Is Multifamily Investing for You? Some of the Challenges…

Before I get deep into multifamily investing, you must first ask yourself whether investing in apartment buildings is the right type of investment for you. Accordingly, I’ll share with you my views on the pros and cons for this type of real estate investment. In this post I’ll discuss the major hurdles as these are significant and cannot be overlooked. It’s not intended to be an exhaustive list. If you cannot, or are not willing to overcome these hurdles, then you probably should not invest in multifamily properties.

Up-Front Capital
As you can imagine, you require a large amount of capital up-front to purchase multifamily properties. If you’re lucky, you might get away with as little as 15% as down payment. More likely you will need at least between 20% and 25% or more of the purchase price, especially if the property requires significant improvements. If you goal is to have a large yearly cash flow, then you would have to put more money in order to lower your mortgage payments and increase you debt coverage ration and thereby increase your cash flow. I’m getting technical here but I’ll dwell more on this too in a subsequent post. Obviously, the bigger the property, the more capital you will need. If you don’t have this capital yourself and must raise the funds through joint ventures, you will likely need multiple J.V. partners, which can be challenging to find and manage. Just to give you an idea, when I purchase a 20-suiter or so in my market, which is Edmonton, I need to raise approximately $500,000 from JV partners. Because I choose not to solicit investors publicly in order to avoid the securities legislation, I can assure you from personal experience that raising half a million dollars is not necessarily easy. You also need enough capital to cover contingencies for unforeseen events such as your boiler dying on you and other such repairs. In the future, I will write a post entirely dedicated to the topic of JV fund raising.

Personal Net Worth
Probably, the second most important obstacle for first-time multifamily investors is having sufficient personal net worth to qualify as a borrower. If your loan is to be insured by CMHC, as a borrower you need to have a minimum net worth of 25% of the loan amount with a minimum of $100,000 in order to qualify. In a future post, I’ll get into more details as to how the personal net worth is calculated.

Financing Rules
I’m inclined to say that the third most challenging obstacle to multifamily investing may be to know the financing rules. But you’re in luck because if you follow the posts on my blog over the course of the year, by the end of it you will have developed the full knowledge of the financing rules to enable you to confidently sit across your mortgage broker or banker. This is PROMISE I MAKE TO YOU because the insights I’m sharing with you are not available anywhere else and I have been on both sides of the equation as both an underwriter and as borrower.
No Margin for Error
There is also little to no room for error when investing in apartment buildings. For one, there are fewer properties and fewer players at this level, including fewer realtors, mortgage brokers and banks that specialize in multifamily properties. Accordingly, you quickly develop a reputation in this business, which you have to protect at all cost if you wish to continue buying more multifamily properties in the future. Your mistakes will also cost you a lot of money… I could not stress this factor enough!

Not a liquid Asset
Multifamily properties are not a very liquid asset. Unlike a small rental property, an apartment building cannot be sold quickly. This is the reason why in the near future I intend to purchase smaller properties (in addition to multifamily properties) that I could sell quickly if I need to raise cash for one reason or another. I believe it’s part of a balanced investing strategy.

Stabilization Period
It usually takes between a year to two years to stabilize an apartment building. I’m talking about the stabilization of income and operating expenses as well as the condition of the subject property. With regards to the income, it may be that your rents are below market and you are gradually raising them. This usually has to be done over a certain period of time. It may also involve cleaning the tenant base in the property. Insofar as the operating expenses, the property may have significant deferred maintenance issues that need to be addressed over time, which means your expenses will be greater during the time while you complete these repairs. The point here that during the stabilization period you will likely not get much of a cash-flow if any at all, or even a negative cash flow. I’ll discuss this at great length later in this blog but it is critical that you assess up-front the property condition in order to factor the cost of bringing the property into a good state of repair. Personally, what I do is once I have an accepted offer on a property, I get it professionally inspected and in addition to my own assessment, I ask the inspector to identify the repairs required within a year or two. Then I get repair estimates and I make sure to raise sufficient J.V. funds accordingly to enable me to address them.
Again, the above is not intended to be an exhaustive list. But in my opinion and experience these are the major challenges to multifamily investing. If you can get past these you are on your way.
In my next blog, I’ll talk about the key advantages. Please do not hesitate to leave me comments and/or questions.

Regards,

Pierre-Paul Turgeon, President Matterhorn Real Estate Investments Ltd. Former CMHC Multifamily Underwriter Please, visit us at www.MatterhornInvesting.com

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