How to grow a really large multi-family portfolio

TangoWhiskey

Frequent Forum Member
Registered
[quote user=ThomasBeyer]Capability, attitude, market timing, "fate/providence" all have to line up. It is not as predictable as you may think.



Point taken... like life itself. But since we assume, mistakenly or not, that life will unfold somewhat like we plan or hope it to, we shoot for a certain level and try to control for the risks we can along the way.
 

RE123

Inspired Forum Member
REIN Member
This thread has brought up a few very interesting points:





1 ` What is the most productive use of your time:


Option A ` Spend time trying to find great deals


Option B ` Spend time finding money and then using that money to purchase more readily available deals (i.e. average deals)





For the longest time, I have been pursuing Option A and I`m just not getting the results that I`m looking for. Although I would like to hit home runs with all the properties that I buy, I`m starting to think that Option B is the better approach. Here are my findings:


-Every Broker specializing in multi-family has their short list of favourite clients. These are clients that are relatively easy to work with and who consistently close on properties. If you present yourself as someone who has high expectations and who is picky about the deals that you are willing to accept, why would they waste their time bringing you a deal when they can just bring it to one of their favourite clients? My findings indicate that they won`t bother to bring you the deal unless their favourite clients have passed on it.


-I know of a few investors that have closed on multi-family properties that I could have just as easily purchased but decided to pass on the deal because the numbers weren`t going to give me the kind of ROI that I was looking for ` these properties had cap rates of 5 or less. While I have continued my search for good deals, they have closed on many similar deals. The result is that all of a sudden, their portfolio has grown significantly. They are now gaining valuable experience in this business and brokers have recognized them as players in this market. They are now also very marketable to investors because from the outside looking in, it appears as though they know what they`re doing and seem to be successful despite having (in my opinion) a relatively low performing portfolio. As they continue to grow and establish themselves in the market, their network will grow and they may be more likely to hear of a great deal before I do.


-Much like Thomas has suggested, great deals are difficult to find and there may not be enough of them to grow a business around.





Option A will result in a small portfolio of highly productive properties while Option B will result in a large portfolio of less productive properties. If both options achieve the same goal, why not pick the easiest one?

2 ` It has been implied in this thread that it is difficult to get rich quick in real estate. I would have to disagree with this general sentiment. In fact, I think that it can be done without doing anything extraordinary: Suppose I buy a multi-family property with a 5.75 cap (including appropriate assumptions for management, vacancies, maintenance, cleaning, snow removal, etc.) and assume the property is in average condition in an average location. I get high-ratio financing and my initial investment (down payment + closing costs) represent about 25% of the purchase price. At today`s interest rates (say 2.5%) that gives me an ROI of roughly 15% when I consider principal repayment and cashflow. This means that I can double my money every 7 years without any rent increases or appreciation. With increases in rent and corresponding increases in property value, I should be able to double my money at least every 5 years. If I refinance every 5 years and roll my equity and accumulated cashflow into similar properties, I should be able to turn 250K into 1M in 10 years. Since taxes and capital expenditures eat into some of this, I would conclude that this is possible in 15 years ` faster in a good market and slower in a bad market. Is this quick? I think it is but it depends what your expectations are. This is essentially my plan.




I would like to hear your thoughts.
 

Thomas Beyer

Senior Forum Member
REIN Member
[quote user=RE123]

At today`s interest rates (say 2.5%) that gives me an ROI of roughly 15% when I consider principal repayment and cashflow. This means that I can double my money every 7 years without any rent increases or appreciation. With increases in rent and corresponding increases in property value, I should be able to double my money at least every 5 years. If I refinance every 5 years and roll my equity and accumulated cashflow into similar properties, I should be able to turn 250K into 1M in 10 years. Since taxes and capital expenditures eat into some of this, I would conclude that this is possible in 15 years ` faster in a good market and slower in a bad market. Is this quick? I think it is but it depends what your expectations are. This is essentially my plan.





I would like to hear your thoughts.


Pretty much bang on !



My first property that I bought in 2000 for $570,000 with $100,000 cash recently sold (the 3rd time after I sold) for over $1.5M. I could have turned $100,000 into over $1M in 12 years. Today that is a bit slower .. but doubling your money invested every 5 to 7 years or so is QUITE DOABLE with average buildings !!!



Account for payments to investors though (say 50% of it) if you raise money .. so wealth creation will be faster for you and slower for investors with that formula. But it is a proven wealth building formula.



That's why I often said: It is not a get rich quick scheme. It is a get rich for sure scheme !



See you all on Saturday, June16 at the REIN money raising event in Toronto !
 

TangoWhiskey

Frequent Forum Member
Registered
Thomas et al - in one of the markets I target and know well an old owner I've been pursuing for months and months has finally decided he wants to sell his portfolio to me. One bldg is a mixed commercial/apt building with commercial units below and residential above. The breakdown is about 50/50 in terms of units, revenue and overall space. I believe CMHC only allows 10 % non residential in this situation so this financing is not an option.



Assuming the valuation of this building is the same as for an apt building, NOI over cap rate, what considerations should there be? Thomas - I've read your posts talking how commercial is generally 2 % higher cap to adjust for risk - would I halve that for the fact its only 50 %? I will look closely at the health of the commercial tenants - any other thoughts?



thanks



Tris
 

Thomas Beyer

Senior Forum Member
REIN Member
[quote user=TangoWhiskey]Thomas - I've read your posts talking how commercial is generally 2 % higher cap to adjust for risk - would I halve that for the fact its only 50 %? I will look closely at the health of the commercial tenants - any other thoughts?
indeed .. say use a 6% CAP rate for apartment portion and 8% for commercial portion.



There is GST/HST payable on the commercial portion.



Analyse commercial separately from apartments upstairs, i.e. lease ladder, TI, who pays for taxes or R&M etc. ..
 

mikelohan109

New Forum Member
Registered
I'm not really an expert on real estate but I know this is a great idea, I'm also reading this thread to have more ideas in real estate.
 
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