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Old 06-22-2019, 10:16 PM   #1
indes
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I was wondering if anyone on here owns an apartment building? I'm looking to diversify my income and was looking for some insights and possible pitfalls.

Looking at prices I'm looking at buildings anywhere from 700k-1M. This has me anywhere from 6-12 units.

Since I'm new to the whole thing my search so far has prioritized buildings that have been recently renovated (within the last 10 years) and the neighborhoods they are in.

I'm not decided either way yet but I am leaning towards using a property management company if I do pursue this.

The general rate of return I've noticed on the properties I'm looking at seem to be in the neighborhood of 1% of the building cost per month (650,000$ building, 6 units, conservative gross income of 6000$/month)

My thoughts are that the condition of the building and the units are the biggest factor.

Does anyone have any experience in this area?
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Old 06-22-2019, 10:32 PM   #2
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Have you been a landlord before? Tenants can cause headaches and this could be multiple headaches at once. But if you're ok with that and can handle the day to day issues (handyman stuff) it may be worth considering. How much financing are you looking at and how will you attract/retain tenants? You mention diversifying your income; I assume you have other investments not related to real estate as part of a balanced portfolio?
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Old 06-22-2019, 11:37 PM   #3
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Have you been a landlord before? Tenants can cause headaches and this could be multiple headaches at once. But if you're ok with that and can handle the day to day issues (handyman stuff) it may be worth considering. How much financing are you looking at and how will you attract/retain tenants? You mention diversifying your income; I assume you have other investments not related to real estate as part of a balanced portfolio?
I've never been a landlord before. I can definitely handle the handyman part and am actually looking forward to having some projects to do around the place. This would immediately become my biggest investment however I do have a job where I could cover all the expenses if for some reason I wasn't collecting any rent.
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Old 06-22-2019, 11:38 PM   #4
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It all depends on what you think the future value of the real estate is going to be. You may have heard that collecting monthly income is a fun way to build wealth. It is not. You must have a willingness to believe property values will rise by the time you're ready to sell. Otherwise this is not going to be worth it.



You should look at alternative cash investments as a comparison. You could buy shares in a mortgage investment corp. for example. The ones I'm familiar with have returned around 11% over the last few years. They do some shifty tax work so it's fairly efficient that way. And most importantly your money is spread over hundreds of properties, not just one. You just cash the checks. On the down side, there is no capital appreciation. Liquidity is fairly good. You can usually get out 3 or 4 times a year.



A lesser return can be had buying publicly traded REITS that typically pay about 7-8%. You can do commercial, residential, or industrial. Local or in other cities. And your shares can rise in value. They can fall too though. So you have risk. But liquidity is very high and that's important. Your shares fall to your risk tolerance and you're out.



Chances are you'll net about 4-5% return on your capital if you buy right and manage well. Your funds are tied up in one building and all the risk is in one place. Things can go very wrong owning buildings. I would not feel comfortable without 100k in the bank for emergencies.



Personally, I would never do it. Investing is about managing risk and it is impossible to manage risk owning real estate. You're at the mercy of so many different factors. And frankly there's much easier ways to make money. But if you do go ahead, get clarity on where the market is now and where it's going. If you bought in 2005 you'd be retired now. In 2008, you'd be under water to this very day.
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Old 06-23-2019, 12:27 AM   #5
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Quote:
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It all depends on what you think the future value of the real estate is going to be. You may have heard that collecting monthly income is a fun way to build wealth. It is not. You must have a willingness to believe property values will rise by the time you're ready to sell. Otherwise this is not going to be worth it.



You should look at alternative cash investments as a comparison. You could buy shares in a mortgage investment corp. for example. The ones I'm familiar with have returned around 11% over the last few years. They do some shifty tax work so it's fairly efficient that way. And most importantly your money is spread over hundreds of properties, not just one. You just cash the checks. On the down side, there is no capital appreciation. Liquidity is fairly good. You can usually get out 3 or 4 times a year.



A lesser return can be had buying publicly traded REITS that typically pay about 7-8%. You can do commercial, residential, or industrial. Local or in other cities. And your shares can rise in value. They can fall too though. So you have risk. But liquidity is very high and that's important. Your shares fall to your risk tolerance and you're out.



Chances are you'll net about 4-5% return on your capital if you buy right and manage well. Your funds are tied up in one building and all the risk is in one place. Things can go very wrong owning buildings. I would not feel comfortable without 100k in the bank for emergencies.



