Income Property Real Estate Agency

Apartment building ownership: Who gets paid?

One of the things that we commonly observe in the apartment building market are broker listings that state “potential revenue.” What this really means is that the rents in place are not up to market standards. A new buyer can purchase this property and slowly increase the rents as tenants leave, thus increasing the value of the building.

To put this into perspective, here is an example. Let’s assume that a building that generates $100,000 in net income would receive a bank evaluation of approximately $1.667 million in today’s market. However, if the same building were to generate $110,000, the bank would value the property at $1.833 million.

Submitting an asking price of $1.85 million and informing potential buyers that there is potential in the rents is a strategy that may backfire. If the buyer is working to increase the rents, they would want to ensure that they are getting a good return on their investment. This is why owners must ensure that the rents are in line with the market average.

A portfolio of apartment buildings can potentially produce a good revenue stream, but just as is the case with any large-scale real estate purchase, buyers must do their research and observe market trends before closing any deals. A combination of proper research and assistance from a trusted real estate professional can help you find a property that suits your needs

Well, I can lose money

Investing in real estate offers the chance to make money through smart decisions and good timing. But there are always two sides to every story. Money can be lost almost as easily as it can be made.

In his book entitled The Black Swan, author Nassim Taleb discusses the concept of losing money. He begins with a simple, yet memorable quote: “Well, I can lose money.” This quote is applicable to several facets of our daily lives, especially where some form of risk is involved.

Taleb goes on to say that “this phrase is not informational unless you can attach a quantity to that loss.” This is true, as it is often difficult to predict how well your investments may fare in the future. If you invest in or own a company, there is a chance that it could be out of business as little as a year from now.

Real estate is an entirely different investment vehicle. In fact, some people prefer it over other types of investments because, unlike stocks or bonds, it is a tangible object. It is, however, not immune to generating losses for those who invest in it. Even if you focus on an up-and-coming area with a strong demographic, you might operate it at a loss for a while before turning profits on your holdings. Sometimes a real estate investor underestimates the costs of renovations, or the time it takes to find tenants thus not meeting the cash flow objectives set.

Elements such as inflation and price asset depreciation can cause other losses for buyers. But if they maintain and manage their assets properly over the holding period, the properties will eventually appreciate in value.

Maintenance and management are crucial parts of the ownership process, as is dealing with tenants and collecting rent. If a property is well-kept, it will be more likely to attract tenants, thus allowing the owner to generate cash flow, and with time obtain the capital appreciation.

Understanding the percentages.

The increase to the cost of borrowing funds from the lenders in 2013 led to an important change of the lending for our multi-family listings. When the five-year CMHC-insured loans were running at 2.5 to 2.6% in early 2013, the most aggressive cap rates that we saw in our sales were at 5.75%. Continue reading

Real estate versus other investments.

I recently finished reading Flash Boys by Michael Lewis. It is a great book that truly exemplifies the limited control that we have over the stock market.

In the book, Lewis explains that the general public does not fully understand the inner workings of the stock market world. Additionally, he mentions that many of the big banks and fund managers face the same situation.

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Why Invest in Apartment Buildings in the Montreal Market?

Among the Canadian Census Metropolitan Areas (CMA), that is, areas with a population of more than 100,000 residents, the Montreal market is one of the most active for apartment buildings and, more specifically, for privately initiated rental apartments of three units and more. Continue reading

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