Multifamily in Edmonton

[Thomas Beyer]

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?

As stated in my post above, capital upgrades and R&M need to be estimated realistically. They can be quite low in a renovated asset in a good area with low suite turnover, or they can be quite high in an older ugly asset in a crappy area with high suite turnover.

 

[Willyboy]

Thank you Thomas and Cory for the replies and advice.

 

[Matt Crowley]

The $750 rents are market in that dogshit market. Multi-family brokers are the least reliable brokers in commercial RE in my opinion and have run up the market with wild assumptions. Canada multifamily market is ~60% private investors. For these small deals, it isn't necessary for a broker to get repeat business.

In Edmonton, focus around Whyte Avenue. Zoning rules are going to change in the 5 years (lots of upzoning). Buy for location. Oliver... meh.

 

[Thomas Beyer]

The $750 rents are market in that dogshit market. Multi-family brokers are the least reliable brokers in commercial RE in my opinion and have run up the market with wild assumptions. Canada multifamily market is ~60% private investors. For these small deals, it isn't necessary for a broker to get repeat business.

In Edmonton, focus around Whyte Avenue. Zoning rules are going to change in the 5 years (lots of upzoning). Buy for location. Oliver... meh.

I have met MANY reliable MF mortgage brokers. Most in fact. Only rarely do they make poor assumptions or "run up the market with wild assumptions". Who gave you that impression ?

Edmonton has many decent areas and some not so good ones. Just be realistic in your price and rent assumptions. Many overpriced deals in QMP, for example. Saw one today at 119/door with a 4.3% CAP on fake expenses and fake vacancies. More like 100/door.

 

[Cory Sperle]

The $750 rents are market in that dogshit market. Multi-family brokers are the least reliable brokers in commercial RE in my opinion and have run up the market with wild assumptions. Canada multifamily market is ~60% private investors. For these small deals, it isn't necessary for a broker to get repeat business.

In Edmonton, focus around Whyte Avenue. Zoning rules are going to change in the 5 years (lots of upzoning). Buy for location. Oliver... meh.

I must respectfully disagree with almost everything in this response.. Like Thomas, MF Brokers are very reliable and I have not met a questionable one, but hey if buyers are uneducated and willing to pay more why not?

Edmonton has many decent areas to make money, but White avenue is not one of them in my opinion, I know REIN members burned there as well, mostly paying a 20%+ premium on price for the same crappy asset you can find in north Edmonton, same bad tenants, and maybe 5% higher rents if that.

Good call on that listing Thomas, I saw that as well and agree price point <100 a door, maybe 90-95. The good news is vendors are starting to wake up and smell the coffee and I predict more sales in the near future closer to actual values and metrics a building should be purchased for.

 

[DustinT]

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.

Rookie question: in what situations or why do you want to convert to condos? Thanks.

 

[Thomas Beyer]

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.

Rookie question: in what situations or why do you want to convert to condos? Thanks.

If mainly 2BRs, all above ground, in high demand area close to transit. Then doable with considerable cash required as very tough to finance partially discharged semi-sold building. Usually major upgrades required in-suite and major components plus reserve fund seeding. Very cash and work intensive and usually not worth anymore as buildings and condos trade at comparable prices these days. The gap used to be sizable but ain’t anymore.


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

 

[Cory Sperle]

Another little nugget I will add, is that for the first time in a very long time investors need to carefully watch interest rates as there is little doubt now that rates will be 1% or higher in a year or two from now, even more. This needs to be carefully calculated into the CAP rate you are paying, as rents will have to be considerably higher to compensate. Borrowing at 5% on a 6% CAP gives you a 1% spread on what you are borrowing compared to the income. When rates shoot higher, say 6%, the CAP would have to be worth 7%, or in other words your likely selling or refinancing your asset at a 7. Owners were very fortunate to get "free" equity in the form of CAP rate compression, which is now over and is going the other way. A brief example:

- 24 suites with a 6 CAP, $165,000 NOI bought for $2,750,000
- When CAP moves to 7, new value is $2,357,000, almost $400,000 erased!
- Rents would have to increase to a new NOI of $192,500 to maintain the $2,750,000 value, or $100 a suite which is very very hard in a flat market!

Hence be extra cautious these days, and factor in a higher CAP rate down the road in addition to all of the above advice.

Happy investing!

 

[Thomas Beyer]

Five year rates will NOT be moving up 1% in a year or 2 .. maybe 0.2-0.3%


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[Cory Sperle]

Five year rates will NOT be moving up 1% in a year or 2 .. maybe 0.2-0.3%

Sounds like a bet to me Thomas! Say loser buys lunch? I also predicted Trump to win the presidency

I truly hope your right, I do, but I've talked to a lot of folks as of late who believe otherwise.

 

[Thomas Beyer]

Five year rates will NOT be moving up 1% in a year or 2 .. maybe 0.2-0.3%

Sounds like a bet to me Thomas! Say loser buys lunch? I also predicted Trump to win the presidency

I truly hope your right, I do, but I've talked to a lot of folks as of late who believe otherwise.

Ok

Trump loses in 2020 and 5 year CMHC rates ( for loans over $1M but sub $5M) over 4%: lunch’s on me !


