Multifamily in Edmonton

Seth Ferguson

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#1
Hi Everyone,

I'm curious to see what some of the Western investors think about this one...This would be my first purchase outside of Ontario, so I'm all ears to any advice. Much appreciated.

20 unit building in Edmonton's Queen Mary neighbourhood. Suites are in decent shape. Good suite mix: 9 2brs, 3 3brs, 6 1brs, and 2 bachelors.

Average rent works out to be $750/suite, which is below market value. I've seen some 1 bedroom buildings with average rents at 850/suite.

Seller is asking 113,500/suite, so 2,270,000 and is pretty firm. Comps are a little all over the place. A 15 suite building in same area is under contract at 113,500/suite, with 11 2brs, and 4 1brs.

Consensus seems to be that Edmonton's future is getting brighter. Do you think there's enough upside on this deal?

I think the best play is to go conventional at 70% LTV, refi after 1.5-2 years and go CMHC for long term.

What are your thoughts?
 
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derek11

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Jan 22, 2014
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#3
Seth
Considering that building was likely worth 125k/ door or more four years ago I would buy it if there isn't a ton of deferred maintenance. They are cheap there right now (on sale). The rents of $750.00 / month average are low, as you indicated, so there is room for immediate upside. 113k / dr is reasonable in my opinion, (a couple grand less would be better). I just got done (almost) buying one very similar in the same location. Good luck
 

ThomasBeyer

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#4
For over twenty years this shitty area has been “transitioning”. Proceed with extreme caution in that area as light and shadow are meters apart. Values will NOT go up very fast in that area. Edmonton is oversupplied. I think $100,000+ per suite for rents at $750is far FAR too high, and certainly over $110,000 for such an old building with at best avg suite mix.

No condo conversion potential here with that suite mix.
 
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ThomasBeyer

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#5
What are the deal economics:
Cap rate
Cash flow yield
What is the 3, 5, 7 year IRR?
How much cap ex required?
What is the business plan for the building?
What does the exit to condo look like?
Exactly. The math matters.

Little immediate upside. Plan to hold ten years minimum to make any money here.
 
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Seth Ferguson

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#6
Thanks for all of your comments. I'm learning about the Edmonton market and really appreciate it.

Thomas - which other areas would you concentrate on? Oliver seems to be the go-to from speaking with others.

The numbers below are based on...
- Bringing the average rent up to avg $900/unit throughout year 1 and an increase of 3%/yr thereafter.
- Vacancy at 6% for duration,
- Property appreciation at 2%/yr.
- I've rounded current expenses up to $85,000/yr. Expenses increase @ 2%/yr.
- 1st Mortgage 70% LTV @ 5.5%.
- Refi at start of year 3 with CMHC @ 4% at 85% LTV
- $50k in working capital
- Roof will likely need to be done around year 10 (not included in numbers)

Snip.PNG Snip 2.PNG
snip 3.PNG
 

ThomasBeyer

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#7
Expenses likely far too low, ie utilities, insurance and R&M much much higher.

Vacancy incl non-collections likely well over 10%. Many of these assets had rents drop 20-25% AND vacancies exceeding 20% in 2015 and 2016. Budget $5000/unit or 100k a year.

It’s an area for poor immigrants, loads of drugs, illegal occupation ie room mates and VERY HIGH turnover. Nearby arena has little effect here. Budget 2BRs at $850-900 and 1BRs at $700 to maybe $750 but only if nice.

$900 seems high for that dumpy area of Edmonton.

This asset is worth sub 100/door .. in the 90s/door. As such your 2%/yr value upside from 110s is an illusion.

85% refi doesn’t exist in Canada anymore unless in smaller towns with very good cash flow.

It’s an ok area to buy, at the right price, say 92,000/door although it will likely trade in the 100s/door.

Feel free to msg me privately, or send the proforma as much fiction is sold these days as “proforma”.
 
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CorySperle

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#8
This is a classic case of a vendor trying to unload his problem onto someone else, and asks full market price for a vast under-performing project. As stated above, this area is awful, and has been in "transition" for at least the 15 years I have followed the Edmonton MF market. He can't refinance as the true lending value is likely anywhere from 85 to 90 a door at the most, likely overpaid and is trying to find someone sillier than he was for buying it. There is no quick upside in rents in Edmonton, even with improving economies we are in very slow growth territory, rents increasing a measly few percent a year if that. Hudson Bay reserve (Queen Mary and Central Mcdougal) also have double the vacancy of other areas and very high turnover. Try going further north, like NAIT or the West side would be much better options. I have seen many out of town folks even REIN members get burned badly trying to go multi family in Edmonton.
 

