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.

Related posts:

1. Buying Multi-Family – Sellers’ Market Tips It’s 2011 and Edmonton’s still a funny market when it...

Surprising no one, the Bank of Canada chose not to raise interest rates yesterday, maintaining the benchmark overnight rate at 1%, which makes the banks’ prime rate 3%.

From the BoC press release:

The recovery in Canada is proceeding at a moderate pace, although economic activity in the second half of 2010 appears slightly weaker than the Bank projected in its October Monetary Policy Report. In the third quarter, household spending was stronger than the Bank had anticipated and growth in business investment was robust. However, net exports were weaker than projected and continued to exert a significant drag on growth. This underlines a previously-identified risk that a combination of disappointing productivity performance and persistent strength in the Canadian dollar could dampen the expected recovery of net exports.

Aptly summarized by Canada Mortgage Trends:

• Global economic “risks have increased”
• “…pressures affecting prices remain largely unchanged”
• Today’s decision “leaves considerable monetary stimulus in place”
• “In the third quarter, household spending was stronger than the Bank had anticipated and growth in business investment was robust.”
• “…net exports were weaker than projected and continued to exert a significant drag on growth”

This is good news for investors and people considering a new home purchase. The fundamentals underlying the recovery in Canada are very strong, and global forces causing the recovery to stretch out a bit will help keep interest rates down longer, with less pressure on inflation.

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As many expected, the Bank of Canada raised rates 0.25%, making the overnight rate 1%. Most banks followed suit, making the prime rate 3%.

Here’s the high points from the press release (via Canadian Mortgage Trends)

“…Consumption growth is expected to remain solid and business investment to rise strongly.”

“The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected…”

“…Financial conditions in Canada have tightened modestly but remain exceptionally stimulative.”

“Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.”

I posted a quick survey the day before the announcement, and here’s what people thought would happen.

It’s a difference of $13 on every $100,000 of mortgage, which is chump change. These are some screaming low rates, and there’s been talk about how the global economy will be growing at a little bit slower pace moving forwards, which also means we’re not as likely to see double-digit interest rates in the near future.

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I know we’re cutting it a little close with this one, but when the Bank of Canada releases the new overnight rate tomorrow morning, do you think it’s going to go up or down? I’ll share the responses tomorrow after the announcement.

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There’s been some great material at the last few REIN meetings about mortgages, particularly timely given the Bank of Canada’s decision to raise prime.

Don Campbell was on BNN, CBC, Alberta Primetime and a couple others talking about the best way to approach the coming rate hikes. Watch the video or scroll under to get the quick skinny.

The best option is to stay variable and make optional payments to bring your payment level up to the same level as the fixed rate payments. It’ll save you tens of thousands of dollars.

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The Bank of Canada released the July Monetary Policy Report. Straight from the mouth of Mark Carney:

The Bank has long expected that economic growth in Canada would resume in the second half of this year and pick up in 2010. Indeed, growth in Canada should resume this quarter. The dynamics of the recovery projected in today’s MPR are broadly consistent with the Bank’s medium-term outlook in April.

More news on the report here on the Globe and check Google News for more stories.

And to add to my already good day, it’s been two months since my wedding.

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There was an interesting article in the Globe last week referring to Cheryl King’s (Merrill Lynch)  comments on a report from the Bank of Canada.

Investors should brace themselves for explosive economic growth in the coming quarters as trade with the United States rebounds, Merrill Lynch said Tuesday.

Economist Sheryl King said the latest Bank of Canada report suggests the economy could bounce back with several quarters of 10 per cent growth in the next year. Her report is titled: “Are markets ready for 10 per cent GDP?” The answer to her question is a solid “no.”

“The markets are far too fixated on the slow, halting, return to growth scenario, in our opinion – especially since recoveries virtually never have that nice linear trajectory,” she said.

She said the survey’s correlation with real GDP growth is “quite strong” at 60 per cent and implies year-on-year GDP growth in the 4.25 per cent range.

Douglas Porter, a senior economist at BMO Nesbitt Burns Inc., said it would be possible for a quarter or two of rapid growth “if everything went absolutely perfect in terms of stimulus spending and recovery,” but cautioned the global economy is still on very shaky ground.

A double-digit recovery wouldn’t be without precedent, Mr. Porter said. Singapore’s economy staged an unexpected recovery in the second quarter, with government data showing the economy grew at an annualized 20.4 per cent from April through June compared to the previous three months after double digit declines in previous quarters.

“I do think we’re going to start seeing things like this happening around the world in the coming quarters,” Mr. Porter said. “But there are still very severe headwinds for the global economy.”

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Peter Kinch is a great mortgage broker, and I use one of his brokers. He’s also a frequent speaker on various radio and tv programs. Here’s a transcript from News 1130 last Friday (June 5th) between Peter Kinch and Russell Byth last Vancouver.

Russ:
The Bank of Canada is standing pat on rates keeping the Prime rate at 2.25%, but the banks have been increasing their long-term rates this week. On the line with me is the #1 Mortgage Broker in Canada, as ranked by Canadian Mortgage Professional magazine, Peter Kinch. Pete, congratulations first of all, that’s quite an honour.

Peter:
Thanks Russ, it’s certainly something I couldn’t have done without a strong team supporting me.

