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Off-market investment properties can yield the best deals

by Neil Sharma on 03 May 2021

Buying off-market investment properties has many benefits that listed properties don’t, however, finding them is often the issue.

Market listings often have inflated valuations because of how robust demand can be, but prospective investors are far likelier to pay favourable prices off-market for a slew of reasons, says Cliff Fraser, chief business development officer of Burlington, Ontario-based Equiton Inc.

“A lot of stuff on the market is overpriced, but when you buy off-market you have less competition and you have more time to inspect and perform due diligence because there’s no bid date looming over your head,” he said. “So you can become more flexible with negotiations and that should give investors more comfort because they have time and won’t get outbid, and hopefully that helps them make better investment decisions.”

As a private REIT, Equiton is an active real estate investor that provides its clients passive investment opportunities. Moreover, it focuses on creating passive real estate investment funds for clients that, on multi-family investments, have earned 7-10% cash flow and share price returns. In addition to investing in the multi-family residential sector, Equiton is involved in the commercial and industrial sectors, real estate development and lending.

Off-market properties still require the same meticulous due diligence as any other property, and as Fraser said, there’s more time and less pressure to examine the multifarious facets of the prospective investment. Fraser advises inspecting the property in person, inside and out, as well as the neighbourhood to understand which factors could have positive or negative impacts on the investment, including who the nearby competitors might be.

“If you’re buying an apartment building and you drive around the neighbourhood and there are five other apartment buildings, mystery shop those buildings and see how those units are finished, see what kind of rents owners are charging, and compare it to the property you’re looking to buy,” he said. “Walk every unit of the building you’re thinking of buying and if there are things you’re not an expert in with respect to due diligence—if you don’t know how HVAC system work or you can’t assess a roof or balcony, as part of your due diligence find an expert who can help give you an opinion on those big-ticket items, because if you miss those there could be a lot of hidden costs involved. How would a brand new condo going up next door affect your ability to attract tenants? You want to make sure you buy at the right price.”

When purchasing a real estate investment property, understanding everything on a granular level is imperative. For example, if an investor is going to buy a property to lodge university students in, say, Hamilton, they will first have to be certain universities are opening in September because the pace of the COVID-19 vaccine rollout might preclude that possibility. Moreover, Fraser says part of understanding the larger community is evaluating everything from transit accessibility to the state of the local economy, including a city’s micro- and macroeconomic situation because everything could conceivably affect cash flow.

Tightening up one’s finances ahead of tendering an offer could also help investors secure properties at lower price points than other buyers.

“Have your financing in place because that could help get you a better deal or help you close faster,” said Fraser. “We weren’t always the highest offer but we’d go in with a clean offer and we carried out our due diligence upfront and made sure financing was in place. That helped us go in with very few conditions, so that could give investors a leg up if they’re not the highest bidder.”

Of course, securing off-market properties isn’t possible without knowing where to look. Fraser recommends forging relationships with real estate professionals with the intention of building a referral database.

“Talk to real estate brokers and agents, property managers and people in the mortgage space because they can sometimes find out about off-market deals before they go to the broader market,” he said. “At Equiton, we’ve done that internally with PropertyTrak, our internal CRM and building/asset tracking tool, where we track thousands of properties and manage all the people we want to talk to who potentially have off-market deals.”

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