Six is the Sweetspot for New Investors

[RealtyHub]

On an almost daily basis I have a conversation with someone who wants to try their hand at real estate investing and become a landlord. There are always alot of different questions that come up, but one of the more frequent ones is; "where do I begin?". It is a very open-ended question which can garner any number of responses. However, given the current Canadian economic and institutional landscape, my response is to "Start with Six". Six-plex that is.











I think that the purpose built six-plex offers new investors their best opportunity to become a real estate investor as it sits in the sweet spot of a venn diagram consisting of 3 circles representing 1. Manageability 2. Cap Rate and 3. Low Interest Rate.











Manageability











Most new investors want to be involved with their real estate investment as they see it being a new adventure (and rightfully so), they want to gain valueable knowledge and experience and they want to save the costs associated with hiring a superintedent and/or property manager. Managing six units may seem like a daunting task at first, but once you dive in you will realize that it is not all that difficult as long as you are a well organized individual that has a few hours to spare every week. While managing one unit (eg. condo) is an easier task, the superior return from a six-plex more than off-sets the extra effort. Tips to help with efficient management of the property include:

• Ensure close proximity to property
• Try to get post-dated cheques from tenants
• Prepare a list of contractors (plumber, electrician, handyman)
  
  
  
  
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    Cap Rate
    
    
    
    
    
    
    
    
    
    
    
    The cap rate for a multi-unit residential property typically has a directly proportionate relationship between the number of units and cap rate (until it reaches a plateau and levels off). For example, the cap rate for a six-plex is higher than a tri-plex which is higher than a single unit. While georgraphy and location play a critical part in determining the cap rate for a typical six-plex, it is safe to say that the cap rate range is somewhere between 5% to 6%, which is significantly better than most condos and tri-plexes. The six-plex lets real estate investors start to take advantage of economies of scale and thus provide a better return. Tips for those looking to maximize the return on a six-plex:
    
    
    
    
    
    
    
    
    
    Look outside the big urban centers and look to smaller towns university
    towns such as Kitchener-Waterloo, Guelph, Hamilton, etc...
    Look for purpose built six-plexes as they have better re-sale value and typically require
    less maintenance
  
  
  
  

Low Interest Rate











A low interest rate is the linchpin to making the six-plex the best place to start for new investors. The math is simple, the cheaper your mortgage interest rate, the bigger the potential spread (difference between interest rate and cap rate) and bottom line profit. Mortgage rates vary based on whether a property is classified as "residential" or "commercial". They are handled by different departments and have different rates. Commercial rates tend to be higher by a percentage point or two than those offered on residential properties. This is where the secret lies in maximizing your ROI on a six-plex. While just about every financial institution in Canada offers commercial rates for six-plexes, the Royal Bank of Canada ("RBC") offers financing on six-plex multi-unit residential properties at residential rates. This means getting mortgage rates in and around 3% for a six-plex (at the time of publishing this article the rate of approx. 3% was accurate, however, rates can change without notice). Tips on where to get started with RBC mortgages:

• Luciano Guarino - Mortgage Specialist (416.575.5994)
  Mario Mancini - Mortgage Specialist (647.405.2518)
  
  
  
  
  

In Summary











When you put these three components together (manageability, cap rate and low interest rate), the six-plex is the ideal starting point for new investors as it provides an investment that is relatively easy to manage, yet at the same time delivers a great spread of between 2% to 3% based on the economies of scale offered and financing available at residential rates.











Author: Paul Kondakos, BA, LL.B, MBA - Professional Real Estate Investor - RealtyHub.ca

 

[Thomas Beyer]

A six-plex is one of many many options to make money in real estate. Depending on the city, a sixplex for $900,000 in a city like Toronto, Lower Mainland, Edmonton or Calgary requires $200,000 to $300,000, which is above many folks' capacity. Of course a six-plex in a small, higher risk town can be had as low as $300,000 or $60,000 cash. It can be a good investment, but it is also less liquid on exit than a house, townhouse or condo. Calling it a "sweetspot" is a stretch to me.



It is an option, but just one option, and not necessarily the best option.



The best option depends on the person's life circumstances, her/his money availability, credit score, ability or desire to self-manage, time availability etc.



