A lot of Canadians want to better their circumstances: where they work, how much they make, and even where they call home. After graduating from university, people rent an apartment until they can afford a good family starter home like a condo. Then they plan for a bigger home.
The same is true for real estate investors wanting to advance in their careers and add to their portfolios. They might start with a condo or two and gradually move toward single-family homes. For a lot of them, their goal is to acquire a multi-residential (multi-res) property with a steadier and hopefully higher cash flow.
One of the main reasons why people seek multi-res is that management tends to be easier. Managing multiple units around town or even in different towns is difficult compared to overseeing the same number in a single location.
It’s also less expensive: getting a resident manager to clean the premises and collect rents for a single building is an easy and economical solution. All challenges and costs associated with maintenance are centralized: instead of worrying about ten different roofs and boilers, you only monitor one.
The appeal of consolidation and stronger cash influx should be tempered by the initial cost of breaking into the multi-res market.
However when you raise the rents on a multi-res building, the building’s value increases. It’s a principle that does not apply to houses, whose value is dictated by the market and the price for a similar property. While comparability is also a factor for multi-res properties, their worth also depends on their condition and how much revenue they generate.
I see apartment buildings as little businesses, and successful management involves increasing revenue and decreasing costs. When the net operating income goes up, the value of the building does too.
Is now the time?
Investors wanting to enter the multi-res market might wonder if now the right time is. That it is. The people analyzing the current market will find aspects of multi-res investment extremely appealing.
This is particularly true when multi-res real estate is compared to alternative investments. Stocks and bonds yield a mediocre return these days, whereas real estate is a more tangible and easily understood asset. If people finance and leverage properly, the return on investment can be attractive.
The fact that interest rates are at an all-time low make it a good time to invest in real estate, if you purchase a property at 6% cap and lock in interest rates at 2.5-3%, you’ve locked yourself in to a favorable spread for five to ten years.
People always need someplace to live. And during economic downturns, industrial and commercial real estate will be hard hit as businesses suffer. Residential won’t be as strongly affected. Vacancies may go up and rents go down, but enough buffer will exist to pay bills and pay down debt.
Most of the challenges facing those getting into the multi-res market involve upfront costs and capital requirements. When it comes to securing capital, there are workarounds. The investors start small by purchasing duplexes or triplexes before looking at bigger apartment buildings. They should think about moving on only after building up some capital and acquiring experience. Those who prefer a quicker route can go with joint-venture partners, but that involves giving up some of their equity.
A multi-family acquisition requires an engineering report and an environmental report, and that’s only “Phase One”. If concerns arise and additional reports needed, a more expensive “Phase 2” environmental report would be necessary.
Before an investor even buys the building, due diligence costs will set them back $10,000 -$15,000. Most rentals are 40-50 years old and will require significant upgrades. There’s also a lot of maintenance. Investors will make most of their money on sale or refinancing when they are pulling capital out.
He stresses that education is key. Investors seeking to move into multi-res should ask themselves why they want to get into it. If they can align themselves with someone with market experience it will make the challenges easier to handle.
Sometimes finding the right property is a challenge in itself. Шnvestors need to be fairly well-connected, involved, and have access to realtors who can drum up deals for later evaluation.
Overall, investors seeking to transition into multi-unit residential have a lot to learn about the market. But proper due diligence and realistic expectations regarding capital needs and expenses can make a move into multi-res a savvy one over the long term.
Facts and figures:
- 8-12% of gross rents are management fees for single-family homes
- 4-6% of management fees are multi-unit residential building (average of 10-20 units)
Top reasons to invest in multi-unit residential:
- Easier to manage and maintain compared to several single-family dwellings
- Comparatively low interest rates
- Potential for greater cash flow
Better returns than traditional equity markets