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

 

[TangoWhiskey]

Ok

Trump loses in 2020 and 5 year CMHC rates ( for loans over $1M but sub $5M) over 4%: lunch’s on me !


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

I want that bet too then, just talked to a MF originator for a loan that size range and he said its currently 3.25-3.5 % CMHC 5 yr money ie 100 basis points above the currently 2.4 % CMB.
For rates to move 50-75 basis points in 2 years with a US economy at full employment does not seem in any way unlikely to me. Hope you're right, but anyone buying right now its definitely better to have a plan for rates moving 1 % higher.
Getting 5 yr CMHC money at 2 % could not last, hopefully others here got belly up to that table when it was laid

 

[TangoWhiskey]

The $750 rents are market in that dogshit market. Multi-family brokers are the least reliable brokers in commercial RE in my opinion and have run up the market with wild assumptions. Canada multifamily market is ~60% private investors. For these small deals, it isn't necessary for a broker to get repeat business.

In Edmonton, focus around Whyte Avenue. Zoning rules are going to change in the 5 years (lots of upzoning). Buy for location. Oliver... meh.

Matt, where do you get that statistic of the Canadian MF market being 60 % private investors? Last summer I hired a business student to do an extremely in-depth inventory of the Nova Scotia market, principally HRM and select small secondary markets, inventorying about 900 buildings total typically in the 800K-3 mill price range. It was actually a fascinating study that you could spin many phDs out of IMHO ranging from wealth building to ethnic changes in ownership predominance (I was amazed to see how 'immigrant' or non Anglo Saxon names now predominate in a very non ethnically diverse part of Canada - so much for all the crap about how you can't get ahead that gov't unions spin). But in this price range, even at the upper end, public ownership was very limited, primarily to Killam. I think price range is your key factor there in determining that statistic, if it is such.

 

[bb2]

Queen Mary Park has some pockets that are very nice. To say it’s a dumpy area is a bit extreme. I owned a 4 plex in that area for years and did very well with it. The further away from 107 ave the better.


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[Willyboy]

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.

Regarding number 2 I mean the one with inflationary return, usually the average annual return over a 10 year period is 2-3% or like 20-30% over the whole 10 year period? I'm curious here because of this is the expected return then why bother with an apartment building just buy single houses and you will get 2-3% or even more a year on average over a 10 year period.
Am I wrong here?

 

[Thomas Beyer]

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.

Regarding number 2 I mean the one with inflationary return, usually the average annual return over a 10 year period is 2-3% or like 20-30% over the whole 10 year period? I'm curious here because of this is the expected return then why bother with an apartment building just buy single houses and you will get 2-3% or even more a year on average over a 10 year period.
Am I wrong here?

You need to count mortgage paydown, and with an inflationary 2% asset value growth your return over 5 years approaches 65-100% cash on cash.

Some thoughts on this topic here with a fictitious $1M.

Real estate is like a three course meal (TM). It has three profit centers: cash-flow (or the appetizer), mortgage paydown (the main course) and equity appreciation through asset improvements and inflationary rental upside (the dessert).

What is better: Cash-Flow or Maximum ROI ? http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/
Cash-flow does NOT make you rich, but it allows a sustained ownership. Appreciation and mortgage paydown (by others) is where you get wealthy.

 

[Tina Myrvang]

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.

Crappo - that made me laugh!!!!!! Love the 3 catagories.

 

[Tina Myrvang]

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.

Hello Seth,

I would like to introduce to you the REIN Coaching.

http://www.reincanada.com/aboutus/rein-team/rein-reia/

REIN Real Estate Investment Advisors are committed and equipped to help you:

• Eliminate roadblocks by helping you create solutions to challenges
• Discover new ways to do deals
• Build or grow your portfolio
• Stay Accountable to your goals to increase your productivity and achievement
• Globalize your reach
• Elevate your game to raise capital: find investors and centers of influence
• Commercialize relationships with professionals and vendors

 

[Novice]

Another little nugget I will add, is that for the first time in a very long time investors need to carefully watch interest rates as there is little doubt now that rates will be 1% or higher in a year or two from now, even more. This needs to be carefully calculated into the CAP rate you are paying, as rents will have to be considerably higher to compensate. Borrowing at 5% on a 6% CAP gives you a 1% spread on what you are borrowing compared to the income. When rates shoot higher, say 6%, the CAP would have to be worth 7%, or in other words your likely selling or refinancing your asset at a 7. Owners were very fortunate to get "free" equity in the form of CAP rate compression, which is now over and is going the other way. A brief example:

- 24 suites with a 6 CAP, $165,000 NOI bought for $2,750,000
- When CAP moves to 7, new value is $2,357,000, almost $400,000 erased!
- Rents would have to increase to a new NOI of $192,500 to maintain the $2,750,000 value, or $100 a suite which is very very hard in a flat market!

Hence be extra cautious these days, and factor in a higher CAP rate down the road in addition to all of the above advice.

Happy investing!

Thank you Cory for taking time and putting this info here for us, newbies

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[Cory Sperle]

Thank you Cory for taking time and putting this info here for us, newbies

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Anytime, if you wish more info don't hesitate to direct message me.