By Narinder Sidhu
-GTA’s Leading Mortgage Expert
If you have the capital, one of the best investments that you can make is a multifamily property. In this article, I will focus on the 5+ unit properties which are classified as commercial properties. 1-4 unit properties are classified as residential home ownership and follow different rules. Typically, they require a lower start up cost (down-payment) and take into account standard ratios such as your income to debt ratio. So your income matters and you can reach a peak as to how many of these properties you can purchase. Commercial properties follow different rules and essentially, there is no limit as to how much capital you can borrow. This is assuming of course that your property is cash flow positive and you can work up the initial down payment cost which could exceed hundreds of thousands of dollars.
1. The ability to make tremendous wealth
This is especially so in the event of a bad economy or real estate market collapse. During the aftermath of the recession in 2009, many walked away from their homes and were forced to rent. Those who saw the glass half full bought these multifamily properties and rented out the units. They also refinanced the mortgages, pulling out as much equity as possible to use as down payments to purchase more. Essentially, they made a tremendous amount of wealth and were able to provide housing for those in need of it. Additionally, those who wanted out of the market were able to sell their properties making windfall gains, leaving buyers, sellers and renters happy.
2. The ability to consolidate massive debt and powerful leveraging
If you own 10 individual properties, you will be paying 10 individual mortgages. This can become quite complicated and expensive, especially since you are probably refinancing or renewing each one every 3 5 years. The cost of doing so will put dollars in my pocket (as your mortgage agent) but at the expense of your own profits (I say this because I am here to help you make money, not take advantage of your hard earned dollars!). But, if you own a 10 unit multifamily property, you will essentially be paying your agent once every 5 10 years (the typical term for such a commercial property). All together, less is going to your agent and more into your pocket. Also, this is where it may become complicated if you are not a seasoned investor, the leveraging aspect can be incredible. Lets say you own a 24 unit property that gives you a net income of $100,000/year and the market area cap rate is 6.5%. That makes the value of the property approximately $1.54 million ($100,000/6.5%). However, if you increase the rents just a little, making $106,000/year, your property is now increased its value by over $90,000 to $1.63 million. That $90,000 is equity that you can now tap into to finance other investments.
3. The relative safety of multifamily properties:
Firstly, you can look at this property being similar to a mutual fund. Because you have so many units, even if one or two units are vacant, you many still be cash flow positive. Secondly, as mentioned earlier, even if the real estate market collapsed, people will still need a place to stay. They will be more inclined to rent so your property may be one of the first places families will look. Finally, you have a great deal of control with respect to this property. In some areas, such as Alberta, the rent control act allows landlords to increase what they charge in rent once a year. You can even charge for services such as parking, the use of laundry machines, maintenance fee, etc Now, just like other investments, the degree of safety is relative to your due diligence. You must make sure that you did your homework on your investment property for this to be safe.
There are really only two major problems or hurdles as Id like to think of them, with respect to investing in multifamily properties. The first is the down payment. Unlike residential properties, commercial units usually require you to put down approximately 20% for a 10 year term or 30% for a 5 year term to get an interest rate where you generate an acceptable cash flow. This can equate to hundreds of thousands of dollars which is one reason why few participate in this market.
The other major hurdle is the size of your resource network. In the commercial property world, you resources shrink significantly! You have few lenders, brokers and just one mortgage insurer, CMHC. Your reputation is everything so if you say that youre prepared to put a down payment on a property; youd better have the cash available on hand. The key is to create a team of successful people to help in your venture. Make sure your Realtor, mortgage agent, and lawyer all specialize in multifamily units. When its your money on the line, you dont want to be a part of somebody elses learning experience!
So, if Investing in multifamily properties seems like your cup of tea, make sure you do your due diligence before taking the plunge! I always advise clients to assist me in completing the mortgage application. Thats the only way to build a solid understanding of the mortgage process in order buy and hold multifamily units long term. For more information, please contact me at Narinder_Sidhu@centum.ca.
About the Author: Narinder is a leading expert in the mortgage industry, focusing in the GTA. He works as a full time agent at Centum One Financial Group and in his spare time, both contributes articles and holds free seminars within the community. To learn more, please visit