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CategoriesInterest rates

Why Stable Interest Rates Matter in Multifamily Brokerage

By Mikael,

One of the key elements in real estate investing is having a stable interest rate environment, which has been the case in the multifamily sector in recent months. While observing the Canada Mortgage Bond (CMB) over the past year reveals some fluctuations, it has shown remarkable stability recently compared to the volatility experienced in 2022.

Multifamily brokers closely monitor the CMB, as it directly impacts multifamily investors and buyers who secure financing based on its rates. The CMB represents the lender’s (bank’s) cost of funds, with the bank adding its profit margin on top. For example, if the CMB is 3.20% and the bank adds 80 basis points (bps) as profit, the investor’s mortgage interest rate for that loan would be 4%.

How does this current stable environment benefit multifamily investors? Here are four key advantages:

Predictable Financing

Costs It is challenging for multifamily investors to make offers or determine the right purchase price without knowing the interest rate at closing.
For instance, if a property generates $100,000 in net operating income, an investor’s valuation approach will differ significantly at a 4% interest rate versus a 6% rate.
Stable interest rates reduce this uncertainty, mitigating interest rate risk and allowing investors to move forward with confidence.

Improved Valuations

Volatile interest rates make it difficult for multifamily brokers to provide accurate pricing estimates for sellers. Sellers rely on brokers to gauge market pricing, but fluctuating rates create uncertainty.
If rates rise from 4% to 6% during the listing period, valuations can change dramatically, impacting negotiations and closing timelines. A stable interest rate environment simplifies valuations,
benefiting sellers, brokers, and multifamily investors alike.

Enhanced Investor Confidence

Investor confidence thrives in stable environments. When interest rates are volatile, many investors hesitate to make offers, opting instead to wait on the sidelines. Stability encourages multifamily investors to actively pursue acquisitions, facilitating smoother transactions and a more dynamic marketplace.

Better Long-Term Planning

Volatile interest rates make strategic planning difficult. Investors may be reluctant to take short-term loans (12-24 months) due to fears of rate hikes during the holding period. In contrast, a stable interest rate environment allows multifamily investors to confidently pursue short-term loans, optimize properties, and refinance into long-term financing solutions. This flexibility supports both short-term opportunities and long-term growth strategies.

As we commence 2025, multifamily brokers, multifamily investors, and property owners are hopeful for continued interest rate stability. Such an environment not only fosters growth and confidence but also enables better planning and valuations for the multifamily sector. Here’s to a prosperous and stable year ahead for all stakeholders in the multifamily real estate market!

Interest rate stability is key in multifamily brokerage
Similar buildings yet the values will vary depending on the interest rate at the time of purchase

 

Real estate investors often stabilize their assets in the short term through renovations before securing long-term financing
How to buy a multifamily property in Montreal
CategoriesAdvice

How to buy a multifamily property in Montreal: A step by step guide

By Mikael,

Montreal’s vibrant real estate market offers opportunities for investing in multifamily real estate for those looking to invest in multi-family properties.
Whether you’re a seasoned investor or a first-time buyer, this simple guide will walk you through the key steps to successfully navigate the process.

1. Location, Location, Location: is an old saying, but still applies in real estate investing

Montreal’s diverse neighborhoods each offer unique advantages. Consider these factors:

a) Proximity to Universities: Properties near McGill University, Concordia University, or the Université de Montréal attract strong rental demand from students year around (especially during the school year),
ensuring consistent occupancy.
b) Public Transportation: Easy access to metro stations and bus routes is a major draw for tenants, increasing your property’s desirability and potential rental income.
c) Downtown Core: Properties in the downtown core command premium rents all the time due to their central location and proximity to amenities, but also come with much higher purchase prices (ie low cap rates).
d) Up-and-Coming Areas: Explore neighborhoods like Rosemont–La Petite-Patrie, Villeray–Saint-Michel–Parc-Extension, Sud-Ouest and Verdun, which offer attractive investment potential with strong growth prospects (yes even today!).

2. Building Condition and Due Diligence:

a) Thorough Inspection: Engage a qualified building inspector to assess the property’s structural integrity, electrical and plumbing systems, and overall condition. This will help you identify potential repair costs after the purchase and negotiate effectively if there are serious issues that are discovered .
b) Environmental Report: Order an environmental assessment to identify any potential contamination issues that could affect the property’s value and pose risks to tenants (this is best done by the seller not the buyer since
the report should belong to the seller, but this is something that varies on a case by case basis).
c) Review Leases and Documents: Carefully examine existing leases, renewal letters, and expense records to understand the property’s net operating income and operating expenses.
d) Unit Sizes: Consider the unit sizes and layouts. Smaller units might be harder to rent in certain markets, while larger units can attract families or those seeking more space ie pay a better rent.
3. Financing and Legal Aspects:

a) Secure Financing: Obtain an opinion for a mortgage from a reputable lender. Explore different financing options and compare interest rates and terms.
b) Legal Representation: Engage a real estate lawyer or your notary to review the purchase agreement, conduct title searches, and ensure a smooth transaction.
c) The multifamily real estate brokers can prepare your offer to purchase, but some buyers prefer to have these offers checked by their lawyer / notary.
4. Negotiation and Closing:

a) Market Research: Conduct thorough research on comparable properties in the area to determine a fair offer price (again the multifamily treal estate broker can provide this information to you).
b) Negotiate Effectively: Be prepared to negotiate with the seller on price, closing date, and other terms during the offer process. These are best negotiated up front before having an offer accepted.
c) Finalize the Purchase: Once an agreement is reached, work with your notary to finalize the purchase and transfer ownership.
5. Property Management:

a) Tenant Screening: Implement a thorough tenant screening process to ensure reliable and responsible tenants.
b) Maintenance and Repairs: Establish a proactive maintenance plan to keep the property in good condition and attract quality tenants (this is a key step, problem tenants are an issue for you and your other tenants).
c) Rent Collection: Develop a clear rent collection policy and system to ensure timely payments (there are many software tools that can help with this step nowadays).
Investing in Montreal’s multi-family market is a rewarding venture for the patient and prudent investor.

