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Actual and projected ROI

Willyboy

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Aug 19, 2016
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Hello.

I've been looking at multifamily proformas in Edmonton lately and I noticed many are presented into two formats. One shows the current actual rents with low CAP rates and another shows projected rents and ROI with higher CAP rates say CAP was 4.4 and it becomes 6.5. Some of the projected proformas also show lower expenses on repairs and maintenance.

I didn't contact any of the realtors to inquire why they have 2 proformas but I was wondering what the reason could be as normally there should be only one.

But I'm also pretty sure multifamily investors must know what it means. So by projected rent does it mean when rents eventually say in a few or more years go back up to what they were before the recession or it might be something else?

Thank you.
 

Thomas Beyer

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It’s a way to inflate the ask price. Keep in mind realtor works for seller and wants a high sale price as commission is higher.

It makes sense to buy MF in Edmonton, or elsewhere, but don’t overpay. The right price matters.

Considering these six factors, where you could easily be off 10% each as a newbie, and in total 50% or more

A) vacancies ( stated 6% but might be 8 or 9%, which is 33-50% higher .. so being off only ten percent is common)

B) gross (as if full) rent ( ie what rent is actually achievable given location, unit size, unit type, unit quality and building quality)

C) operating expenses ( esp insurance, utilities and property taxes which are routinely understated)

D) mortgage interest rate

E) mortgage amount (ie amount that a bank will realistically give you)

F) rental or NOI upside .. with little or significant expenditure

REIN has a comprehensive MF binder where numerous experts, included yours truly, contributed. That is a good start to get educated. Or get a mentor. One of five factors off is tens of thousands of $s, 2 or 3 easily $100,000 and 4-5 $250,000 on an average 15-24 plex !
 

Willyboy

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I bought an online course last year by an investor who also owns lots of buildings in Edmonton and it was helpful in terms of information and I'm also thinking about the REIN binder as the more info and expert opinions the better.

I have been considering taking the single family house or 4 plex route but If I decide I want to give a try to a small multifamily like 6-8 units and I need a mentor how or where can I find one who also should have a strong knowledge of the neighborhoods in Edmonton?
 

Martin1968

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Jan 22, 2017
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I bought an online course last year by an investor who also owns lots of buildings in Edmonton and it was helpful in terms of information and I'm also thinking about the REIN binder as the more info and expert opinions the better.

I have been considering taking the single family house or 4 plex route but If I decide I want to give a try to a small multifamily like 6-8 units and I need a mentor how or where can I find one who also should have a strong knowledge of the neighborhoods in Edmonton?

I so agree on Thomas point C. You really need to understand what comes your way in expenses, as property taxes and insurances are often changing as soon as a building is purchased that has been with the seller for 25-30 years. Utilities are verifiable, however it has been noted before on this forum when buildings the size of 16-24 units change ownership, it usually creates unrest with the current tenants and don’t be surprised tenants pack up and leave. You now not only mis out on rent, you are also on the hook for utilities. And you will have to fork out money for necessary updates. On the bright side, if your pockets are deep enough, you can now renovate and bring apartments up to 2019 standard, and thus defeat the actual current rent and blow the projected rents out of the water. (Done it many times but it takes cash, and lots of it)

The nice thing in real estate is that everyone finds a product or way to invest in what works for them. For me personally the old style walk up apartment buildings are not the ones, wether 6-8 units or 16-24, they are overpriced, outdated, low cap and take a lot of time and effort to manage (wether self managing or source it out)
Although I’m not excited about investing in financial markets, I would choose the latter in a heartbeat over apartmentbuildings.
 

Matt Crowley

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@Willyboy

Difference is going-in cap rate vs. disposition cap rate. It is standard. There is also a stabilized cap rate.

If the going-in cap rate is lower then the Realtor is probably showing how current NOI has room for growth.

Don't believe anything Realtors have to say on what a 'good neighbourhood' is. They are all good neighbourhoods to them. That is your job to understand that in and out, not your Realtor.

Just underwrite the asset. There is nothing inherently unusual in what the Realtor has done.

Look at current rents. Where is market? Cost to improve? How is that funded? What is IRR / Multiple? Time horizon? Waterfall?
 

Cory Sperle

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Sep 1, 2010
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Edmonton multifamily is NOT the hot commodity it was in the boom years of 2003-2014. Most of these projects need major work, with little or no immediate upside. During the hay day Edmonton MF was on the radar as the go to product, and was hyped up by many sources. You could buy a building with little down, even throw a second mortgage on it, didn't matter the shape of the suite, you could re-rent it right away without major upgrades, raise rents and refinance your way to freedom. At the end of the ride, these buildings were converted to condos for even greater profit.

Today is starkly different, and many great points made above, especially operating expenses, insurance and taxes in particular that have gone up relentlessly even through 5 years of flat and declining values in Edmonton MF. Martin also mentions the turnover, which is now a key metric on the CMHC rental market reports. It is not uncommon, and in fact has happened to me in virtually all buildings I have purchased, to turn over 80% or more of the units in the first 24 months!

That said you need to price accordingly. Know your competition, his suite condition compared to yours, and say half the suites need an overhaul at 10K a piece, the roof needs to be changed, and parking lot resurfaced in the next 10 years add up those costs and tack on 50% for your trouble into your going in cost. Many folks who were bigger players a decade or so ago are now discount selling their buildings, or are substantially over-leveraged.

Don't overpay, have your eyes wide open, and that applies even more so to folks not from the Edmonton area as they seem to be getting stung the worst in this regard. Also there are still really great deals to find, they are just incredibly rare. Ask yourself why you are buying this building, shopping mall, trailer park, as one has to have a very good reason.
 

Cory Sperle

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One other point I will add is the actual and projected numbers that show up on the proforma. This was standard practice in the boom years as people would buy based on the future price in the rising market. Today the projected is based on 2014 rents, that could possibly not return until 2025 or later. Today the property is priced based on the projected, however from the many sources I talk to projects are increasingly and repeatedly falling apart from financing. So reinforcing Thomas's point e above, have a realistic idea of the loan you can get before you make an offer if possible.
 

Neelu

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Apr 4, 2019
Messages
10
It’s a way to inflate the ask price. Keep in mind realtor works for seller and wants a high sale price as commission is higher.

It makes sense to buy MF in Edmonton, or elsewhere, but don’t overpay. The right price matters.

Considering these six factors, where you could easily be off 10% each as a newbie, and in total 50% or more

A) vacancies ( stated 6% but might be 8 or 9%, which is 33-50% higher .. so being off only ten percent is common)

B) gross (as if full) rent ( ie what rent is actually achievable given location, unit size, unit type, unit quality and building quality)

C) operating expenses ( esp insurance, utilities and property taxes which are routinely understated)

D) mortgage interest rate

E) mortgage amount (ie amount that a bank will realistically give you)

F) rental or NOI upside .. with little or significant expenditure

REIN has a comprehensive MF binder where numerous experts, included yours truly, contributed. That is a good start to get educated. Or get a mentor. One of five factors off is tens of thousands of $s, 2 or 3 easily $100,000 and 4-5 $250,000 on an average 15-24 plex !


---
How to access the REIN has a comprehensive MF binder
 

Willyboy

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Aug 19, 2016
Messages
115
Thank you everybody for the replies and information.
 
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