Russ:
Good stuff, now down to business… it can be confusing when we see rates going up one day and then hearing that there’s no change the next.

Peter:
Exactly Russ, and it comes right down to an issue that confuses a lot of consumers – there are two types of rates: Fixed and Variable. When you hear the Bank of Canada talk about not changing rates – they are referring to the Prime or Variable rate – and we don’t expect any movement there for at least a year.

Russ:
But the long term rates are not controlled by the Central Bank?

Peter:
No, they are governed by the bond yields and can be constantly fluctuating based on market conditions. Right now we have a rising Loonie, and fear of pending inflation causing the bond yields to rise – which in turn has caused a jump in the long-term rates. So it’s important not to make assumptions on your long-term rates, based on announcements by the Bank of Canada.

Russ:
Thanks Pete – We have to be sure not to confuse the two – In the Business Center, I’m Russell Byth.

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Here’s a 20 minute video that gives some pretty cool insight into Mark Carney, Canada’s monetary policy and economic strengths.

The first half is an interview with Mark Carney, Governor of the Bank of Canada. The second half is a panel with Kelly Keehn, Jack Mintz from University of Calgary , and Russell Westcott. My notes (liveblogging style) are blow.

My notes and thoughts.

• Talking about Mark Carney, the youngest Central Banker in the G8
• Carney went to Harvard and Oxford. He’s an Edmonton boy, so when he was in town he took some some people to Earl’s Tin Palace on Jasper Ave.
• Do you agree that Alberta’s insulated? It’s a global recession, and there isn’t any part of the global economy which is unaffected. Some areas have some strength which help to mitigate the impacts.
• Alberta’s budget is being released. Here’s Mark’s three thoughts. First there’s a need for stimulus, to fill in the void. The second need is for credible policies with a long term fiscal outlook. Third, there’s a need to make an investment in long term productivity and sustainability.
• Original projections were recovery in ’09 and in ’10 but have been amended. The Bank of Canada actually reviews its forecasts on a quarterly basis, so it’s nothing too crazy. Things that have changed, the global recession is deeper and the timing of our recovery will depend on the stabalization of the global financial system. The problems are outside of Canada.
• David Dodge has criticized the projections. He responded by saying ‘read the transcript of his comments’. The BofC has a very transparent process, and they welcome other people’s inputs.
• Why such a wide variety of projections? There’s a huge amount of uncertianty. The band of uncertianty is wider than the range of projections. The question is how quickly the massive policy responce will take effect (monetary and policy).
• Interest rate cuts, not much farther to go, but are working? They are, monetary policy always works with a lag, but our monetary system is still working. The levels of corporate borrowing have remained steady.
• You’ve been critical of the banks in the past for not passing along rate drops. Now they’ve passed through all but 25 basis points.
• What are the big lessons from what has happened?
• Canada has many lessons we can teach others. You have to have rules and infrastructure, and a measure of prudence. We restricted the level of leverage banks could have.

Then at 12:04, Kelly Keehn, Jack Mintz from UofC, and Russell Westcott.

• Anyone surprised? Kelly Keehn – no. Russell – no. “He who forecasts the most often gets it right eventually.” Jack – “The variability of the forecasts often gets it right eventually.”
• The David Dodge clip at 13:45 is the one where he says ‘likely we’ll do as well as, or better than other countries, but why should we recover very quicky when the rest of the world is recovering moderately.’
• Is it a fair criticisim? Yes, it’s been a remarkable set of changes, and it’ll take the world economy will take a while to re-adjust. Growth will take some time come back. there are huge deficits which will slow that. (and put Alberta ahead)
• What should people be doing? Buying, selling? If you’re planning to live in your house you’ll be ok. It’s not like daytrading, just chill out. If you can’t afford to hold onto it for 5 years, you should still be renting.
• Kelly does point out that the small drop this year over last pales in comparison to the increase the year before.
• Housing is a consumption good, not just an investment.

Getting into Investments:

• Kelly: Understand fear and greed. Get back to basics, and understand your risk profile.
• Jack: Tough time to understand that. People are afraid it’ll get worse before it gets better.
• Russell: Pay yourself first. 100% of investment portfolio is focused on yield.

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The Bank of Canada just dropped the prime interest rate by 0.25% making it….0.25%. The federal banks quickly followed.

Here are the 6 things you should do right now.

1. Call your banker/mortgage broker and reduce your mortgage payments as close to interest-only as possible. Do not go into negative-amoritzation (i.e. where your loan gets bigger).
2. If you don’t already have a reserve fund account, open one. High interest savings accounts are good, but 1% doesn’t really matter.
3. Set up an automatic transfer to your savings account for your an amount equal to your current debt service payment minus the new payment amount. You’re banking the savings on your mortgage and building up your reserve fund. I agree with Don Campbell that we’re still looking at 18 months before we see serious sustained growth in Canada again. Make sure you can stay above water until then.
4. Watch what Mark Carney and the Bank of Canada are saying. Eventually the interest rate will go back up.
5. If you’re losing sleep at night, lock your mortgage rate in. If rates start going up or you have better things to do with your time.
6. Don’t forget, any interest rate below 10% is just fine. Don’t ditch a good bank or mortgage broker over a half percent.

Now go and pick up the phone.

photocredit:Gaetan Lee

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