Is Calgary ripe for investment?

[gwasser]

In the discussion on 'Cash Flow Return' where we digressed a lot, Thomas Beyer made some interesting observations about Multi-family and single family investments in Calgary and Edmonton. My question:

Is Calgary now ripe for REIN investors?




QUOTE (ThomasBeyer @ Jul 30 2010, 03:27 PM)
indeed .. and what you will see that the cash-on-cash return IS QUITE A BIT LOWER .. or negative if too levered !!!



Thus, on a single family asset, where the CAP rate rarely exceeds the interest rate, negative cash-flow is virtually guaranteed with 75%+ leverage when using 10% vacancy or slight unexpected R&M expenses for new carpet, new dishwasher, paint, ...




I wanted to get back to the point above made by Thomas and also his increased interest for multi-family properties in Edmonton and Calgary.



First: Yes it seems that multi-family properties are becoming more attractive. But are we truly in a market where 4 and 6 plexes become economic?



Second and for many smaller guys such as myself maybe more relevant: Thomas states for single family properties (and I include for this discussion town houses and apartment units - bought one at a time) the cap rate seldom exceeds the interest rate.



In Calgary we can buy single units for cap rates between 3 and 4% while interest rates are 4% or less (variable rates are just around 2%)? Would that mean that we have here now an attractive investor's market?



I would like to add a metric of my own as well. A typical non-leveraged ROI on investment (for both stock market and real estate) lies around 11-12% per year long term. With Calgary's appreciation rate of the last 40 years lying around 7-8% (although Thomas pointed out in another post that over the last 50 yrs appreciation was closer to 6%), that would mean that in an investment grade market, the cap rate should be around 3-4%. (If you add leverage the ROI would of course go up quite a bit).



So is Calgary now a good place to invest both on a multi-family and single property basis?



BTW did you read in the Herald today that Alberta's employment picture is improving and that last month we actually outperformed the nation?



Since this topic has driven so far from the original question, I will post this under a new topic. Please make your response there. The topic here is what people consider an attractive Cash-on-Cash return.

 

[Thomas Beyer]

QUOTE (gwasser @ Aug 7 2010, 12:21 PM) ... A typical non-leveraged ROI on investment (for both stock market and real estate) lies around 11-12% per year long term. ..

..
Only a smart guy like you Godfried can deliver 11%+ on a non-levered basis consistently .. I and millions of others have been unable to do that in either real estate or stocks .. more like 6% or so .. maybe 8% .. but even to do that consistently is extremely hard ! I found over my 15+ year investment career that I can deliver 12%+ returns [or far more in fact] only with a decent (cheap) mortgage on the cash invested .. and indeed consistently.

The trick is to use sensible leverage. "Sensible" being 50-70% of value in today`s slower growth, higher vacancy environment !

Examples:

If your CAP rate is 5% and your mortgage is 5%, using a 25 year amortization, and the following loan-to-value your cash-on-cash ROI is negative until you put down 30% !

LTV Cash-on-Cash ROI
90% -13.86%
85% -6.87%
80% -3.38%
75% -1.29%
70% 0.11%
65% 1.11%
60% 1.86%
50% 2.90%


if you assume a 6% CAP rate and a 4.0% interest rate .. a more realistic assumption in summer 2010 ... you arrive at the following cash-on-cash return:

LTV Cash-on-Cash
90% 2.39%
85% 3.73%
80% 4.40%
75% 4.80%
70% 5.06%
65% 5.25%
60% 5.40%
50% 5.60%

NOT SO BAD !!! add 3% annual appreciation and it is fantastic .. but please allow for significant R&M expenditures usually not shown in ROI calculations !

LTV ROE + Appreciation at 3%
90% 49.50%
85% 34.50%
80% 27.00%
75% 22.50%
70% 19.50%
65% 17.36%
60% 15.75%
50% 13.50%

Use 5% appreciation and arrive at:

LTV ROE + Appreciation at 5%
90% 69.50%
85% 47.83%
80% 37.00%
75% 30.50%
70% 26.17%
65% 23.07%
60% 20.75%
50% 17.50%

In the real world, you have to include realistic expenses and R&M upgrade costs that will reduce the actual return on cash invested .. but still very decent in an appreciating market like AB, SK and select pockets of NB, MB, ON, BC or TX !


