3 Questions: Apartment Buildings, Cash Flow & Rents

This week we had three different questions tossed our way and because they come up regularly we thought we'd share...

The first was from someone who was looking to do "hands-off" real estate investing. They were chatting with us about investing and felt they would be better suited for a larger apartment building than a single-family home because they wanted to make more money - faster. Here was the question...

1. I want to buy apartment buildings so I don't have to manage the property as much. What should I know?

Wow, lots to discuss here but there are a couple things you should know. In the Ontario market right now there is incredible demand for apartment buildings. The larger REITs are after anything $5,000,000 and up. And well qualified individual buyers are looking at anything from $1,000,000 to $5,000,000.

What this does is really push down the returns but it's still possible to find a property returning a good amount. And if you include the debt pay down in your return as many investors do then the numbers really look decent.

Apartment buildings are great long-term purchases and to buy them you'll need 15% for CMHC insured financing and after fees, it'll be closer to 20%. So if you find a small building on the very low end you'll be looking at about $200,000 to get into the apartment building game. If you see a building for $3,000,000 you're looking at $600,000 down.

But don't get confused with thinking they are an easy way to make money. If the building returns 6% to you a year and in your first year you have a major repair you're likely going to need to fund the building with some extra money to take of the expense.

Words to consider perhaps: You buy buildings when you have money. Not to make it.

The next two questions came from a Toronto investor who was downright confused as to why were buying property in the "905" region and beyond without even considering Toronto.  And he also had a great question about rents versus property prices.  Let's tackle both...

2. Why would I want to own a property in a sleepy town like Kitchener, Ontario when I can buy a great property in Toronto? Especially if I have to drive an hour to get there ... why would I want to do that?

Easy answer! Cash flow.

Sure you can buy great properties in Toronto ... it's just a tad difficult to make the things cash flow. And the fact that Toronto has the wonderful double land transfer tax going on is not very nice either.

But cash flow is the real reason. Cities like Kitchener have growing population, strong income bases and diverse employment. You can buy very, very nice single family homes from $250K to $300K.

We're ALWAYS thinking about the worst case scenarios ... so if the market tanks and we're stuck with a nice home in Kitchener we feel we'll have a much better chance at maintaining positive cash flow or AT LEAST breaking even on that property in a poor market than a higher priced condo or home in Toronto. That ability allows us to hang on to the property much easier than one that is losing money every month. We can afford to hold the property until the market turns and we're prepared to hold the property for years and years.

We'll gladly own properties that are an hour away from us if the fundamentals of that community are better than our own.

And obviously, this applies to properties purchased at today's prices.  We own property in Toronto that we purchased years ago and we're happy because the purchase prices were much lower at the time.

3. What happens to rents if the real estate market collapses?

Ah, the money question!  This is a big deal.

We're always thinking about this ourselves because if the real estate market falls we want to be able to cover our mortgage payments, taxes and insurance on the property to hold on to the thing for as long as possible with the greatest ease.

We've been monitoring rents in the U.S. and asking friends who own multiple single family homes in St. Louis, throughout Ohio, in California and in Florida and here's what they've all been reporting...

For good property, although the values of them have fallen, sometimes by as much as 35%, the rents have remained relatively stable.

So they're able to rent out their properties and charge the same amount of rent that they were charging on small single-detached properties as they were before their real estate correction.  We have no proof that the same thing would happen under similar circumstances here but we can tell you that over the last 21 years we've seen prices of homes vary wildly ... but we've very rarely seen rents reduced by any significant factor in the starter home category.

Personally, we like buying property in strong, fundamentally correct communities, so that if the values of them change we're left in an environment where we have the best opportunity to cover our carrying costs.

This way we have the best chance of hanging onto our properties in good times and bad.

Hope this helps a tiny bit!

Remember, each answer above is very brief, there are dozens of factors to consider.  Find a good mentor, build a good team ... the insights they provide to you will be invaluable.

Until next time ... Your Life! Your Terms!

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