Wednesday, 29 August 2012 13:16

Five challenges to investing in the booming north

Written by  Mike Oswin
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Go North, young property investor! Go north! That may be easier said than done for those looking to capitalize on increasingly hot housing markets in Northern Ontario and other industrial, mining or forestry areas.

Still there is plenty of incentive.
“Things have been absolutely crazy up here,” says seasoned investor Mike Oswin, head of Nottawabay Trading Co in Bracebridge, Ont. “The vacancy rate is about as close to zero as it can get, so every time we finish a building the apartments are immediately rented.”
The leading property investor is well-established in the hot Kirkland Lake market, but he’s come up with a list of the top five things new investors anywhere in the north should consider.

Oswins' 5 tips for investing in the north:

1. Allow for necessary repairs
Like anywhere else, but especially in the north, investors MUST do their due diligence. It's so easy to fall in love with a multifamily property that is priced incredibly low compared to those in a large city like Toronto, but all aspects have to be considered. Some properties have been updated but others will need baseboard heaters to be replaced with gas wall heaters or furnaces to offset huge hydro bills. Some older buildings will need electrical updating and/or plumbing, toilets and vanities replaced, flooring, etc. The key is to have an inspector see the property and/or see the property yourself more than once before putting in an offer. Never buy sight unseen. There is an enormous amount of money to be made here by investors, but one must calculate all expenses on a property when the purchase is made, including necessary repairs, so that the budget for rehab is known beforehand.

2. Figure on low rents for sitting tenants
 Many northern properties can be purchased for a song, but the existing rents in a building that you purchase can be way below the current average. The simple reason for this is that tenants know their rent can only be raised by the annual % allowed by the LTB. So when rent amounts climb as quickly as they have here in a few short years, existing tenants end up paying only half of what a new tenant would pay. Try to find properties which have been recently re-tenanted at current rent rates, or ones that are vacant, which enables the landlord to charge current rates. Current rents in Kirkland Lake are more than double what they were 3 short years ago. Also, almost all residential rentals in Kirkand Lake as well as everywhere else in the north are month to month, with no written lease. This is slowly changing.

3. Expect some leery lenders
Banks and private investors are leery of the increase in value, afraid of the boom and bust syndrome, even though the local mines in Kirkland Lake and Matachewan have promised there will be full production for at least 15 years, with an estimated production life of 25 years.
The major banks will lend money on commercial buildings (5 units and more). I have 10 conventional mortgages (from two different major banks) in Kirkland Lake on multifamily buildings that were relatively easy to get on the merit of the buildings themselves. Of course, I have now hit that wall that all investors hit, where I have maxed out with conventional bank mortgages and have now started looking for JV partners and private investors. They are also slow to accept the huge value increases anywhere north of Barrie, although this is also slowly changing.

4. Budget for increasing taxes
Municipal taxes will be increasing, since they have been extremely low for years and improved infrastructure such as road upgrades are badly needed to support such a high rate of growth. This increase will be offset by property values rising when infrastructure improvements are made.

5. Do the math on material costs and contractor availability
Materials are higher in price generally in the north; eg, some click flooring that may cost $1.50/sq ft. further south at Home Depot may cost $1.75 or even $2/sq ft at a local hardware store.
Items such as second-hand appliances may cost as much as $100 for a good stove and $200 for a good used fridge, whereas in the Barrie/Orillia area the same items may be readily available on Kijiji for $50/$100. You may want to buy "down south" and bring them up.
Contractors are so busy in this area that a lot of them are literally booked through until the end of next summer. If I want to get a roof redone I would have to book for next year.

Last modified on Thursday, 30 August 2012 09:55

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