QUOTE (gwasser @ Aug 7 2010, 12:21 PM) ... A typical non-leveraged ROI on investment (for both stock market and real estate) lies around 11-12% per year long term. ..

So is Calgary now a good place to invest both on a multi-family and single property basis?

BTW did you read in the Herald today that Alberta`s employment picture is improving and that last month we actually outperformed the nation?

yes Calgary is a very decent place to invest .. but HIGH leverage is not good .. try 50-65% LTV .. and have cash-flow and equity growth for decades !

Hard to cash-flow when 75%+ levered .. not impossible .. but very hard to find .. we`re working on a deal in Calgary in the 120`s/door range and it will cash-flow .. but not at 80% LTV !

 

[housingrental]

Re Godfried`s above post
the cap rate should be around 3-4%. (If you add leverage the ROI would of course go up quite a bit).

So is Calgary now a good place to invest both on a multi-family and single property basis?

The answer is no.

Too much risk for the potential return. No money to be made from operations and risk of burning through cash on an ongoing basis when things don`t go perfect - vacancy, damages, market rents lower, condo fees increase - and also likely scenario of:
Returns available from alternate investments increase
Cost of operations (interest rates, tax`s, etc.) move up and significantly outpace rent increases

We`re entering a lower inflationary environment. The next ten years the appreciation rate is unlikely to revisit what has been.

 

[Thomas Beyer]

QUOTE (housingrental @ Aug 8 2010, 09:32 AM) So is Calgary now a good place to invest both on a multi-family and single property basis? [/i]

The answer is no.

Too much risk for the potential return. ..
Where is the risk LOWER ?

Low inflation ?

What about:
a) Alberta has lowest unemployment still across the country
b) gas prices rising --> more jobs
c) higher oil prices --> more jobs
d) Wild Rose in (coalition) government in 2012 --> lower taxes and even more jobs
e) baby boom right now in AB
f) low debt and low deficit
g) growing oilsands extraction, both conventional oilsands (pit mining) as well as SAGD (Steam Assisted Gravity Drainage, i.e. underground)
h) thus, growing provincial revenues
i) higher price for a barrel of the tar-like oilsands, which used to sell at a 30% discount to conventional WTI (West Texas Intermediate) oil .. which is estimated to eventually surpass the thinner benchmark oil barrel WTI .. which all means:
j) more government revenues, less deficits, less or no debt, more jobs, more n-migration, thus higher home prices and rent !

Where is a better place to invest ?

The ONLY difference (to the past 10 years) is that overall return expectations need to be lowered and that less leverage has to be used to obtain cash-flow !!

 

[gwasser]

QUOTE (ThomasBeyer @ Aug 7 2010, 01:08 PM) Only a smart guy like you Godfried can deliver 11%+ on a non-levered basis consistently .. I and millions of others have been unable to do that in either real estate or stocks .. more like 6% or so .. maybe 8% .. but even to do that consistently is extremely hard ! I found over my 15+ year investment career that I can deliver 12%+ returns [or far more in fact] only with a decent (cheap) mortgage on the cash invested .. and indeed consistently.

Thanks for the compliment(?). But a 11-12% is not that hard to reach over the long term. Jeremy Siegel estimated the combined annual return of dividend and appreciation on stocks to be 11.7% (he looked over a 100 year period and used the Dow Jones Index as portfolio). Also, if you combine a 4% cap rate with a 6-8% annual average rate of appreciation (as Calgary did over the last 40 years) you will get a similar total return.

I entirely agree with Thomas on the level of leverage. I did a Excel calculation using Calgary Single Family Homes from 1973 until today and if you kept your leverage at 65% over that time you would have survived even the 1982 housing crash. However, you would have been wiped out with a LTV of 80%.

And yes, I am warming up on Calgary. Still a bit concerned about a possible double dip, but the likelyhood for that will probably get less over the coming quarter.