By following these simple steps and conducting thorough due diligence, you can increase your chances of success and build a profitable real estate portfolio one property at a time.

Mikael Kurkdjian is a multifamily broker, with Baron Realty , you can reach Mikael at info@baronrealty.ca

For larger buildings, Bill 122 relevant to apartment buildings in Montreal may apply.

 

Sometimes the buildings for sale are true gems. Others may need more work after the purchase.

 

Many similar buildings in the Plateau Mont Royal borough.
Multifamily Property Investment Strategy
CategoriesOpinion Real Estate Investment

The Multifamily Investment Sector Cannot Endure Additional Rent Control or Rent Caps

By Mikael,

In recent months, we have seen numerous news articles and even government policies capping rent increases for landlords, as the media and politicians try to blame Canada’s housing problem on rental increases by multifamily landlords. Granted, inflation’s devastating impact on purchasing power has affected everyone negatively. However, blaming the housing affordability issue on landlords is utter nonsense. The truth is that landlords’ expenses are not capped, and worse, mortgage interest rates aren’t capped either—both of which have risen dramatically in recent years.

Having worked as a full-time real estate broker for the past 21 years, focusing on apartment buildings in the Greater Montreal region for the past 16 years, I have never experienced mortgage interest rate turmoil like we did in 2022, when rates spiked nearly 250 basis points almost overnight.

This was indeed dramatic and had a negative impact on buyers’ purchasing power, thus reducing sales volumes for all of us. However, we may face an even bigger problem in the coming year.

In our real estate industry, most of us, along with our clients, rely on leverage. Where would real estate prices be without leverage? That’s a discussion for another day.

The Next 12 Months Are Crucial

The next 12 months will be crucial for the apartment building market due to the dramatic events we experienced during the COVID-19 period, particularly between April 2020 and March 2021, when interest rates sank to nearly zero.

This was, of course, an excellent time to buy real estate or finance existing properties at record-low interest rates. However, this may come back to hurt borrowers in the next 12 months if interest rates remain at current levels. Why?

Since March 2021, real estate borrowers have faced significant rate increases, with most of these hikes occurring between November 2021 and August 2022. The real impact of these rate increases will be felt during the 2025 mortgage renewals (many mortgages have 5-year terms), as multifamily investing is really about the numbers and leverage.

A High-Level Look at the Numbers

For example, a $1 million mortgage taken in 2020 at a 2% interest rate, amortized over 35 years, would have a debt service of $39,700 per year. By 2025, the remaining balance on this mortgage would be $897,000. If the borrower decides against refinancing and continues paying down the loan, the amortization period would be 30 years at renewal time, down from the original 35 years. In my experience, it is very difficult to extend the amortization period with Canadian lenders unless the borrower refinances, adds to the mortgage, and pays the applicable loan renewal or application fees. So, what would this mean for the borrower?

Assuming interest rates remain at current levels, with 5-year CMHC rates around 4.0%, the original $1,000,000 mortgage amortized over 35 years at a 2% interest rate would have a balance of $897,000 at renewal in 2025, with 30 years remaining at a 4.0% rate. The debt service would increase from $39,700 per year in 2020 to $51,132 in 2025—a 29% increase in debt service despite the mortgage amount decreasing by over 10%.

Here, I assume that this real estate investor is a capable multifamily investor and has managed to keep up with market rents, as average rents in the Greater Montreal region increased by 20% between 2020 and 2023 (source: CMHC https://shorturl.at/gJmSU). This 20% increase would help offset part of the increased debt service.

In the above example, I haven’t discussed anything beyond mortgage interest rates—no mention of increased heating costs, insurance premiums, renovation expenses, etc. My focus is purely on what we can see in the charts: the rise in mortgage interest rates.

Now imagine if additional rent control were imposed on the investor / landlord. The Tribunal administratif du logement in Quebec is powerful and sets the allowed rental increase amounts, yet its formula does not consider interest rate risk. Its calculations focus only on gross rents, vacancies, renovations, and utility and administrative expenses, without accounting for interest rate hikes.

Any form of increased rent control beyond what we have today would be catastrophic for the multifamily investing and ownership community. Without adequate cash flow for landlords and real estate investors, there is no way that our aging stock of properties can receive the necessary funding to maintain these properties for both tenants and landlords if restrictive caps are placed on rent. The free market will penalize landlords who attempt to overcharge tenants—we don’t need more legislation on this topic. The solution to our housing affordability issue is to make it easier for builders to construct new properties and increase housing supply, not penalize landlords who are already affected by inflationary pressures without caps on their expenses or borrowing costs.