Seth Ferguson

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#9
This is a classic case of a vendor trying to unload his problem onto someone else, and asks full market price for a vast under-performing project. As stated above, this area is awful, and has been in "transition" for at least the 15 years I have followed the Edmonton MF market. He can't refinance as the true lending value is likely anywhere from 85 to 90 a door at the most, likely overpaid and is trying to find someone sillier than he was for buying it. There is no quick upside in rents in Edmonton, even with improving economies we are in very slow growth territory, rents increasing a measly few percent a year if that. Hudson Bay reserve (Queen Mary and Central Mcdougal) also have double the vacancy of other areas and very high turnover. Try going further north, like NAIT or the West side would be much better options. I have seen many out of town folks even REIN members get burned badly trying to go multi family in Edmonton.
Thanks for the comments! This is exactly why I'm asking.
 
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ThomasBeyer

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#10
This is a classic case of a vendor trying to unload his problem onto someone else, and asks full market price for a vast under-performing project. As stated above, this area is awful, and has been in "transition" for at least the 15 years I have followed the Edmonton MF market. He can't refinance as the true lending value is likely anywhere from 85 to 90 a door at the most, likely overpaid and is trying to find someone sillier than he was for buying it. There is no quick upside in rents in Edmonton, even with improving economies we are in very slow growth territory, rents increasing a measly few percent a year if that. Hudson Bay reserve (Queen Mary and Central Mcdougal) also have double the vacancy of other areas and very high turnover. Try going further north, like NAIT or the West side would be much better options. I have seen many out of town folks even REIN members get burned badly trying to go multi family in Edmonton.
Right on Cory.

Amen to this analysis.
 

CorySperle

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#12
When I analyze an apartment building I generally lump them into three possible categories:

1. Home run deals - either premium condition with under market rents that value can be raised quickly, or crappy buildings bought very CHEAP that deliver at least a 2:1 bang for your buck on all costs including upgrades, holding, and fees. Large upside in short time periods are possible, however these deals are rare, especially premium ones.

2. "Market" deals where the building is decent, and operating normally with low vacancy in decent areas that one can buy and make a decent inflationary return over say 5 to 10 years.

3. "Crappo" deals needing a lot of work, high vacancies, and delusional vendors asking full market pop for inferior product.

In my years about 95% fall into #3, and the remaining 5% in #2, and about 1/500 in #1. Finding a decent building takes a lot of time, patience, and effort to avoid falling into the trap of #3. The biggest issue for new folks entering this space, is they will often buy buildings that sophisticated investors would not touch, and find out too late they have paid too much. Once you close on the project you own it and it is surprisingly easy to break you financially and mentally with even small mistakes.
 

ThomasBeyer

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#13
When I analyze an apartment building I generally lump them into three possible categories:

1. Home run deals - either premium condition with under market rents that value can be raised quickly, or crappy buildings bought very CHEAP that deliver at least a 2:1 bang for your buck on all costs including upgrades, holding, and fees. Large upside in short time periods are possible, however these deals are rare, especially premium ones.

2. "Market" deals where the building is decent, and operating normally with low vacancy in decent areas that one can buy and make a decent inflationary return over say 5 to 10 years.

3. "Crappo" deals needing a lot of work, high vacancies, and delusional vendors asking full market pop for inferior product.

In my years about 95% fall into #3, and the remaining 5% in #2, and about 1/500 in #1. Finding a decent building takes a lot of time, patience, and effort to avoid falling into the trap of #3. The biggest issue for new folks entering this space, is they will often buy buildings that sophisticated investors would not touch, and find out too late they have paid too much. Once you close on the project you own it and it is surprisingly easy to break you financially and mentally with even small mistakes.
Well said.

You can easily be off 10% on each of these six pillars for potentially disastrous financial consequences

A) acquisition price
B) rent assumptions
C) vacancy assumptions
D) operating expense assumptions
E) financing costs
F) deferred maintenance / upgrade costs

If you are at least at market with all five then indeed apartment buildings can make a lot of sense as several folks in the REIN community have demonstrated repeatedly. The space is tight and inventory low at reasonable prices in decent enough locations though.

But if you are off on or or only two of these five spaces then you might not make any money over five years. As such, not a slam dunk anymore. If you’re off on 3 or more capital loss ( and associated bankruptcy, marital distress or health issues ) a distinct possibility !!

Only if you are well advised, with sufficient cash depth, deep local research, determination and emotional support will you do well.


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

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#14
I appreciate all of your points and time! We're actively searching for a mentor for the first few deals so we can avoid making those mistakes. We're located in the GTA, and while the appreciation has been great for us for our residential properties, rent control and really compressed cap rates leave us wondering if there's a better play when purchasing larger multifamily buildings, which prompted us to start looking outside of Ontario.
Would you guys say stick to the GTA since we know it well, or go out of province in search of more favourable landlord/tenant laws? The GTA's periphery has some potential with higher caps, but the rent control issue is still present.
 
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CorySperle

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#15
Well Said Seth, and although challenging and not the slam dunk that it used to be in the (2002 to 2007) or even (2012 to 2014) massive uptick years, I personally stick to Alberta and Saskatchewan for the reasons you mention and rent control laws of course. I find if I turn over enough rocks, eventually good deals present themselves. I mentor from someone locally knowledgeable is a solid plan as well.
 