 

[BrianPersaud]

QUOTE (ThomasBeyer @ Aug 8 2010, 12:15 PM) Where is the risk LOWER ?

Low inflation ?

What about:
a) Alberta has lowest unemployment still across the country
b) gas prices rising --> more jobs
c) higher oil prices --> more jobs
d) Wild Rose in (coalition) government in 2012 --> lower taxes and even more jobs
e) baby boom right now in AB
f) low debt and low deficit
g) growing oilsands extraction, both conventional oilsands (pit mining) as well as SAGD (Steam Assisted Gravity Drainage, i.e. underground)
h) thus, growing provincial revenues
i) higher price for a barrel of the tar-like oilsands, which used to sell at a 30% discount to conventional WTI (West Texas Intermediate) oil .. which is estimated to eventually surpass the thinner benchmark oil barrel WTI .. which all means:
j) more government revenues, less deficits, less or no debt, more jobs, more n-migration, thus higher home prices and rent !

Where is a better place to invest ?

The ONLY difference (to the past 10 years) is that overall return expectations need to be lowered and that less leverage has to be used to obtain cash-flow !!


Hi Thomas, wouldn`t it make some sense to Start buying around the golden horseshoe? I can imagine the Calgary market doesn`t have that much supply. The only place in North America that has more density of apartments is New York.

 

[housingrental]

Hi Thomas, wouldn`t it make some sense to Start buying around the golden horseshoe? I can imagine the Calgary market doesn`t have that much supply. The only place in North America that has more density of apartments is New York.

Brian has got it. Good post.

 

[Thomas Beyer]

QUOTE (BrianPersaud @ Aug 9 2010, 06:11 AM) Hi Thomas, wouldn`t it make some sense to Start buying around the golden horseshoe? I can imagine the Calgary market doesn`t have that much supply. The only place in North America that has more density of apartments is New York.
is the horseshoe still golden ?

Apartments are not that common in Calgary .. far more in Edmonton ..

focus on price to earnings .. like stocks .. and then SK and AB still stand out !!

 

[housingrental]

Why whats currently doable?
I thought you (and others) were recenlty posting on Calgary market at 5% cap rate for multi-family? Parts of the horseshoe are provide higher PE`s.
QUOTE (ThomasBeyer @ Aug 9 2010, 11:22 AM) is the horseshoe still golden ?

Apartments are not that common in Calgary .. far more in Edmonton ..

focus on price to earnings .. like stocks .. and then SK and AB still stand out !!

 

[gwasser]

QUOTE (housingrental @ Aug 10 2010, 10:40 AM) Why whats currently doable?
I thought you (and others) were recenlty posting on Calgary market at 5% cap rate for multi-family? Parts of the horseshoe are provide higher PE`s.


I am glad you`re not calling the Horseshoe golden in this post

. If you mean to refer to New York (I am not quite sure what you mean with Golden Horshoe), I don`t think there is any comparison other than Apples (big ones) and oranges.

I may be too oil and gas centric and focus too much on its impact on Alberta, but I think you`re the opposite. If I understand correctly, you are now 100% in cash and bonds, waiting for the next big depression.

I definitely happen to disagree with that, although I have been buying corporate bond etfs (amongst other higher yielding investments) and have been sitting on the sidelines for buying real estate. I am in the process to set up a small JV company and hope to be ready to move this fall and winter = target is Calgary which was just listed as Canada`s top city for real estate investments by our own D. C.

 

[Thomas Beyer]

QUOTE (housingrental @ Aug 10 2010, 10:40 AM) Why whats currently doable?
I thought you (and others) were recenlty posting on Calgary market at 5% cap rate for multi-family? Parts of the horseshoe are provide higher PE`s.
E as in earnings of workers / people .. i.e. how many times an average annual income is an average house ?

 

[housingrental]

Godfried - "If I understand correctly, you are now 100% in cash and bonds, waiting " You misunderstand. I like to argue

Purchased a 14 person place this year and hopefully purchasing another 25 person one soon. Only selectively though - there`s too much downside.

Thomas - Thanks and sorry I thought you were interchanging this with cap rate.

