Rent 2 Own Homes & Other Types of Investments: Let's Focus On Apartments...
It’s easy to feel overwhelmed when analyzing different investment opportunities, such as rent 2 own homes, joint ventures, or in this case, potential apartment buildings.
Let’s break down the analysis in plain English and walk through it step by step.
Often the listing agents don’t provide all the information you need so you have to ask for details like the current “rent roll” (a list of all the units with how much each is renting out for), expenses, state of the apartments etc.
Maybe you have had experience investing in rent 2 own homes, but now you are looking at expanding your portfolio and adding something like an apartment building! Well not to fear...
You may not know this yet, but we have a member of the Rock Star team, Steve DeVoe, who has over 25 years of commercial real estate experience.
Steve recently did a very high level analysis on this building which we thought you may find interesting and instructive. Maybe you have implemented rent 2 own homes as investments, but here is the breakdown of what Steve looks for in potential apartment investments...
Enter Rock Star Steve DeVoe:
“When I look at these things the first note is “How does it look physically”? This looks pretty good.
I’m not a fan of balconies (always a source of capital exposure) but in general, the building and location looks good.
Then I look at the status of major capital items; roof, windows, heating, parking.
The roof is mentioned here, other items are not.
So I would note these as questions moving forward. I always want to know the type of heating and also how is the hydro paid.
I always would prefer if it was separately metered.
In this case it does not appear to be separately metered, but it does appear they are collecting some money from some tenants.
Can’t quite figure out what’s going on there so again, a question as you move forward.
I like more 2 bedrooms than 1 so that looks good.
First opinion, so far physically looks pretty good, but with a few questions yet to be answered.
Now the numbers; I see an ask price of $645,000 for 6 units.
That means you’re looking at $107,000 per unit or per door as the lingo says.
I’m not too keen on that.
My market knowledge tells me, out in those types of areas (outlying communities) anywhere for $60,000 to $80,000 a door is attainable.
I’m working on 32 units in London at $60,000 a door and another in Kitchener at $85,000 a door.
This is a red flag for me, but I’m all about cash flow and returns so let’s keep going.
Next, I’m looking at the Gross revenue, expenses, and the Net Operating Income (NOI).
I see the rent role and the monthly rentals seem to be in line with what I would expect.
Perhaps even a bit below, as $800 per month or more is common of 2 bedrooms I see mostly $700 and change here. (I note there may be potential extra growth here).
The expenses as a whole appear to be OK although the vacancy, and management numbers are low but the maintenance is high and they even out.
That said, the NOI of $32,637 is acceptable to me as relatively accurate.
I now see the cap rate is 5%, $32,637/$645,000 = 5.06
Yikes!! That’s low.
Those are Toronto type numbers.
One should expect this, however, when you have a unit cost that is so high while the rents are market or below.
But again it’s all about return so let’s keep going.
My full work sheet would show all the numbers but here are the basics:
If you purchase the property at full asking price plus all the closing costs, land transfer tax, etc., and obtain 80% conventional financing (I don’t think CMHC will work here) at an interest rate of 4%; the property will not carry itself.
It is in a small but negative cash flow position.
So the cash-on-cash return is negative for at least the first couple years.
However having said that, when you include the principal pay down the return is over 17%.
That’s a pretty good number.
If you get any appreciation at all it looks even better.
Given the rents are low you may also get additional growth here that would help its cash position.
The answer on good or bad investment is... “It depends on the investor”.
If someone is looking to protect cash with a hard asset and they don’t mind that that it barely carries itself if at all but like the overall returns, this may work for them.
I would, however, suggest the numbers are tight here and any substantial change in the market could negatively affect the cash flow position further.
In other words, it could be risky.
Also, despite the returns they are paying over market.
I would argue to a member that, although the returns here seem not bad, with more digging in this market they could find buildings with positive cash flows and with returns on cash invested of 8 to 10% and 25 plus percent with the equity pay down are definitively attainable.
And purchasing something more in line with the market not only will provide better returns but will also be much more insulated to drastic market changes.
Basically, they can sleep at night after making the purchase.
I estimate this should be more like 480,000 to 540,000 purchase price.
At the end of the day it depends on the return expectations and goals of any investor.
Hope this helps, and I’m happy to discuss in more detail.”
And there you have it. If you are looking to branch out to other investment opportunities - other than rent 2 own homes, single family homes, student rentals, etc., that is a great starting point to see what to look for.
A quick analysis of an apartment building that covers the major points and helps determine if you should spend the time to go out and visit the building. Rent 2 own homes may sound easier, but it is great to diversify your portfolio if that is something you are interested in!
If this particular building met your criteria, the next steps would be to go out and visit the building for a preliminary physical inspection of the condition of the roof, HVAC, brick, foundation etc..
And you would check out as many of the units as you could to determine if they would need updating to keep the building competitive with the competition.
you make a decision on any building like this it’s always a good idea to have
someone with experience guiding you.
And don't forget or underestimate the potential success in other forms of investing, such as rent 2 own homes, joint ventures, etc.