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CorySperle

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#17
What do you think of the Canora area in Edmonton in regards to small apartment buildings?
Proceed with extreme caution. I'm not a fan of small buildings because the costs are the same buying a larger one, and Canora has lots of 6 to 12 suiters from 149th street to 156th. The farther away you are from Stony Plain Road the better, north or south, but south is better. The area from 149 to 156 a block south and north is extremely sketchy, and has the highest payday loan count of any street in Edmonton, peep shows, you name it. That being said the west end is still far better than Hudson Bay Reserve. The areas change all the time and I'm constantly in the loop from my PM who manages in all areas in Edmonton.
 

Willyboy

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#18
Expenses likely far too low, ie utilities, insurance and R&M much much higher.

Vacancy incl non-collections likely well over 10%. Many of these assets had rents drop 20-25% AND vacancies exceeding 20% in 2015 and 2016. Budget $5000/unit or 100k a year.

It’s an area for poor immigrants, loads of drugs, illegal occupation ie room mates and VERY HIGH turnover. Nearby arena has little effect here. Budget 2BRs at $850-900 and 1BRs at $700 to maybe $750 but only if nice.

$900 seems high for that dumpy area of Edmonton.

This asset is worth sub 100/door .. in the 90s/door. As such your 2%/yr value upside from 110s is an illusion.

85% refi doesn’t exist in Canada anymore unless in smaller towns with very good cash flow.

It’s an ok area to buy, at the right price, say 92,000/door although it will likely trade in the 100s/door.

Feel free to msg me privately, or send the proforma as much fiction is sold these days as “proforma”.
Because I haven't purchased anything yet due to family reasons that is I haven't experienced the real numbers as far as expenses on houses or buildings I keep wondering about those proforma things which apparently seem to be maybe simplified or underestimated as compared to the real numbers in reality. this is because when I check proforma online I generally see the following numbers for expenses:
Property management: 10%
Vacancy: 5%
Maintenance and repairs: 5%

So what I did is I called a number of property management companies to check those numbers before I go forward with any purchase so I won't get surprises down the road and some of those agencies told me the percentage on R&M could be way higher than 5% in reality. They said it could be 15% to 25% on old properties. And vacancy could be 10% or more.

Do you think they could be correct or they may be also exaggerating?
 
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CorySperle

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#19
They are absolutely correct. As I said previously, they are unloading their problem on to you, so expect massive deferred maintenance in years one and two, as the new manager you hire will expect you to upgrade to attract and retain tenants, and the huge kick in the scrotum these days is a tenant leaves paying $1000, you have to pay $10,000 to upgrade his suite or it stays empty, then re-rent it for $875. It's cowboy capitalism at it's finest. My opinion is the insane shifts from 2005-2017 are over, and one must be extremely conservative going into any deal these days.

The reality there are many owners, recent, and long term who are trying to unload their projects to uneducated buyers, don't be one of them.
 

Martin1968

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#20
They are absolutely correct. As I said previously, they are unloading their problem on to you, so expect massive deferred maintenance in years one and two, as the new manager you hire will expect you to upgrade to attract and retain tenants, and the huge kick in the scrotum these days is a tenant leaves paying $1000, you have to pay $10,000 to upgrade his suite or it stays empty, then re-rent it for $875. It's cowboy capitalism at it's finest. My opinion is the insane shifts from 2005-2017 are over, and one must be extremely conservative going into any deal these days.

The reality there are many owners, recent, and long term who are trying to unload their projects to uneducated buyers, don't be one of them.

Really good stuff in all the posts above. Couldn’t agree more.
The deferred maintenance of 10.000K a suite, let’s say 750 sq ft, 2 bed 1 bath, make that about 20.000K contractor cost per apartment. This is true cost of a complete Reno, not talking about a new countertop on an old kitchen, or a new tub wall on your retro coloured bathtub, but everything brand new, and this amount doesn’t include new appliances.
Lets say it’s a six plex with 15 windows, 6 slider doors and 2 entry doors, tag on another 30.000K, and heaven forbid you need a new flat roof, 15-20K.
So, expect your 6 suiter at a purchase of let’s say 660K (110 a suite) to cost you 825/830K. For that you now have an outstanding product, but will it cash flow? Highly doubt it. ($100/150 per suite is lousy cashflow IMO) This would be the same for any 12, 18 or 20 suiter.

Furthermore, I wouldn’t say not to invest that far from home, but you will definitely be at the mercy of the property manager that is entrusted with your investment. I’m not saying there aren’t any good propertymanagers, but in today’s competitive markets like Edmonton Red Deer and Calgary, I can assure they would just be a little less precise in who they will put in your apartments. Who will be checking up on the PM?

So, seeing all the advice you have gotten,I would think twice about the acquisition.
Regards.
 
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