2014 will the price go up knowing that it didn't initially come down along with the rents so it can go back up again? Or it will stay flat until it matches with 2014 rent levels then start going up with the market?
2014 rent levels are a LONG way off. Maybe 2024.

Prices did come down.

Use 6% cap rates for Edmonton and 5% for Calgary on realistic NOI ( ie realistic rents, vacancies and expenses ) to get realistic prices. Many assets in Edmonton now sub 100/door. Both markets overbuilt with condos that eat into older buildings’ rent levels.

In some sub-markets land prices impact prices ie future rezoning pushes prices up in high density areas aka Beltline in Calgary or Oliver in Edmonton ie lower cap rate.

Don’t overpay !


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

Senior Forum Member
REIN Member
#4
Buy the present not the future. Apartments will keep going up, especially smaller ones as folks make the first jump to multi family where vendors are just waiting for over zealous first time, unsophisticated buyers. Don't fall into this trap as so many have.
Don’t be a motivated seller.

Don’t be a motivated buyer, either !

Real estate is like public transit: if you miss one there’s another one in 15-20 minutes !!


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

Willyboy

Inspired Forum Member
Registered
Aug 19, 2016
95
14
8
#5
Thanks gentlemen for the replies and clarification which I find very helpful indeed.

I also had a phone conversation with a property manager today to see what management might look like if I bought a small apartment building so as we spoke they told me that investors from BC and Ontario are already buying over inflated buildings in Edmonton but they stressed that it is very possible for the realtors to find something good and not over inflated for me although depending on the search with the realtor I might or might not have to have a bit of renovations done.

So what you clarified gentlemen explains some of the things that could be happening currently and apparently some investors are being motivated and probably unsophisticated buyers like you said from out of the province and buying the future instead of the present.

Unfortunately this will affect in some ways buyers who are not necessarily sophisticated but at least they're doing their best due diligence.
 
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CorySperle

Senior Forum Member
REIN Member
Sep 1, 2010
637
356
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Edmonton
#6
To find a decent project expect to comb over 100 listings, visit a dozen properties, make a handful of offers for every purchase. There are three categories of building you can buy:

Value add - 20% or more below market value but needing a lot of work. Can do very well in a short term time frame. Very hard to find.

Coupon cutter - market value, about 100k a door in Edmonton. Upside is inflationary and you will do okay over 5 years.

Future value - you pay 20% more than market praying to make money, starve yourself with negative cash flow and a large mortgage hoping like heck to find someone more foolish than you to pay so much.

Most if what is selling in the 115k a door range falls into category 3. Don't do it. As Thomas says new deals are always coming and don't dive in due to the fear of missing out.
 

Martin1968

Frequent Forum Member
Registered
Jan 22, 2017
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#7
2014 rent levels are a LONG way off. Maybe 2024.

Prices did come down.

Use 6% cap rates for Edmonton and 5% for Calgary on realistic NOI ( ie realistic rents, vacancies and expenses ) to get realistic prices. Many assets in Edmonton now sub 100/door. Both markets overbuilt with condos that eat into older buildings’ rent levels.

In some sub-markets land prices impact prices ie future rezoning pushes prices up in high density areas aka Beltline in Calgary or Oliver in Edmonton ie lower cap rate.
Thank you for saying and confirming about markets being overbuilt. And what it actually does for apartment building investors such as your self. How do you compete with large corporations that build 72 to 144 unit ultra modern complexes with all modern conveniences. From insuite washer and dryer to nice stainless steel appliance packages including dishwasher, nice private decks/balconies, airtight windows, impacable grounds and keep up included and other much desired conveniences.

This to me is a real problem investing in smaller and older, and often completely outdated apartment buildings. (Let’s say 6 to 24 units) Often one third of the apartments are underground, hard to rent out, the other two third above ground lack mostly all of the above modern day conveniences and need significant $ to make it rentable and to up your tenant profile.

What can the benefits be? Two things, rent often low and has a significant part of utilities that are included, which is great for the renter but not so great for the investor owner. The other benefit can be location in inner city or close to inner city where there are no large developments of new rental unit complexes. Then you would hope indeed like Thomas said you can bank on land value increase.
Other then that, you will find it tough to make a go of it. High purchase price, high investment dollars for improvements, high operating expenses and a crappy cashflow. (Unless you think making $100-200 cashflow per apartment is great)
It has become very clear (to me at least) that if you want to make money, don’t buy those apartment buildings. They suck.
 

ThomasBeyer

Senior Forum Member
REIN Member
#8
Real estate is a complex business where light and shadow are close together. Location matters, but so does price, quality of asset, maintenance backlog, rental upside, views, management, leverage, price of money, size, timeline, access to cash, marketing, ie expertise matters ..

I have made a killing in many deals but 2014-2017 was very tough, but survivable with tightened expenses and surplus cash to sustain operating losses in excessively leveraged buildings. Take the long view, 10+ years, and if done well enough you will usually make very decent money. However if you become a motivated seller, pay far too much, don’t have cash surpluses for difficult times or unplanned renovations you can easily lose money.




Sent from my iPad using myREINspace
 

Matt Crowley

Senior Forum Member
Registered
Dec 14, 2013
804
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Edmonton
#10
Now regarding the first method I'm not confused but what is confusing me specially in Edmonton and Calgary is the second method which is the normal market rent increase. So from many posts here and from my looking at listings in Edmonton I noticed the prices didn't come down in the last few years whereas the rents came down substantially maybe 20-30% and the cap rate deteriorated accordingly. So the price didn't come down to match the decrease in rents.
Excellent observation Willyboy. The reason it doesn't pencil is because multifamily is super-saturated in Edmonton and has been overbought by investors. There is virtually no value-add available on the market (what you refer to as requiring renovations) because investors are willing to pay the full value of future income today.

To @Martin1968 another good observation. Quite frankly, the 3 story walkups don't compete for the same customers as the new buildings. There are different core business models: Mainstreet buys generally good locations, shitty C buildings and brings them to a B- or B. Avenue buys C buildings in C neighbourhoods and holds them as C's. Outside a select few buyers in multifamily (which is still mostly private money, not institutional), the only thing that pencils in Calgary or Edmonton is building new because the rents are so much better and debt is still low. Both cities have tons of internal and external sprawl so the poor locations come with a double negative - hit once on a shitty building and again for being in a crap location.

@Willyboy the one point I will make that I think you got wrong is that value add plays (what you call renovations) tend to be short term plays, where you put the money in up front to bring an underperforming asset to market or above. So it is a relatively short term strategy, usually look to execute in the 2 - 5 year timeframe.

If you are investing money against a benchmark that you have to beat, you will want to keep your time frame relatively short to assess whether the investment is really paying off. Very easy to beat a benchmark of 0%. It is absolutely essentially to pick an appreciating market if you want to have high leverage as you will have no return at all from distributions.