Multifamily Investing: Its A Game Changer
Domenic Mandato, Founder and President of InvestPlus Properties Canada Ltd., was on hand recently at REIN s Multi-Family & Commercial Investing Summit, to provide some advice on implementing profitable multifamily strategies. With over 15 years of Canadian investing experience, Mandato has an amazing track record in investing as well as immeasurable knowledge in building wealth.
Mandato, along with his wife, first started investing in 1999, building his portfolio by acquiring single family houses, duplexes, and triplexes across the country. Although they lived in Vancouver at the time, their first property was a condo in Edmonton. To quote Mandato You don t have to buy where you live, you can also buy away from where you live . He recommends always buying where real estate s going to go up.
In 2003, he was relocated to Calgary by his employer and it was at this point that the Mandato s Alberta portfolio quickly started to grow. After deciding that they had, in Mandato s words, a pretty good sense of what drove real estate value [and the impending boom], they sold everything and focused their efforts, and dollars, all in Alberta. In 2008, another milestone was reached: they started raising their own money through limited partnerships and off a memorandum after exhausting the funds of family and friends. Today, they have rolled everything together into an REIT, in a large part for their investors who want to yield product, and invest solely in multifamily and commercial whereas prior their strategy had always been equity building.
Doing Your Homework
Before you start doing any multifamily or commercial investing it s important to ask yourself the following:
- How much capital do you have?
- How much can you actually buy?
- Where are you going to buy (close to home or elsewhere)?
- Will you be self-managing or will you have someone else manage your properties?
- Is it your goal to earn cash flow or just to create a nest egg to pay down the mortgage, gain the equity, and then live off that money in retirement?
- If you are going to have partners, do their goals align well with yours?
When it comes to where to buy, it s a matter of choosing what Mandato refers to as Class . An A class location is usually downtown with brand new buildings in a great location close to transit, B is in the suburbs about five kilometers outside of the city, C is 20 minutes from downtown, and D .well, D you just want to stay away from altogether.
Class D areas, although cash flowing, can be very management intensive with longer vacancy periods, higher turnover costs, and more tenant transiency (6 18 months on average). A Class D turnover could cost a few thousand dollars whereas a Class A , where tenants are stable and stay for years, the turnover costs are far and few between. A Class D building will also not only wear away at your cash flow, but it will take away valuable time that could be better applied to portfolio growth.
Regardless of which area you choose to buy in, it s best to buy bigger as the larger the multifamily building, the better the economies of scale. Anything under 20 units usually means your resident manager is paid a flat monthly fee. When you go over 20 units, the manager is paid on a per unit basis so the lower the number of units, the lower the manager s income. Both situations pose a problem as neither one is likely to cover the manager s rent meaning they likely aren t on site 24/7 because they also may also have a day job. As Mandato shares, Trying to find a resident manager, especially a good one, there s a good chance you re not going to keep him because the income just isn t there. For Mandato, 30 units and up seems to be his sweet spot for income, cash flow, and resident manager retention.
If you are having trouble retaining a resident manager, another option is buy two or three different buildings within close proximity to each other. That way you can have one resident manager looking after multiple buildings and pay him the same wage as a 20, 30 or 40 suite building.
The Suite Mix
Bachelors, although they do really well from a rental per square foot perspective, during a downtown can result in high turnover. This can be especially true if your tenant is a young person or student and can rent for cheaper in a two bedroom with a friend. You can make the place look appealing by putting in some expensive-looking touches which will make the apartment/house a great find, e.g. blackout curtains, a new mattress (you can take a look at a Sleeping Duck vs Koala Mattress comparison), and new carpeting. All of this together can make a great living space.
A building full of two bedrooms, on the other hand, will provide great income and occupancy and withstand a down market well. The same goes for three bedrooms, although because they are commonly occupied by families and make great anchor tenants, they can take longer to rent once vacant.
Mandato s advice: A lot of it depends on location, where you re buying. If it was a one bedroom in the suburbs, I probably wouldn t be buying it unless it was a screaming deal but if I were to go into a brand new market I try to balance the two bedrooms with the ones and bachelors.
Low Rise versus Mid-Rise
Low Rise
A low-rise is typically a wood-framed (sometimes concrete) three to four storey walk-up. It is usually low in terms of operation costs because, for those without an elevator, there is no heat loss in an elevator shaft and there s no hydro cost for powering an elevator. There are also no elevator repair or maintenance costs to worry about and zero underground parking costs. Underground parking can be pricey especially if it is not ventilated but having surface-level parking, especially in unsafe areas, can play into turnover.
