All Forum Posts by: Thomas Kambadzi

To anwer your question "how are people in Canada actually buying positively cashflowing properties were you can put "real" money into your pocket every month, starting from day 1?"

Answer 1. We don't. With mortgage rates high and prices also high there are no positively cashflowing deals from day 1. Case closed. Buy in the US is the easiest answer.

Answer 2. Having said that, let's go a bit deeper. Positive cashflow is achievable in Canada if you manage to find a realy good deal, which is very hard and takes plenty of creative networking, marketing, negotiation, etc. After you buy such a property it will likely be in a distressed condition. It may also require a conversion to a duplex, triplex or even 4-plex. This will take time and money to implement. You way also need creative financing or change in use (say rent by the room or rent it furnished or what not). It may also be in a different location that you live (northern ON, NB, AB, etc).

Pick your answer from the two paragraphs above. Both answers are correct. Which one is right for you is your own choice.

Thank you so much @Paul Sverdlin, this feedback is so insightful. It was one thing just reading things in real estate books, and a completely different thing when I start to try out the things in the real world so I really appreciate your advice because this makes it so much more practical.

0 Votes

Toronto, Ontario

Quote from @David C.:

The 1% rule is based on gross rents. Cap rate is based on net rents. Thus, need to multiply $120k by the expense ratio (generally understood to be 50%, although it can vary depending on property) before using it in the cap rate formula.

Using your example …

1% rule: Gross annual revenue would be $10k * 12 months = $120k … as you said.

Missing step: Net rents are $120k * 50% = $60k

Cap rate: $60k/$1M = 6%

So, a 6% cap rate is the same as the 1% rule.

This is roughly speaking of course. These are all rules of thumb.

Thanks @David C. really appreciate the quick demo that you did for me, it made the math clearer to me now.

0 Votes

Toronto, Ontario

Quote from @Stevo Sun:

Quote from @Thomas Kambadzi:

I am seeking a second opinion on whether I am doing this right. If I am looking for properties that pass the 1% rule, say for example the property is going to cost a hypothetical figure of $1M, it means I should be able to charge a monthly rent of $10k for it to pass the 1% rule.

In this case the annual gross revenue would be $10 * 12 months = $120K

Then it means the cap rate for it would be 12%? (i.e. $120K divided by$1M * 100 = 12%).

This being said I have been scrubbing the (Canadian) MLS for a while now and haven't yet seen any multifamily property advertised with such a cap rate. The average I see is around 6%. I have also read that high cap rates are red flags for high risk investments. Is it then even realistic to look for such a cap rate (i.e. 12%) when shopping?

Some properties would meet the math if they were bought, renovated and re-rented at up-to-date market rents however after reading online I am realizing that landlords can be in trouble for "renovicting" tenants of the previous owner with the sole intention to increase rent afterwards.

All the above being said; how are people in Canada actually buying positively cashflowing properties were you can put "real" money into your pocket every month, starting from day 1?

1% rule has not worked in Canada for many many years. A lot of people in Toronto buy negatively cash flowing properties in hopes of appreciation. That has worked quite well for people in the past few decades. So a lot of them have a lot of cash built up and are not financing at a high leverage. This means they can cash flow anything with enough down payment.

Makes sense @Stevo Sun, that brings a lot more clarity as to how people are doing it, thanks for the response

0 Votes

Toronto, Ontario

Quote from @Tim Ryan:

Hey Thomas, you are right about the 1% Rule that you would need $10k per month in rents (revenue). The cap rate is correct at 12% if you pay all cash. With a loan, you then want to look at cash on cash return. Anyway, you are not finding deals in Canada. I know nothing about Canada. But I do know the Mid-west has growing cities that do provide the 1% rule. It's not a thing of the past and I'm not buying crappy properties in crappy areas. The key is you'll have to travel. So again, your area is not ripe for investment - then look elsewhere...

Thank you @Tim Ryan

0 Votes

Toronto, Ontario

Quote from @Greg Scott:

Thomas:

First of all, I would say the 1% rule is a rule-of-thumb from immediately-post the Great Financial Crisis. It isn't terribly helpful any more. If you follow it strictly, it would cause you to buy properties in very bad parts of town.

I'm not sure how financing is done in Canada. (Fun fact, my wife is Canadian and we go there frequently.) In the US, anything with four units or less is financed using comps, not the income approach. When using comps, Cap Rate is meaningless. If they use the income approach to finance properties in Canada, then Cap Rate is meaningful.

FWIW, I haven't seen a 12% Cap Rate EVER. Also, the definition of Cap Rate is the rate of return from operations with no leverage, so in your example, the math is incorrect. You would have to take $120K minus operating expenses before dividing by $1M.

Seems like you need a more sophisticated spreadsheet to analyze properties. I'd reach out to some local investors for help.

@Greg Scott thank you for the clarification on the Cap formula, that makes a big difference.

0 Votes

Toronto, Ontario

In this case the annual gross revenue would be $10 * 12 months = $120K

Then it means the cap rate for it would be 12%? (i.e. $120K divided by$1M * 100 = 12%).

All the above being said; how are people in Canada actually buying positively cashflowing properties were you can put "real" money into your pocket every month, starting from day 1?

0 Votes

Toronto, Ontario

Thank you @Dave Skow, @Paul Sverdlin & @Hai Loc 🙏🏾

0 Votes

Toronto, Ontario

thanks @Dave Skow, good to know! by pricey you mean the interest rate charged on the mortgage loan in comparison to when doing it in Canada?

0 Votes

Toronto, Ontario

Thank you @Hai Loc, @Dave Skow, @Stephen Selinger, @Emily Shay, @Cody Neustaedter, @Account Closed. That makes a lot of sense. At least now I know I am applying what I am learning correctly because the math wasn't making sense at all when I was analyzing deals lol.

That being said, I am now ab bit confused on what next then, and here's why -

1. I have heard people say on your first deal you should invest in your backyard, but I don't want to invest for appreciation (I find it a bit speculative, especially right now with rising interest rates). Besides investing for appreciation what other strategies work in this kind of a market?

2. I am also thinking of maybe exploring Thunderbay, (the prices there seem good, quite a bit of the properties work with the math, and there is always a shortage of rentals due to the student population), but another part of me thinks of exploring across the border down in the US. Would any of you be able to comment on pros and cons of investing in smaller Canadian cities vs investing in the US market, as a Canadian investor? (Specifically I am talking about investing in positively cash-flowing small multifamily properties).

0 Votes

Toronto, Ontario

Hi everyone!

I am new to Real Estate Investing and I am excited about the journey. I just finished reading the Book by BiggerPockets on “How to Invest in Real Estate - the ultimate beginner’s guide to getting started”.

I have been analyzing plenty of deals on the Realtor.ca MLS using the new tools I just picked up in the book. Specifically I am focusing on 2-5 unit Multifamily properties in southern Ontario/GTA area up the way to Barrie region. What's interesting though is it seems as if not a lot of properties (if any) would pass the 1% rule. I know it's a general guideline that helps one to quickly filter if a property will cash flow positively. Does this mean that deals are just harder to find in this region? Makes me wonder too that are the people who end up buying these properties (which don't seem to be good deals, assuming they are bought at the asking listed price) making bad deals or are there cases whereby even though something might not necessarily pass the 1% rule, it may still end up being a worthwhile deal to look into?

Thanks in advance!

Thomas

0 Votes

Toronto, Ontario

All Forum Posts by: Thomas Kambadzi

Thomas Kambadzi has started 2 posts and replied 10 times.

Post: Please clarify my Real Estate Math

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Post: Multifamily property Investing in Ontario, Canada

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