REI in Canada = Not profitable? (BP #214)

31 Replies

Originally posted by @Roy Cleeves :

@Chris Baxter - can you tell me what Cap rate of return you are getting on the 6 plex in Moncton?  Thanks. 

I bet I could not tell you the CAP on a 6-plex in Moncton (or Fredericton, or Saint John) and it is one our markets. I never underwrite using the CAP rate ... in fact, the only time I have any curiosity about the CAP rate is when I am thinking about selling a property (and am trying to determine how much someone will pay).

CAP rate is a dangerously misused metric which is far to frequently batted about as though it has significance beyond being the inverse of a P/E ratio for a business/property at a point in time.

Thanks for that @Roy N.   People often look at me funny when I can't spout the cap rates for properties I own. Realtors often ask "what kind of cap rate are you looking for?" and again, I get blank stares when I reply that cap rate isn't important. 

In listings, agents present the best possible cap rate to attract buyers. If you look at the financials, you'll see that many expenses / income adjustments that should be included in the NOI calculations are omitted: vacancy, property management, maintenance, snow removal, anything done by the current owner, etc.

My advice...ignore cap rates and do your own financial analysis of any deal

@Chris Baxter - I'm on the East Coast (nova scotia) and have certainly found some great properties - from a cash flow perspective - outside of Halifax as well!   As someone said - there's always deals for those who look!

Urban core investing is typically for the big pocketed companies. There are things you need to keep in mind on how they are successful. 1. Financing could be interest-only or equity financed, meaning very low carrying cost. 2. Development and densification is usually the goal, not buy and hold. millenials are a huge generation, much larger than gen X. They want to live close to downtown. 3. Rezoning. SFH lots that are rezoned to duplex or low rise will instantly get 50-100% return. This happened on Cambie, oak, king Ed, etc. Houses on busy streets that most investors would look over, all were offered 50-100% over market value and assembled into large lots for condos. 4. Almost all municipalities have underbuilt due to NIMBYism. Most land within a 5 minute drive of the downtown of major cities is under zoned and therefore under valued. Savvy investors buy for the rezoning, not the cash flow. The risk is higher and the returns are higher. 5. Buying in small towns to get a few hundred dollars a month is not the way to make money in real estate. Better to find a partner and buy urban, then rezone or wait until millenials put enough pressure on local politicians. I hope I have been able to explain why billion dollar development companies see investment opportunities in low CAP rate areas, while average mom and pop investors get hung up on the 1% rule.

Thanks for this info guys.  I have a builder planning to build a 6 plex in Milverton, Ontario which is not a major centre at all.  Small town in Southwestern Ontario.   And he felt he could get $1.2M based upon 6% cap rate.  Yet so much more comes into the equation including the ability to finance it in a smaller centre, and would the rents really be as high as he is predicting, appreciation rate lower in small town etc.

I have recommended that he consider Kitchener or Waterloo or London even instead.

@Roy Cleeves I had a chuckle when I googled Milverton and google comes up with a picture of a Menonite woman. Yeah, small-town. However, I saw a 6-plex in Hensell (a bit west of Milverton) sell at a 6-cap after only a couple days on market. At 1.2 million for a six cap, though, I run the numbers on this proposed build to about 1300+utilities. You will NOT get 1300+ in Milverton unless you are renting luxury 3-bedroom units with granite... even then I doubt it.

Then again, are you finding legitimate cash-flow at all in Kitchener or Waterloo? Even INSIDE london you'd better be prepared to rehab or convert to get decent cash flow now - that's why i'm trying to be more familiar with the surrounding towns. Generally speaking, if a realtor has touched it, there's no cash flow left.

@ Matt Geerts Thanks so much for this reply - I was working with 1200 as the rental and I agree - we won't get that from the Menonites and they probably won't live in this type of building - LOL. 

Although the builder was planning to put in an elevator - can you imagine the cost over runs.  LOL. Crazy.  I am not interested in that area.

So I told him to look to build in KW area instead.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here