Mid to High-Rise
In additional to housing potentially better tenants, mid to high-rise buildings are typically close to, or right in, the downtown area, making them Class A buildings that are appealing to larger investors and companies. However, elevator is an additional service that can be a necessity in such buildings. It might become fundamental to get in touch with experts in the elevator industry to procure the best available contract for the same. Furthermore, it can save a myriad of money on future repairs and upkeep. Mandato himself gets a call every other month from someone wanting to buy from him.
Investing in a mid to high-rise can also mean additional cash flow from parking. In Calgary, Mandato earns 15 20% of his income from underground parking on one particular building. After realizing he wasn t doing a great job of renting the stalls out himself, he hired Westpark. They tend to have introduced a hang tag permits system and are now managing the parkade more efficiently. They pay Mandato $10,000 guaranteed each month and then anything above $12,000 that they earn in income, [Westpark] shares with us and 30% for them .
Location, location, location
Once you’ve decided where you want to buy, you need to look for amenities, transportation, downtown versus the suburbs, etcetera. It will affect who you market to. Mandato s rule of thumb: Never buy real estate where you live, just buy where real estate is going up. Great property in a bad location is never going to do well but a not-so-great property in a better location will. It s also important to realize not only what neighbourhood you re in but also who your neighbours are.
To Manage or Not to Manage
Self-management, in Mandato s experience, better controls costs due the ability to make decisions in-house. Management fees, on the other hand, which leave everything out of your control, can run between four to 18% depending on the size of the building.
Self-management also increases your bottom line. For Mandato, his bottom line has been affected by, at minimum, 10% and it has the potential to go up to 20%.
It also speeds up your ability to pull in good tenants since large property management companies may only do showings on a certain day of the week between certain times.
This isn t to say that working with a property manager can t be beneficial but it needs to be with a manager that does more than just ensures the tenant has a safe and clean environment. A good property manager needs to also be organized with all of their paperwork. A manager who doesn t have a system will find their growth limited. The same applies to self-management.
That’s why Mandato is a big fan of third-party property managers because it has allowed him to grow and buy buildings in remote locations. A third-party manager will also save you the hassle of producing an income expense statement in-house or hiring an accountant to do one up. One can look for a company providing Property Management Manchester (or elsewhere) to avail benefits that they may not get while opting for self-management.
The Importance of Communication
It s very important to keep the lines of communication open with your property manager by asking questions such as: How can I make your job easier? , What will you do to fill my vacancies?, and Once my vacancies are full, how will you keep those vacancies full over time? . It s also a good idea to take your manager with when you re looking at a property because they might notice things you may not, like less than ideal suite locations that might result in higher turnover or things that might affect your acquisition budget.
Also, in Mandato s words, Knowing what your property manager wants and needs out of marketing the suites allows you to shape your suites towards making their job as easy as possible, decreasing your vacancy in turnover in the process.
Equity Growth or Cash Flow?
Equity Growth = higher leverage and less money down. It means buying a building that you re somehow going to raise rents in [over] a short period of time and raise the equity. It also means: 1) being able to get financing, 2) finding a building that will facilitate rental increases, and 3) purchasing in province that doesn t have rent control (currently only Alberta or Saskatchewan).
Cash Flow = chasing high cap rates that pay dividends. The challenge? Finding the right cap rate in the right major center. For Mandato, it s a 6.5% cap rate. Right now cap rates in Vancouver are 3%, 4.5% – 5% in Calgary, and 5% – 5.5% in Edmonton.
A cap rate is a market income multiplier that equals building value. To calculate your building value you take your net operating income (expenses minus all non-financing and/or the income minus non-financing and expenses) divided by your cap rate. Traditionally as a building gets bigger, the cap rate does as well.
Risk Factor
Multifamily buildings are considered one of the lowest asset risks to real estate from a lending standpoint because the lender knows that if you manage the building well, you re going to pay. They also know that people will always need a place to live, unlike commercial where if a unit goes vacant, especially in a downward market, it can spell trouble.
Multifamily buildings can also be hard to finance, depending on the lender. CMHC, for example, requires you to have at minimum five years of management experience before they will insure you. Also, even if you are not planning on paying yourself, the bank is still going to take a percentage and put that into property management expense.
Multifamily is undoubtedly a different buying game than single family and one that requires some learning when starting out. It s important to; know the game , be properly financed for it, and have the right tools in your investing toolkit to play in it. It s a great game to be in.
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