Buying Multi-family Housing In Smaller Markets.

Some time ago, I promised you a post on buying multi-family properties in smaller markets and in March I also gave a talk on this topic. One of the reasons I want to address this topic is because I have encountered many investors who experienced significant frustrations when seeking financing and/or dealing with challenges present in smaller markets. In this post I want to summarize the key implications of such an investment strategy, namely:
Highlight issues and challenges in purchasing multi-family properties in smaller markets;
Suggest a market research methodology; Make you aware of what to expect in terms of financing and potential issues;
As always, I recommend you use a risk management approach in your investing strategy to assess key risks and mitigate them (I just cannot shake off my old training as a former CMHC multi-family underwriter). The four key risk factors are:

  • The property (its condition)
  • Market
  • Value of the property
  • Borrower/investor

In this instance, the 2 risk factors, which are significantly impacted when buying in smaller markets, are the market and valuation risks. Hence, this post will mainly focus on these risks.
I’m not trying to dissuade anyone to invest in smaller markets. My goal is simply to help you be better prepared! On the contrary, there’s definitely money to be made in smaller markets! I have underwritten many deals by very successful investors who were getting fantastic returns. It’s matter of knowing what you’re getting into.


First, what do I mean by smaller markets? Generally speaking, I mean markets with a population of less than 10 000 inhabitants and for which there generally is no formal market data being collected. For instance, CMHC collects market data for Census Agglomerations (CA) in excess of 10 000 inhabitants and for Census Metropolitan Areas (CMA) of over 100 000 inhabitants (see for rental market surveys). Any market with a smaller population is not surveyed by CMHC. However, there may be other sources of information, as we’ll see below. In short, small markets may be isolated from large centres and/or be remote such as in northern areas.
Implications of buying in Smaller Markets :

1) Financing
If the property you’re looking at purchasing is located in a small market and you need financing, your deal will likely have to be insured by CMHC !

The reason for this is because conventional lenders (lenders that don’t use CMHC insurance) generally don’t lend outside large centres because they’re considered ‘higher risk markets’! In addition, local banks are likely to have little to no knowledge in multi-family property investing. If the loan-to-value is low, that is below 60%, you may be able to get financing but likely under tight terms and conditions including a maximum amortization period of 25 years versus a 40-year amortization you could get if your loan is insured by CMHC. Needless to say there is a significant difference in your cash flow between a 25-year amortization period and a 40-year one…

Let me go back just for a minute to the fact that most local banks in small markets have no experience with multi-family properties. This often makes the process of obtaining financing very unpleasant and stressful for you. To this effect, I’ll refer you to my Ebook (which you can download by signing up at where I recommend you work only with people with experience with this type of investment, including brokers, realtors, etc..
Now if banks and CMHC think smaller markets are riskier, you need to know why.

For one, economic fundamentals in smaller markets tend to be weaker. Perhaps the market is more volatile and less diversified and often overly reliant on one or two main industries or prone to frequent cyclical fluctuations.
In addition, the valuation of multi-family properties often presents a challenge because there are fewer sale transactions to use as comparison. There is less market data readily available in terms of rents and vacancies. Accordingly, because of the higher risk profile of small markets, apartment buildings located in smaller markets are harder to sell, therefore making them somewhat less desirable to investors and banks alike, especially in the event of loan default. Indeed, most investors prefer the more stable markets of large centres.

2) CMHC’s Mortgage-default Insurance
Because CMHC is a federal Crown Corporation, its mandate is to offer the same service absolutely anywhere in Canada. However, CMHC will take into consideration the specific risk profile of each market where it insures loans and apply mitigation measures deemed appropriate on a case-by-case basis. Among the possible mitigation measures you might expect are:

i. A higher capitalization rate (Cap Rate) in calculating the lending value, which will result in a lower lending value and corresponding larger down payment. Remember, cap rates are also an indicator of risk;
ii. Higher operating expenses will be used in calculating the net operating income (NOI) resulting in a lower value of the property.

You can see the ‘double whammy’ negative effect on the value of the property.

What can you do about it?

1) Get an appraisal: An appraisal will certainly satisfy conventional lenders, but not CMHC! You can try but it’s no assurance CMHC will accept the appraised value. As a matter of fact I’m willing to bet it won’t! I’ve said it before in public speeches, CMHC doesn’t care about market value! It’s not in the business of appraising the market value of properties. Proof of that is that CMHC does not formally require investors to provide an appraisal in support of their financing application. An appraisal is a ‘nice to have’ thing, but not a must.
2) Provide solid support for the operating expenses: Do your best to obtain from the vendor sound details on actual expenses for the property going back 2 or 3 years if you can. What you want to avoid is having a weak financing application package (no concrete support for your numbers) that would cause CMHC to use its own expense benchmarks which always err on the high side as indicated above. However, it is fair to say that investors should indeed expect operating expenses to be higher than in large centres.
3) Be resourceful to locate market data: The fact that the small market you’re interested in is not surveyed and no formal market data is systematically collected does not mean you cannot find it on your own. Among the other possible sources of information you can look at are the following (not an exhaustive list):
Provincial and/or municipal surveys
Town’s websites
Local realtors who will most of the time be very knowledgeable with regards to rents and vacancies, sale transactions, etc.

  • Land titles office
  • Chamber of Commerce
  • Local newspapers for economic news
  • Etc.

Then, when you prepare your financing application package, include the data you’ve uncovered with the names and phone numbers of people you contacted during your search in order to enable the underwriter to verify the data first hand.

As indicated above, CMHC’s mandate is to provide the same service to all Canadians anywhere in Canada and as multi-family underwriter I underwrote deals in many small communities including in some of Canada’s Territories (Nunavut, Northwest Territories) and I had to go through that investigative process.

There you go !  I hope these few tips will help you if you decide to invest in smaller markets.
Please, make sure to leave me comments, questions and/or topics you’d like me to cover and I’ll do my best to oblige.
To your success in real estate investing and all areas of your life,

– Pierre-Paul

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