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The Double Edged Sword of New Rental Construction

There are many reasons I love new dedicated rental buildings. There’s also a lot of reasons I love working out of a RE/MAX brokerage. I have many great commercial clients and a lot of wonderful friends who are simple residential clients. There’s also a world that crosses the divide; investors who want to move up from a couple dozen houses to an apartment building.

This summer however, the two worlds connected in a new way for me. I had three clients move out of new dedicated residential rental construction and buy homes. In one case they were a young professional couple who bought a $250k townhouse, one bought a $450k new build detached home and one bought a $350k existing home. The common reason they all gave for moving out? The poor quality of the building and the management. In one case there was an 8 foot long settlement crack in the living room.

The double edged sword is this: It’s great to build nice looking buildings and push for the top end of the rent range, but the tenants you attract are high maintenance, have high expectations and the same high incomes that fuel your top of the market rents also make them great home buyer candidates. They’re renting by choice and it doesn’t take much to change their minds and move them into an ownership mindset.

Come to think of it, I might start targeting some residential buyer focused advertising at those buildings to see if I can’t convert them into good buyer leads for my team…..

First published at: http://www.chrisdavies.ca/2014/09/the-double-edged-sword-of-new-rental-construction/

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This 18-suite, 3 1/2 story walkup is situated in Westmount, a rapidly transitioning area, well positioned to benefit from the new NAIT LRT line, Arena and City Centre Airport redevelopment. Brand new windows, roof, balcony decking
and railings with a very strong suite mix.

Offered at $2,250,000 ($125,000/suite).

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SOLD! Beacon Heights 4-Plex

This solid 4-plex is tucked into the mature neighbourhood of Beacon Heights. Strong rents, low vacancy and convenient access to Yellowhead Trail, this property will also benefit from the final north east leg of the Anthony Henday. The two upper units have balconies and there are two new high efficiency furnaces and a newer hot water tank.


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An Open House for an Apartment Building?!?

It’s almost unheard of to throw an open house for a multi-family building. Usually there’s creepy tenants, you can’t see much of the building and they’re sold before they’re listed anyways. Until now.

We’re having an open house for a building today (Wednesday) from 1-4pm. Why? Because it’s essentially brand new. They’re just days from finishing construction and getting the occupancy permit. That gives us a perfect chance to show people around. If you’re free, come by 13115-69 Street and check it out.

You can get some of the info for the property on our listing page and download a proforma here.

 

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New Listing – Forrest Heights 4-Plex

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Listing Update for June 2012

We’ve added a page for our exclusive listings (we’ll also include our own MLS listed properties as they come up), as well as some information and made sure we’ve got working contact-us forms. The curse of being busy is that we don’t have time to work on sites like this.

Here’s a taste of some other good listings out there. Give us a call if you’d like to go check them out.

  • 15 Suites – Eastwood – 97th Street Handyman Special on 97th Street – David Parker, DTZBarnicke
  • 15 Suites – Jasper Place – Solid Building, lots of upgrades – Pam Gill, Sutton Sutton Central
  • 8 Suites – Westmount – Decently Priced, Good Area – Pam Gill, Sutton Central
  • 13 Suites – Eastwood – Simple, has balconies – Miki O’Ree, RE/MAX Excellence
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We’re working to compile a better database of multi-family listings around the Edmonton and northern Alberta area. Until we do, go ahead and give Chris or Brent a call at 780-488-4000.

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It’s 2011 and Edmonton’s still a funny market when it comes to multi-family investment inventory. There’s only 58,557 purpose built rental units in Edmonton according to CMHC (page 2, PDF) and that number is shrinking. That’s 58,000 units for just over a million people compared to almost a half million units for Montreal’s 3.6 million. That’s more than double the number of apartment units per person.

The fact remains that it’s very tough to buy an apartment building in Edmonton. Advertised CAP rates as low as 4.5% are not unheard of, and 5.5-6% are more reasonable. The vast majority of inventory sells privately, without ever touching the commercial MLS. The question is, how are you supposed to find and buy these buildings? Here’s some tips from my experience working with the owners, managers and purchasers of multi-family buildings.

  1. Don’t be a Jackass. You might be a successful investor. You may have even earned a bit of that ego you’re carrying around. However the owners of apartment buildings have the gold and make the rules. The majority of sellers I know (at least those who didn’t buy conversion-crazed prices at the peak) don’t need to sell and aren’t interested in being pushed around by you.
  2. Networking Works. There are few owners around and most of them know each other. Getting out in the community and meeting some of the owners, managers and agents who deal with these types of properties is important. You need to build a relationship to give them a reason other than a bunch of numbers why they should sell to you.
  3. Solid Finances. I’ve got a list of 50 people who want to buy small multi-family buildings. How do you get to be a the top of that list? By being the best able to close the deal. That means cash, solid teams and the ability to pull the trigger quickly.