Personally, I would never do it. Investing is about managing risk and it is impossible to manage risk owning real estate. You're at the mercy of so many different factors. And frankly there's much easier ways to make money. But if you do go ahead, get clarity on where the market is now and where it's going. If you bought in 2005 you'd be retired now. In 2008, you'd be under water to this very day.
I have no experience owning an apartment building but I strongly endorse the above quoted message.

Want to get in the real estate market as a landlord? Own a REIT or REIT ETF. So much less risk, it takes absolutely no time out of your life, and there are absolutely no headaches.
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Old 06-23-2019, 12:27 AM   #6
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Buy one or more of the Canadian apartment REITs. Some are national, some regional in terms of geographic diversity. Most are very well managed.
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Old 06-23-2019, 12:34 AM   #7
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Wouldn't this be a bad time to invest in something like this? I mean, I'm sure you could get a deal on a building, but with the economy in a bit of a shambles, and property taxes increasing you could be stuck with a boat anchor. Let alone managing tenants.


Wouldn't your money be better spent on a shrimp boat?
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Old 06-23-2019, 01:26 AM   #8
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I'd caution against buying a 6-plex sized building. They are not a great size for a few reasons.

On the financing side, typically banks will offer residential mortgages on 4-plex and smaller. So you can't get a standard residential mortgage, have to go commercial with higher down payments (typically). Also, a six plex will be a small deal for a commercial loan, making it less desirable.

The same lack of economy applies to building items. A four plex or smaller will typically have individual furnaces for each unit, small cheap residential ones. A six plex probably has a boiler. But you only have six units to spread the cost of replacing/maintaining it.

Similar to the roof/snow removal/grass/garbage/recycling/compost. You're too big to just get tenants to do their own snow/grass, but not spreading the cost among many rents. You're too big to get green/blue/black bins, but not spreading the cost of (mandatory) service among many units.

There is a reason 6-plex buildings are the cheapest on a per unit basis, and the reason is they are structurally less profitable then smaller (4 plex) or larger (12 plex+) buildings.
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Old 06-23-2019, 01:52 AM   #9
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I appreciate the advice! I should add that while I have a fairly solid income right now (180-220k/year), I'm skeptical of how long its going to hold up for because its based around oil and gas construction.

A 7-11% return sounds pretty awesome, but the reason I was leaning towards the apartment building is because aside from the 20% I put down it should support itself.

Now, I am definitely not the most financially savvy person around and this is why I'm asking for advice.

Is there some calculators I could check out to see what the difference would be in return on $100,000 between the two options?

Down payment on a $650,000 apartment complex that grosses 72,000/year. We could assume a conservative $50,000 net profit less mortgage payments of 32,000/year. My goal would be to pay down the mortgage as fast as possible and I don't see 10 years as being unfeasible.

Take $100,000 and invest in REITS and assume a 7.5% return?

Again, knowing nothing about investing wouldn't I end up being better off after 10 years having an asset worth $650,000 that generates $50,000 a year that I've invested only $100,000 of initial capital into?

Thanks guys!
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Old 06-23-2019, 08:00 AM   #10
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^ well the $100k you put in generates a higher return in the apartment owning scenarios because of the leverage (there’s $650k invested and the return on that is higher than $100k invested in the REIT scenario). I don’t think you need a calculator for that.

But I would caution you that while it magnifies your returns, leverage also magnifies the loss. So if you have a 5% decline, you’re out $5000 on the $100k REIT and let’s say $30k on the apartment building. I think a lot of the other potential issues have been covered by other posters here; the maintenance/taxes etc that you have as a property owner that you don’t have as a REIT owner.

I guess if you wanted a pure apples to apples comparison though, you could run a return scenario of the apartment ownership vs. a 5:1 leverage loan invested into a REIT. I’m not suggesting that you should embark on that as a course of action without professional review and advice, but it would give you a more equal comparison in terms of returns.
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Old 06-23-2019, 09:08 AM   #11
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Quote:
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A 7-11% return sounds pretty awesome, but the reason I was leaning towards the apartment building is because aside from the 20% I put down it should support itself.

Now, I am definitely not the most financially savvy person around and this is why I'm asking for advice.

Is there some calculators I could check out to see what the difference would be in return on $100,000 between the two options?

You can use any compound interest calculator to check out what your return could be in another interest baring investment. I would plan on using a 25% down payment though. I'm not sure what the reality of your financing options is but it's a bit more realistic I think. And you'll definitely be needing a 25 year amortization if cash flow is important. But let's do both 10 and 25.



A $162,500 initial investment at 7% compounded annually is worth $882k in 25 years. At 11% it's worth 2.2 million.



Even at 10 years it's 320k and 460k. When calculating the roi on your building you must remember to include the value of your down payment in interest over time. So your 650k building is worth less because of the time value of your money.



