How to evaluate value investment property?

[Thomas Beyer]

[quote user=LawrenceMak]

... I suppose the next step, is to start small with something and then gain experience before I move up the ladder!


Indeed .. I started with 3 80,000 condos .. [ hence the book title]

 

[REQRentals]

[quote user=LawrenceMak]Out of curiosity, how does one come up with a cap-rate, of say 6%?



Is it based on similar properties in the area? Or is it based on yourself as an investor, that you could get 6%+ somewhere else (stocks, other cities), so anything less than that isn't worth it for you?



I guess i just don't understand how one could find a property with a 6% cap-rate (only NOI, not appreciation) in the GTA.. Either that, or i haven't found it yet!



(I'm also a beginner, so does cap-rate only talk about NOI and never considers the appreciation?)



Thanks for your tips!


I do not think you have been able to find 6% in the GTA for a long time other than Hamilton possibly.



We do however still sell a lot of 80,000 Tampa properties to Toronto investors for that reason.

 

[Thomas Beyer]

[quote user=REQRentals]

I do not think you have been able to find 6% in the GTA for a long time other than Hamilton possibly.
Indeed, due to low interest rates and little alternatives to invest in that have a yield with low risk.



As stated, that was an example only as the original poster did not state what city or even property type. Of course Vancouver, Calgary, Edmonton, GTA would have lower CAP rates, say 4-5%, given that you can get CMHC mortgage at 2.3% or non-CMHC commercial mortgages in the low 3% range.

 

[Joel]

[quote user=ThomasBeyer]

Buying a building is not that simple (i.e. price/door or CAP rate) as
it may look as many, often very time-intensive factors have to be
considered such as:

a) CAP rate

b) price/door

c) what is behind the door i.e. condition of suite

d) what is in front of door, i.e. condition of common areas

e) rents today

f) immediate rental upside

g) long term rental upside

h) balconies ?

i) suite size or price per sq ft

j) views ?

k) macro-location, i.e. future of city/town

l) micro-location i.e. suburb or local area pluses and minuses

m) condition of major elements like roof, boiler, windows, balconies

n) interest rate on mortgages

o) cash per door i.e. cash-to-mortgage

p) availability of 1st and 2nd mortgage money

q) condo conversion abilities / potential

r) who pays utilities

s) potential future tax increases or decreases

t) ability to lower operating expenses

u) curb appeal

v) `feel` of suite / attractiveness

w) competition from new construction

x) competition from existing buildings

y) in-migration

z) new jobs coming (or leaving)


.. maybe I forgot 3 or 6 more ..


one of these elements overlooked .. and there goes $100,000 or $1M in potential profits !!


Yes, you can do it yourself, and many have, or you can join with experts !







That's Amazing!

Thanks Thomas

 

[LawrenceMak]

[quote user=REQRentals]

Port Credit would be my bet.





That's a _really_ good guess.

 

[Matt Crowley]

[quote user=LawrenceMak](I'm also a beginner, so does cap-rate only talk about NOI and never considers the appreciation?)




Theoretically, cap rate fully considers all future appreciation. Once you have stabilized NOI, the cap rate is before-tax cash return you should expect on the property.



Cap rate = Discount rate - growth rate



REQ Rentals has a great point about what your "acceptable" cap rate should be. The greater your expected growth rate, the more you should be willing to pay for the property and the lower the cap rate.



The accurate discount rate is much more difficult to objectively define. Intuitively, you should look to a similar asset class with similar risk characteristics...hint: there isn't one. REIT indexes, TSX,...any publicly traded company has the benefit of diversification and experience in the industry.