 

[JohnS]

QUOTE (gwasser @ Aug 10 2010, 02:38 PM) I am not quite sure what you mean with Golden Horshoe

Hey Godfried. The Golden Horseshoe is the area at the western part of Lake Ontario that comprises Oshawa, Ajax, Toronto, Hamilton, etc. You know how on maps, cities are often done in an orange/yellow/gold colour? Well, all of those cities basically blend together and wrap around that part of Lake Ontario. Hence, the Golden Horseshoe.

Have a good one!

JohnS

 

[gwasser]

QUOTE (JohnS @ Aug 10 2010, 10:50 PM) Hey Godfried. The Golden Horseshoe is the area at the western part of Lake Ontario that comprises Oshawa, Ajax, Toronto, Hamilton, etc. You know how on maps, cities are often done in an orange/yellow/gold colour? Well, all of those cities basically blend together and wrap around that part of Lake Ontario. Hence, the Golden Horseshoe.

Have a good one!

JohnS

Thanks, much appreciated. I guess I am a bit too westernized.

 

[RedlineBrett]

QUOTE (housingrental @ Aug 8 2010, 09:32 AM) So is Calgary now a good place to invest both on a multi-family and single property basis?

The answer is no.

The REIN brain trust disagrees with you and for the second year in a row ranked Calgary as the top investment market in the country.

http://www.donrcampbell.com/wp-content/upl...ia-Release1.pdf

 

[Thomas Beyer]

QUOTE (gwasser @ Aug 11 2010, 10:50 AM) Thanks, much appreciated. I guess I am a bit too westernized.
nothing wrong with being "too westernized" .. and if the horseshoe is "golden" .. then W-Canada is either DIAMOND or PLATINUM !

 

[housingrental]

Hi Brett
Lets re-examine this in a few years
If you`re correct Calgary multi-family will have increased a fair bit
If I`m correct Calgary multi-family will be lower... whether from some combination of lower net income or from market cap rates increasing to closer to closer to 7% we`ll have to wait and see.

 

[RedlineBrett]

QUOTE (housingrental @ Aug 12 2010, 12:12 PM)
Hi Brett

Lets re-examine this in a few years

If you're correct Calgary multi-family will have increased a fair bit

If I'm correct Calgary multi-family will be lower... whether from some combination of lower net income or from market cap rates increasing to closer to closer to 7% we'll have to wait and see.




I'm happy to do that... Care to make it interesting?

 

[Thomas Beyer]

QUOTE (housingrental @ Aug 12 2010, 12:12 PM) .. market cap rates increasing to closer to closer to 7% we`ll have to wait and see.
love to buy at 7% CAP .. sight unseen actually .. that doesn`t exist in Calgary .. and hasn`t for a decade or even last year in the depth of the "great recession" .. so why now with improving oil pricing, rising gas prices, tightening vacancies, lower unemployment and improving economy ..

Expect to pay 5% CAP for a decent building .. 6% if you`re lucky .. whether a 5% CAP based building is a good investment, that is of course debatable .. but that is what is selling !!

 

[RedlineBrett]

QUOTE (ThomasBeyer @ Aug 12 2010, 03:06 PM) Expect to pay 5% CAP for a decent building .. 6% if you`re lucky .. whether a 5% CAP based building is a good investment, that is of course debatable .. but that is what is selling !!

The lower rates of return are also par for the course with smaller income properties as well - fourplexes and under where I do all my business. Some of my clients struggle to see cash flow when using conservative numbers across the board.

I think the `old world` return expectations are dying hard. Many investors that were used to higher rates of return for so many years are having a hard time coming to grips with the new money accepting lower rates of return. A lot of people made a lot of easy money in real estate for years and that has drawn a lot of interest to the industry.

I think the difference is in the operator. Cap rates from the outside looking in might be tough for some buildings but investors that know their stuff when it comes to managing property will still make great money. But if you are the type of investor that wants to write a cheque and be completely hands off and watch the high returns roll in you won`t make the money you might have 10-20 years ago. If you want to add to your portfolio going forward your expectations need to be adjusted. Just my $0.02.