The main issue I have is risk control. If you think about one thing in your life of investing it must be risk. To be honest I've made the most money by not understanding risk. But it was pure luck. It's the hick who pulls one lever in Vegas and wins the big prize.



In real estate your macro risk can really set you up. Osama bin Laden comes along and bombs the foundation of your world's capital markets and voila, physical assets become your best friend. Oil booms and you'e in an oil town, money is free, people watch flipping shows all day and pretty soon you're a millionaire.



But you have no say in it. You have no say in currency risk, interest rate risk, policy risk (utility price, property tax, insurance rates), weather (2013 flood).



You might think you have a say in micro issues, but you don't. My last job was a leasing agent and over 2 years I rented 450 units. The ones I thought were great tenants turned into the worst tenants and vice versa. Good investors always have a say in the risk to which they expose their money. Other investors get lucky, others go broke. Chances are you'll wind up in the middle.



You need things to go well. You need luck. If you paid off your building in 15 years you'd be doing well. But it totally depends on the value of the building in 15 years to decide whether it's a worthy venture or not. Is your 650k worth a million or half a million?
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Old 06-23-2019, 09:25 AM   #12
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Personally, right now in Alberta I would not do this with the short term economic outlook not being good. One would have to think that residential property taxes are going to go up over the next few years, hard to think of reasons for people to move to calgary. But that being said, people still have to live somewhere.

But, like that real estate guy used to say “perhaps I am afraid to be rich”
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Old 06-23-2019, 09:29 AM   #13
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I'm not sure if it matters all that much but I'm looking in Edmonton
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Old 06-23-2019, 09:31 AM   #14
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Seems to me that Edmonton is in better shape for the short term than calgary is. But what do I know
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Old 06-23-2019, 09:31 AM   #15
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You're not wrong, but despite what you've read about down payment percentages on the Internet, I doubt you'll be able to get a 550k mortgage on a $650k building at a decent rate. It's not impossible, but I'd be planning on putting 25-30% down and be pleasantly suprised if you can do better.
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Old 06-23-2019, 12:19 PM   #16
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Are you located in Edmonton? If not it may be tough to deal with all the issues that come up in a timely manner (ie. plumbing, electrical, etc) that need to get fixed very quickly. Canadian REITS are a good way to get real estate exposure in a diversified way. Buying an apartment building would be like putting all your eggs in one basket as someone mentioned above. Personally I'd go with REITs over an apartment building 99/100 times - unless the local market values go up quickly (highly unlikely) you'd probably get higher returns (and waaaaaay less headaches) with REITs over an apartment building
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Old 06-23-2019, 01:23 PM   #17
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Here's some back of envelope math for a six-plex in a decent location in Calgary.

Rent - $1200 per month per unit = $86,400 per year
Expenses - $38,400
- water - $2500 per year
- electric.- $2000 per year
- gas - $5000 per year
- waste - $1500 per year
- taxes - $10,000 per year
- maintenance - $5000 per year
- vacancy - $2500 per year
- insurance - $3000 per year
- landscaping - $1500 per year
- cleaning - $1500 per year
- misc - $900 per year
- management - $3000

Operating profit: $48,000
Cap rate - 4%-5%
Cost - $0.95m-$1.2m

From this, assume every 25 years you have to spend $250,000 on capital expenses. So your actual cash return is 1% lower than your cap rate.

So your cash income is 3%-4% a year. Call that a dividend. You can try to improve that rate with leverage, but it doesn't really make a difference because cost of borrowing is 2.5%-3.5%.

Capital appreciation is the other driver. I'd assume 2-3% a year.

So total annualized return is assumed at ~6% without leverage and ~9% with 50% leverage. It's not substantially better than stocks. Maybe a bit better, but even if you're "hands-off" you can expect quite a bit of "hands-on" work.
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Old 06-23-2019, 01:49 PM   #18
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My opinion: your current job and the price of rent both rely on oil and gas. Becoming a landlord doesn’t seem like a good way to diversify your particular assets.

I’m not a financial advisor however.
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Old 06-23-2019, 02:19 PM   #19
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The best time to invest in something is usually when everyone else thinks it’s a bad idea. So based on this thread, I say go for it!

That said, my plan 20+ years ago was to put my investment money into rental properties. I discovered that I hated being a landlord and I didn’t even have any real problem tenants. So I got out and went a different direction, but it might be right for you, even if it’s not for a lot of people.
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Old 06-23-2019, 02:21 PM   #20
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My mom always regrets getting her 6 and 4 plexes. Too much trouble.
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