Other options are:

a) a townhouse

b) a rental pooled condo (that is how I started and still own a few)

c) a 20-plex apartment building (more money, but more efficient to manage than a 6-plex)

d) a strip mall / a small (or big) retail center

e) a single family house, ideally with an up and down unit, possibly a separate garage, i.e. three income streams

f) lease options

g) REITs

h) MICs or mortgage investments

i) JV with others, ie. co-ownership with an expert in a certain sector

k) pre-sales

l) land development (say a sub-division into 3 or 4 lots which can be very profitable)

m) a small (or big) trailer park

n) a small (or big) office building

o) a small (or big) industrial building



All of those can be good options in the right circumstances, some better than others, all with their pro's and con's.

 

[Sherilynn]

[quote user=ThomasBeyer]The best option depends on the person's life circumstances, her/his money availability, credit score, ability or desire to self-manage, time availability etc.


I agree 100%.



For some people, condos are the way to go. Others won't consider anything but single family homes. It is a personal choice for personal reasons, as Thomas said. There is no one right answer, and certainly no magic formula.

 

[Sherilynn]

Besides which, have you ever tried to find a good six-plex in a place like Edmonton? They are few and far between, and the good ones get snapped up quickly. Not exactly 'new-investor-friendly.'

 

[jonathanb]

Some good points above- however, i would add that a good majority of people find that Real Estate investing isn't for them very quickly. (risk tolerance, time, not suited to there personality etc, want the money for something else)



And for that reason, a condo would likely be a good first property because its far more saleable, with much lower transaction costs in the event the investor wants out.



Just a thought.



Jon

 

[JimWhitelaw]

[quote user=jonathanb] Some good points above- however, i would add that a good majority of people find that Real Estate investing isn't for them very quickly. (risk tolerance, time, not suited to there personality etc, want the money for something else)



Good points. But RealtyHub's posts aren't really meant to be helpful to the community here, they are just link-bait to drive traffic to their business. Seven posts, all highly advertorial in nature, cut and pasted here without attention to formatting and loaded with backlinks and topic tags. No responses or other engagement in the myreinspace community. Borderline spam.

 

[bizaro86]

[quote user=Sherilynn]Besides which, have you ever tried to find a good six-plex in a place like Edmonton? They are few and far between, and the good ones get snapped up quickly. Not exactly 'new-investor-friendly.'





This is a great point that basically invalidates the entire original post, imo.



I'd love to buy a purpose build 4-8 plex in Calgary, but everything that's available is much, much more expensive per unit than the prices I've been able to continually buy equal or better quality condos at. So what's the advantage to paying much more per unit for a 6 plex? Maybe one could save money on and have more control over building management, but the higher prices and lower liquidity really outweigh that in my opinion.



Regards,

Michael

 

[housingrental]

Jim I thought you were against witch hunts on posters - ?



[quote user=JimWhitelaw][quote user=jonathanb] Some good points above- however, i would add that a good majority of people find that Real Estate investing isn't for them very quickly. (risk tolerance, time, not suited to there personality etc, want the money for something else)



Good points. But RealtyHub's posts aren't really meant to be helpful to the community here, they are just link-bait to drive traffic to their business. Seven posts, all highly advertorial in nature, cut and pasted here without attention to formatting and loaded with backlinks and topic tags. No responses or other engagement in the myreinspace community. Borderline spam.

 

[bennyskywalker]

I'd say that a 6-plex is pretty risky for a new investor. It's not liquid enough to unload if the person decided that real estate investing was not for them. I have a friend who thought real estate investing was for them - but turns out - it is not - at this point in his life.



As a started I'd recommend a 3/2 townhouse. They have a nice price point, and are somewhat liquid. You can sell to other investors or to a 1st time buyer - so lots of market options.



I find that buildings such as condos, 3/2 towns, houses, and a duplex is still capable to sell to both investors and the retail market (retail being someone that will move it).



Once you move to triplexes, 4 plexes, 5/6+ plex units, you are move out of the retail market, and into more investors market - so now your audience is more limited. You won't be selling a 4 plex to a first time home owner for example.



So, as a start, start with a 3/2 town. You can even expand the answer to "where do I begin?" - I'd answer - with a commitment. I and my business partner committed to buying 10 doors - then re-evaluate if this was a good business. You could tell after 3 it was - but after the 1st one... not so much. I can't even imagine learning the ropes with a 6-plex.