Owning an Apartment Building

[I_H8_Crawford]

Originally Posted by Slava

^ 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.

Don't forget about taxes... I believe the rental income is charged at regular income tax rate... Investment income is capital gains/dividend tax which is a lower tax rate

[Slava]

Originally Posted by I_H8_Crawford

Don't forget about taxes... I believe the rental income is charged at regular income tax rate... Investment income is capital gains/dividend tax which is a lower tax rate

Yeah, or if you have an advisor who knows what they’re doing you can defer that tax bill as well! That’s a whole other discussion though.

[curves2000]

I grew up in the business you just described, owning apartment buildings and rental properties for immigrant families was and currently is a staple for generations. The business has undergone some changes over the years but I still think its a good business.

As some other posters mentioned, owning properties like these doesn't mean you are just sitting around counting cash every month, the expenses can be a lot and they are increasing with taxes, utilities, maintenance etc. Don't like being interrupted at night or during a vacation with a boiler that stopped working, a tenant issue or a roof leak??? than this isn't for you.

Where a lot of the business has changed is that a lot of older, traditional apartment buildings like 6-12 unit buildings were bought up in the 90's and converted to condo's in Calgary, Edmonton etc. That was the trend back then meanwhile companies like Boardwalk bought up huge swaths of quality real estate holdings on the cheap and held onto them and make that cash flow every month.

Now where the business has changed is that a ton of investors have bought up condo's as rental properties and are then renting them out to renters. This has created a situation where people who own condos and want to live there are not that interested in living next to a ton of renters and having to deal with the changing neighbors, Air B &B etc. The huge surplus of unsold condo's is leading to more and more people trying to rent their condo's, depressing rents even further and now even the developers like Strategic Group are converting some office space into rental units.

If you are able to buy an apartment building, I wouldn't advise against it. People need a place to always live, if you know how to market yourself, do basic repairs and renovations and are a solid landlord, people want to rent from you. We have had very little tenant issues in the many many years my family has been in the business.

Having an investment portfolio with stocks, bonds and other securities is important and so is having some real estate as well. An apartment building is a physical asset, will continue to provide a steady income stream today and in the future for your retirement and strikes the right balance between active and passive income streams, you also have the opportunity for appreciation over the long term.

Cost's can be high but also look at the generational wealth that can be generated and passed onto future generations, people discount this but is enshrined for immigrant families. The income stream will help to pay down the debt on the property which can lead to a future purchase using additional borrowed funds which will than increase your income stream which will pay down the debt and so on.

Either way, good luck!

[Flamenspiel]

I agree with above poster, it’s worked out for me as well. Two things that seem obvious though. Buy in a good location and screen your tenants very carefully.

[afc wimbledon]

I nearly bought a downtown eastside SRO (crack den) about 10 years ago, absolute pain to manage but a gold mine if you can do it, I regret not buying it now as they are being convertyed into 'microsuites' and rented to students these days so the buildings have shot up in value

[fulham]

I grew up in the industry you're entering, and have an inherited ownership stake in the multi res industry.

The Alberta Residential Landlord Association has lunches and many events in Edmonton & Calgary. That anyone can go to. Id recommend you email them, and attend. Ask questions and befriend some owners as the group is diverse from single building owners, to large nationwide companies. Everyone is generally pretty friendly, and would love to candidly answer some questions over a beer.


From my experience its hard to make good money renting apartments(If entering the market in 2019) You make money on the real estate. Cap rates are sub 0.3% in places like Vancouver and Toronto. Alberta is a way softer market, but rent reflects that as well.

[bizaro86]

Originally Posted by Slava

Yeah, or if you have an advisor who knows what they’re doing you can defer that tax bill as well! That’s a whole other discussion though.

It's pretty easy to defer most/all of your taxes on rental real estate purchased using CCA. You can claim CCA yearly to get your taxable income down, and you don't have to pay the tax (recapture) until you sell. But presumably you have cash at that time due to mortgage paydown/appreciation.

[Wormius]

I am not sure if this will be the right thread, but is there a way of finding data for the rental market, i.e.) how long it takes for certain properties in certain areas to get rented out? We have been entertaining the idea of buying a small condo to rent out, but aside from monitoring the units that are currently for rent on RentFaster to get an idea what the monthly rents are going at, the only way to figure out how long they are on the market for is to just check back occasionally to see if the property is still listed or not.



For reference, we are exploring some of the bachelor studios around Chinatown that go for about $100-150k and bring in about $850-900 / month minus condo fees of $300-$350. It's not a huge profit, but they're relatively low maintenance from what I remember.



Thoughts?

[OMG!WTF!]

Originally Posted by Wormius

I am not sure if this will be the right thread, but is there a way of finding data for the rental market, i.e.) how long it takes for certain properties in certain areas to get rented out? We have been entertaining the idea of buying a small condo to rent out, but aside from monitoring the units that are currently for rent on RentFaster to get an idea what the monthly rents are going at, the only way to figure out how long they are on the market for is to just check back occasionally to see if the property is still listed or not.



For reference, we are exploring some of the bachelor studios around Chinatown that go for about $100-150k and bring in about $850-900 / month minus condo fees of $300-$350. It's not a huge profit, but they're relatively low maintenance from what I remember.



Thoughts?

