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Wednesday, 23 January 2013 00:33

Think 'six' for an investor sweet spot

Written by  Paul Kondakos,
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Given the current Canadian economic and institutional landscape, might I suggest "starting with six," six-plex, that is.

I think that the purpose built six-plex offers new investors their best opportunity to become a real estate investor as it sits in the sweet spot of a Venn diagram, where those three circles overlap. The number three, in fact, represents  the key things going for six-plexes.

. Manageability 2. Cap Rate and 3. Low Interest Rate.

Manageability

Most new investors want to be involved with their real estate investment as they see it being a new adventure (and rightfully so), they want to gain valueable knowledge and experience and they want to save the costs associated with hiring a superintedent and/or property manager. Managing six units may seem like a daunting task at first, but once you dive in, you will realize that it is not all that difficult as long as you are a well-organized individual who has a few hours to spare every week. While managing one unit (eg. condo) is an easier task, the superior return from a six-plex more than offsets the extra effort. Tips to help with efficient management of the property include:
•  Ensure close proximity to property
•  Try to get post-dated cheques from tenants
•   Prepare a list of contractors (plumber, electrician, handyman)

Cap Rate

The cap rate for a multi-unit residential property typically has a directly proportionate relationship between the number of units and cap rate (until it reaches a plateau and levels off). For example, the cap rate for a six-plex is higher than a triplex, which is higher than a single unit. While georgraphy and location play a critical part in determining the cap rate for a typical six-plex, it is safe to say that the cap rate range is somewhere between 5 per cent to 6 per cent, which is significantly better than most condos and triplexes.

The six-plex lets real estate investors start to take advantage of economies of scale and thus provide a better return. Tips for those looking to maximize the return on a six-plex:
•   Look outside the big urban centers and look to smaller towns university towns such as Kitchener-Waterloo, Guelph, Hamilton, etc.
•  Look for purpose built six-plexes as they have better re-sale value and typically require less maintenance

Low Interest Rate

A low interest rate is the lynchpin to making the six-plex the best place to start for new investors. The math is simple, the cheaper your mortgage interest rate, the bigger the potential spread (difference between interest rate and cap rate) and bottom-line profit. Mortgage rates vary based on whether a property is classified as "residential" or "commercial." They are handled by different departments and have different rates. Commercial rates tend to be higher by a percentage point or two than those offered on residential properties. This is where the secret lies in maximizing your ROI on a six-plex. While just about every financial institution in Canada offers commercial rates for six-plexes, RBC offers financing on six-plex multi-unit residential properties at residential rates. This means getting mortgage rates in and around 3 per cent for a six-plex (at the time of publishing this article the rate of approx. 3 per cent was accurate, however, rates can change without notice).

 

In Summary

When you put these three components together (manageability, cap rate and low interest rate), the six-plex is the ideal starting point for new investors as it provides an investment that is relatively easy to manage, yet at the same time delivers a great spread of between 2 per cent to 3 per cent based on the economies of scale offered and financing available at residential rates.

 

Paul Kondakos is a seasoned property investor and his RealtyHub.ca helps others get a leg up, or two, in real estate.

Last modified on Friday, 25 January 2013 10:28

14 comments

  • enzo Friday, 04 April 2014 15:02 posted by enzo

    I just built a new 6-plex in vaughan,the only problem that I had is trying to get the rbc residential mortgage. a new building was appraised by the bank way under its true value, so in turn I did not get the amount I needed ,so I had to get a commercial mortgage for one year and then try again with rbc. Any advice when I RE-APPLY to rbc for a residential mortgage.

  • Dennis  Kim Downey Tuesday, 25 February 2014 03:01 posted by Dennis Kim Downey

    We've found that you don't get the same appreciation from an investment in multi-unit property.

  • Chris_Toronto Tuesday, 08 October 2013 18:02 posted by Chris_Toronto

    The article has been written in January and states that there are lenders willing to finance a 5 unit property using a residential mortgage. Are there any lenders out there that issue this type of mortgages as it seems that RBC doesn't do them anymore?

    Can any one point me in the right direction?

    Thanks,
    Chris

  • Irene Sunday, 09 June 2013 06:29 posted by Irene

    If you are going for a commercial mortgage and paying all the fees anyways, might as well go up to 12 or 20 units.

  • fabio Sunday, 12 May 2013 14:59 posted by fabio

    French Investor,

    Im lokking to get into real estate investing, but im not sure which way to go. I read your way of adding a bedroom to a house. How exactly does this work for you? What do you look for?
    Any info is appreciated.

    Kind Regards

  • The French Investor Thursday, 31 January 2013 23:42 posted by The French Investor

    What about trying the short term rental in the 6 plex, it could be a great cash flow if you know where to get them.

    I currently do that with a house I just put 5%, build a new bedroom and make net cash flow of $800.

    If you multiply by 6 units it goes really high. But same story, need the cash to start..
    Any idea? private money?

  • Steward Fulfordf Monday, 28 January 2013 14:09 posted by Steward Fulfordf

    'Your rights and responsibilities as a landlord are different, in terms of when you can and cannot evict a tenant."

    What are the differewnces? Source, please.

  • Lijoy Ulahannan Monday, 28 January 2013 13:27 posted by Lijoy Ulahannan

    They key to this strategy is mortgage financing, in particular having the right lenders. The article mentions "Look outside... smaller towns such as Kitchener-Waterloo, Guelph, Hamilton, etc". There are 4PLEX lenders who offer "big urban centers" rates in these smaller towns.

  • Nicholas LaRamée Monday, 28 January 2013 12:44 posted by Nicholas LaRamée

    Commercial Mortgages similar or lower than the residential rates. As a broker, even though I am charging fees to arrange a commercial mortgage for my clients, the fee is usually offset by savings within the first year. Banks are typically not the best deal for Multi-Unit Residential properties. Also my experience on the East Cost is the 5-6 unit buildings are the worst performing properties. I would recommend a 4 unit or 10+. 3-4 unit properties are easy to trade and simple to finance (standard residential mortgage, and no fee) so as your portfolio grows you can easily get out. 10+unit properties tend to start being more economical and provide cash flow and efficiencies. Also the price moves them into an much more competitive finance market where a good broker will be able to save thousands, or tens of thousands, over the rates the banks will offer their clients even after charging a fee.

  • Dan Simpson.  Monday, 28 January 2013 01:37 posted by Dan Simpson.

    Rbc does offer great financing on these units with low 20 percent down and residential rates. Standard 25 year amortizations and in some cases a homeline mortgage option. Many would agree much more favourable than commercial lending option. Good article with or without the rbc plug but as a mortgage specialist with RBC, i do alot of these properties due to the flexible mortgage options available for investors.

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