Buying Multi-Family Sucks

It’s a relaxing Tuesday night. My son is in bed, the shopping is done, cleaning is done, lunches are packed and I’ve got a cup of tea with a couple biscuits. I’m thinking about the 4 multi-family buyer clients I spoke with today.

There’s no way around it – buying apartment buildings (and most other types of commercial) right now around Alberta sucks for buyers. While the residential markets are more relaxed in Edmonton and Calgary compared to the rest of Canada, multi-family continues to be a sellers market. Prices have moderated only a little bit in some areas. Sellers are still asking for fairly high prices and buyers typically need to come in with 30%+ down-payments or consider all cash purchases, interim financing while they deal with issues or use other creative ways of structuring a deal.

I’ve said before there’s very little on the market right now for apartments. What I should have said is there’s very little saleable on the market. When I ran down listings for the current group of active buyers we have I came up with 49 listings. They run all the way from a $499,000 4-plex with two (probably) illegal suites through to three buildings which are all going to sell in the $8,000,000-$10,000,000 range.

Sellers are often asking in the range of 4.75-5.5% CAP rates.

Buyers are getting between 5.5%-6.5%.

CMHC is financing values based on (maximum) a 7% cap rate. One prominent mortgage broker said he’s yet to see them do better than 72% LTV of the purchase price. That’s hardly worth the time and effort of going through the insured route.

How do I get a deal put together?

First, get it out of your head that you’ll magically get something under today’s market. That’s just not a realistic thing to ask of us. Maybe you’ll find it on your own – best of luck.

Second, know your values. I recently put a personal offer on a 6-plex priced around the $550,000 mark. I thought that was a cracking good price so I offered a little over list (in a 6+ multiple situation) with what I thought were the right terms for a unique situation. I asked my mortgage broker to tell me how he thought we should finance it since it’d be vacant at possession (complicated story). His values came out at $605,000 for CMHC and $630,000 with conventional financing. Where do you think it sold?

$631,000, or almost $80,000 ($13,000/door) over list price. And it would have been a great deal at that price.

I lost out because I didn’t follow my own rule about knowing the values (or was too prideful to listen to George). That brings me to:

Three. Be willing to buy at market or slightly above market for a building you can turn around faster, better, smarter or differently than anyone else. Since the income/expense/net income of a building determines the value, mortgage and your cashflows be ready to buy with a little more down, turn the building around by adding value and get it back out on a refinance or a new first mortgage.

Four. Be persistant. Lots of these listings sit on the market for years. Writing offers and seeing buildings is the only way to know. I use my relationships to find out which ones might be able to get a creative deal done or which ones represent really good value even at a premium to market price.

Five. Be realistic about how far your cash can carry you. If you’re planning to do 80-85% LTV up front then I’m not likely to show you many buildings. We’ll go find something smaller, simpler and cheaper. That way you have more financing options, more cash to add value and will be better able to get things turned around and cash out.

Deals are happening but there’s a lot of people with very patient pockets. They’ll put 40% down and sit on it for a year. There’s sellers who need an out – I know of one deal that happened with the seller holding almost all the financing for a year while the buyers fix the building. Be willing to be patient. It’ll happen eventually.

Photo Credit: COD Gabriel

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  • HomeHow

    I have seen so many people buying apartment buildings, but I don’t get how something like this is possible at such a young age. I would want to be this successful when I am this age.

  • Mabel Manzara

    Please give me a call, I am looking for multi family property for rental investment

  • Great article Chris !

    The low CAP rates are a result of low yield elsewhere plus the safety for investors in this asset class. Where else do you get a safe 4-5% yield PLUS UPSIDE .. FOREVER ?? This attracts not only smaller investors with $200,000 to invest but also firms like ours with $1 to $5M to invest and larger REITs and pension funds with $50-$250M to invest.

    Too much money chasing too little product – hence a low, but SAFE yield !

    So it would not say it sucks. I would say: low CAP rates are the norm. Get used to it. Suck it up AND BUY !! You (or your kids and grandkids) will enjoy it later !