Multi-family is a different kettle of fish compared to residential investments. Get used to the fact that in Edmonton it’s a sellers market, and you might have to learn to play by the vendor’s rules.

NB – First published on ChrisDavies.ca on June 21, 2011

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Last weekend Brent and I attended one of the Real Estate Investment Networks’ ACRES weekends. It’s always a good refresher weekend and the people I meet there always amaze and inspire me.

We often take out a booth to share our listings and our services as REALTORS®. However, since Brent joined me this July, we’ve been quite busy on the multi-family side of the business.  To help promote a few listings I did up 20″x30″ posters of a couple apartment buildings which are available. There’s always lots of discussion on what information goes into a proforma (financial summary) for a property and what investors can/should plug into REIN’s Property Analyzer for cash flow analysis. Here’s some assumptions you should consider, and some you should be aware of.

Inflation – Remember, the Bank of Canada aims to have inflation running between 2-2.2%, so for any costs that change, that’s my baseline.

Purchase Price – you should know your local market (or work with a buyers’ agent who does) well enough to know what the value of a property is before you look at the list (asking) price. Getting a discount with respect to list price does nothing but feed your ego. Know what properties have sold for, and be able to explain that to the sellers, personally, through your agent or in a cover letter. For some areas in Edmonton, I know the ballpark, so for quick analysis I just take 1-2% off the list price because for properly listed prices, that’s what things sell for. Again, there’s no substute for good data on sold properties and an agent who knows the area and the history.

Repairs and Renovations – I always assume at least $2,000 will be spend in the first few months. That’s both spent tidying up little things they sellers just did a quick fix for and also for normalizing the properties or making tenants happy. I usually get asked what I mean by ‘normalizing’. Ideally, all my properties have the same faucets, appliances, flooring, locks/door knobs, light fixtures, etc. That makes it faster, easier and cheaper to repair things when they break.

Current Rent – If you’re buying something that already has tenants in it, either single family or multi-family then this number comes from the vendor and should be confirmed before going unconditional and buying the property. If it’s vacant then you need to know what it’ll rent for today. Again, market knowledge is king and part of the reason I’m a fan of buying several units in a complex which you already know. To help make things easier for Edmonton investors, I’ve surveyed several property managers and investors to create a rental market survey that you can download for free.

Projected Rent – The projected rent comes in two flavours. First, this is how much you can rent it for or raise the rent to when you are next raising the rent or filling a vacancy. The second is where rents will go in the next few years. CMHC publishes some information and limited projections. For example, spring 2011 has the average 2-bedroom at $1030, with a projected 2012 price at $1060, or a 3% increase. If nothing else, I use a 2-2.2% increase, which is the Bank of Canada’s mandated range of inflation.

Vacancy – CMHC publishes lots of stats, but I also use my own historical vacancy because I have better than average property management. For apartments I use 4% and for single-family I use 5%.

Utilities – For all my single family properties I have the tenants pay the utilities. If I’m on the hook I look for actual historical amounts from the vendors, while for multi-family that’ll be included in the financial information provided during the due diligence period.

Property Management – As a rule I use 10% for single family through to 4-plexes. For multi family I use ~6% up to 8 doors, and 4-5% beyond that.

Financing – I use prime plus 1%. That’ll put us somewhere between the VRM and fixed costs. I also use a 30 year amortization, since that’s what I look for myself.

Multi-Family Specific Assumptions

Expenses – CMHC will use ~$3,600/suite/year in their projections unless you can prove that the real costs are lower than that. It’s still a good ballpark. Costs will be higher on older buildings, higher on concrete/steel construction that wood frame, and higher on poorly maintained buildings.

CAP Rate – Capitalization rates are always tough to figure out and one of the reasons we pay for private sources of sold commercial data. Today (Fall 2011) in Edmonton sellers are asking 4.5-6%, while CMHC is financing a maximum of ~7%.

Ownership and Tax – For multi-family buildings in Edmonton I always assume that the property is held in a company and will be subject to the top tax rate, which in Alberta is 17%. I also assume that the goal of the investor is long term buy and hold unless we’ve discussed otherwise. That way we have a base to determine how to handle slightly more complex items like maximizing the use of terminal losses if you decide to tear the building down and rebuild after several years.

There’s a projection for everything, but be sure to use realistic numbers. Also, it’s always a good idea to do a 5-year cash-flow model to get an idea of the impact of time on your investment.

NB- First posted on ChrisDavies.ca

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