builder/investor

[JohnKrahn]

Hello All,


I've been reading this forum for a while and found it informative so I thought I'd join in. I'm a multi-family/commercial property developer/investor in a city of about 10,000 people and growing in southern Manitoba. I've considered taking my business model to other similar sized communities but haven't taken that step as of yet. Are there any other investors out there who have a large portion of their investments in small cities?

 

[fdrover]

John,


My wife and I have been investing in Labrador City, NL ( pop. 10K) for the last 8 years or so. We currently own an 11 unit and a 15 unit along with a mobile home and a townhouse, plus our personal residence. Because this area is subject to the ups and downs of the mining industry, there are 4 iron ore mines nearby and another being planned, we have also purchased other single family homes on the island of Newfoundland, near St. John's. Cash flows are very good now that most all of the apartments have been renovated. We are looking forward to purchasing additional properties in the smaller cities of Newfoundland.


All the best,


Fraser Drover


droverproperties.ca

 

[Thomas Beyer]

We invest and have invested in bigger and smaller towns - usually apartment buildings - primarily in AB and SK .. but have also invested in BC and ON ..





Smaller towns have the advantage of better CAP rates, thus better cash-flow yields on the cash invested, but also have the following drawbacks that have to be weighed against lower prices/better CAP rates:


a) less liquidity when it is time to sell i.e. less buyers


b) harder to finance, especially when using CMHC financing


c) more impact of economic downturns, i.e. higher vacancy potential, sometimes very fast


d) lower rents compared to big city with similar expenses

 

[JohnKrahn]

Thank you for your comments. The main reason I've invested in southern MB is because it's where I live and do business. I struggle with the idea of having investments in an area that I wouldn't know/understand the way I know my hometown, but I suppose with the right team in place it would all work just the same.


I feel that I have unique opportunities to create equity in my position here and I've wondered if my business model would work in other communities as well. As a developer and builder, I often create enough equity in a project to cover the cash down payment required to get financing. For example, in 2009 my partner and I developed a 28 suite condominium project at a cost of 2.5m (our Ltd partnership did the project). As the general contractor, my own building company (different than the development co) charged my standard fee to manage the project so costs to build were the same as if we would have hired someone else to build it. We sold 16 of the units to investors and/or live in owners for a total of +/- 2.0m and then to close the project we sold the remaining units to ourselves personally at our Ltd companys cost to develop (we each purchased 6 units for 500k, appraised value on these 6 units was 704k). Bottom line was that our Ltd partnership profited 400k (after legal and selling expenses), and we each personally owned 6 units fully mortgaged at our cost of 500k (which the bank had no problem financing because of the 71% LTV). On another note, we did have a separate interim construction mortgage in place while we were building, until the condo titles were created.


I have also developed several commercial projects (strip mall, office building, commercial/industrial space) using the same concept and it worked well, although not to the same extent as the one mentioned above.... I am not trying to boast, rather I wonder if this concept could work in other areas?? Or do I live in a pocket of the world where this situation may be unique and only for a season? Are there others out there who have developed new multi-family buildings? If so what are some of the experiences you have had?


Hopefully my ramblings make sense, thanks for your input.

 

[Thomas Beyer]

Construction projects work anywhere were there is demand for the product you're building !


Otherwise, no one would build.


Selling condos to investors works too in many places .. although it is unclear if "investors" actually make money in your poroject or in others as making money in newly built condos and rent them with cash-flow usually does NOT work unless there is a significant downpayment !!

 

[fdrover]

Thomas,


Well said. I have been looking at purchasing a condo or two in the St. John's, NL area where I plan to retire in 8-10 years or so but can't seem to find one that will positively cash flow with 15 - 20 % down. When you add the monthly condo fee onto the mortgage and insurance, municipal taxes, etc, it gets quite expensive. However I have a 15 unit in Labrador City that I wouldn't mind turning into condos if I knew what I was doing and if the payoff was worth it. Heck, the experience of having done it would be an added bonus. In Labrador City we are landlocked by the mining companies so there aren't many places left to build multi-family units.


Fraser Drover


droverproperties.ca

 

[JohnKrahn]

Thomas, You are correct regarding investors needing a down payment to cash flow. The down payment required to have a small positive cash flow in the condos in this project was 25%. Most of the investors were also speculating on gain from appreciation because the condo concept is relatively new in this area. One of the 3 bdrm units which we sold during construction at 127,500 sold for 134,500 approx a year later so there was a modest upside there.


Having said that, I guess my question lies not so much in the sale of units, but rather in the cost to build new versus cost to buy used. Typically the cost to build new is less than to buy a comparable used property here. Is that the case in other areas as well assuming that there would be land available to build on? The reason I ask: the way I get myself into ownership usually involves creating value where there previously was none, which ends up being the equity/down payment required to finance the full cost of the project. I also like to make sure that there is actual legitimate value being created, not just an inflated appraised value just to obtain financing (which can cause a lot of issues as we can see when property values drop slightly)

 

[housingrental]

Hi Zebediah I ask that you please remove or edit your post. This is just a non-sensical post and could cause others harm


Though you might have had good intentions writing please take a minute to edit it