I think you can get basic stats just about anywhere...


https://www03.cmhc-schl.gc.ca/hmip-p...hyName=Calgary


I'm not sure very many people are enjoying their condo ownership right now though. Condo fees are scary. The risk of huge special assessments is terrifying. Property taxes are due for a major increase. And condos are not going up in value at all and haven't for a really long time.



You'll have a month of vacancy once and a while but it won't amount to much. You'll probably have decent tenants who move every now and then leaving you with a few re rental costs here and there. But it won't be a big deal. I think your major risk is that which is beyond your control.



A friend bought a new condo in Bridgeland in 2006 for 225k. I don't think he had a day of vacancy the entire time. But he did get a 35k special assessment and several fee increases that turned his rental income into a small loss. He just sold it for 240k. Minus commissions and expenses he was almost 40k in capital short. But his mortgage was 60k lower. So it's pretty much a giant 13 year wash. Not worth the risk by any metric.



If you do buy, stop focusing on rental stats. Focus on the price you buy it for. That's all that's going to matter down the road. If you get a good deal on the buy it can mitigate some pain later on.

[Ahuch]

Originally Posted by OMG!WTF!

I think you can get basic stats just about anywhere...


https://www03.cmhc-schl.gc.ca/hmip-p...hyName=Calgary


I'm not sure very many people are enjoying their condo ownership right now though. Condo fees are scary. The risk of huge special assessments is terrifying. Property taxes are due for a major increase. And condos are not going up in value at all and haven't for a really long time.



You'll have a month of vacancy once and a while but it won't amount to much. You'll probably have decent tenants who move every now and then leaving you with a few re rental costs here and there. But it won't be a big deal. I think your major risk is that which is beyond your control.



A friend bought a new condo in Bridgeland in 2006 for 225k. I don't think he had a day of vacancy the entire time. But he did get a 35k special assessment and several fee increases that turned his rental income into a small loss. He just sold it for 240k. Minus commissions and expenses he was almost 40k in capital short. But his mortgage was 60k lower. So it's pretty much a giant 13 year wash. Not worth the risk by any metric.



If you do buy, stop focusing on rental stats. Focus on the price you buy it for. That's all that's going to matter down the road. If you get a good deal on the buy it can mitigate some pain later on.

I would argue that they are both important. I have a rental condo (that I used to live in) and there is going to be a lot of new rental competition on the market in the next few years, something to keep in mind.

There's also special assessment insurance on Condo Insurance nowadays which could mitigate some of your friends losses in that example.

[OMG!WTF!]

Originally Posted by Ahuch

I would argue that they are both important. I have a rental condo (that I used to live in) and there is going to be a lot of new rental competition on the market in the next few years, something to keep in mind.

There's also special assessment insurance on Condo Insurance nowadays which could mitigate some of your friends losses in that example.

I think you have to worry more about the things you can control. You don't have to buy a condo but if you do, make sure your offer reflects the value you want to gain when you buy.



The rental market is totally out of your control. If you're only renting one unit you are sort of out of the big market anyway. But things change and that market may look very different in a year. You'll always do better buying desirable real estate in desirable areas so general real estate savvy sort of trumps specific rental data.



Condo insurance sort of maybe covers some assessments depending on a number of conditions. But the reality is, it doesn't cover the effect on the future value of your unit. Not too many people are willing to pay top buck for buildings with large assessments in their past. At least the short term sellability is very much affected by special assessments. It also makes it harder to get loss insurance when there is a history of assessments.

[lazypucker]

I suggest take a look at this thread about potential headaches about being a landlord:

https://forum.calgarypuck.com/showthread.php?t=175244

BTW, I am going to the hearing next week. Let's see how that goes...

[DownInFlames]

Our condo board is budgeting for a 40% increase of our insurance premiums, and that's with no claims in the past five years. Some buildings with claims are seeing their rates rise as much as 100%.

If you own a building full of renters prepare to get nailed with huge insurance premiums.

[OMG!WTF!]

Originally Posted by DownInFlames

Our condo board is budgeting for a 40% increase of our insurance premiums, and that's with no claims in the past five years. Some buildings with claims are seeing their rates rise as much as 100%.

If you own a building full of renters prepare to get nailed with huge insurance premiums.

I just got a notice today from a borrower whose condo insurance premiums are going up by almost 200%. That's $130 a month on her condo fees.


And yesterday a friend got a notice about an emergency condo meeting to discuss insurance premiums. Sucks.

[Manhattanboy]

Still say buy an apartment REIT.

[Flash Walken]

Originally Posted by Scroopy Noopers

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.

Best advice so far in the thread imo.

[GullFoss]

I sit on a number of condo boards and about 50% of insurance claims are preventable if the owner occupant or (more often) the owner investor did basic stuff like screening for tenants and doing preventative maintenance work.

And most insurance claims cost 50%-150% more than they should because remediation companies take advantage of the situation and insurance companies let them. I've seen bills for $800 to patch and paint 30 sqft of drywall. And neither the board or property manager care because it's part of a $15,000 claim and the deductable was $5,000, so the $500 of over-billing is irrelevant.

But over time when you end up with lots of claims and they all cost way to more to remediate than they should... it all gets baked into premiums, eventually.

The problem is that everyone thinks they can just free-ride or be a hands off landlord and expect it will all take care of itself. News Flash - owning a condo is not hands off. And when enough people think it is, you get surprises like 50% increases in insurance premiums.

My advice is that unless you want to live in a condo 15+ years, just rent it. Condos are a giant headache, especially as they get older and become mostly rentals.