Financing Your Apartment Building: Webinar
Good day everyone, and welcome to the Rock Apartment Advisors webinar. Financing your apartment building is our topic today. my name is Jim Dimanis, and I am the Chief Operating Officer for Rock Advisors. Very happy to have our guests today, and those guests are Derek Lobo, our Broker of Record and CEO. Hello Derek.
– Good Day, Jimbo. And, as well, we are also very fortunate in that we have one of our very fine sales representatives, Manjit Virk. Manjit, how are you today? Very good, how are you?
– Wonderful. Okay guys, so we’re going to be talking about financing, a very important topic, obviously, in the business that were in. And I thought that the way we would approach it today is go from the macro to micro. Talk about financing more general terms and then – and I’d like Derek to speak to that – and then Manjit, will talk to you about some of the more specific transactions that you’ve worked on and how you go about on the financing of things. So Derek, what kind of an investor are you? Maybe you can talk a little bit about that, and how strategy plays a very important part in this.
– Yeah, you know Jim, at Rock, when we’re dealing with our clients, we always think about, we ask ourself: Is this a counselled client? Do we really know what the client wants to do and what their objectives are, right. So, if it’s a developer it’s one thing, right. If it’s a guy who’s doing turn around, he may want a building with the front door on the lawn. If it’s a short-term hold, the guy might not mind spending money on mezzanine financing and things like that. So, it’s important that we understand what the clients business plan is and then we can be better brokers for that person. Ok, and in terms of the business plan, if you were counselling one of your, one of your clients, what kinds of things would you have them do, insofar as a business plan is concerned?
– Well, you know, real estate is a very, it’s a very locational sensitive business, so where do you understand the market. I always say that when I’m selling a building, the best buyer is the guy next door. Ok, he understands the marketplace, he knows exactly what’s going on, and so we often joke with owners, when you’re buying, try to buy the building next door, you know, as the first one. So, locationally, where do they want to be. Then, what type of asset do they sort of specialize in. Then, you know, then are they people who are active, people who want to move the money on, or are they people that are just passive and want to have a core holding to create, you know, an income stream for themselves and for future generations. It’s really important to understand the client’s motives. Mhm, and what about funding options, Derek? What’s available for our clients? Yeah, and you know, as brokers we’re the guys getting the deal done, but we also need to understand, you know, how to finance a building. Especially when we’re doing mid-market buildings, and Manjit will talk about that later on, you know, if you don’t understand how to underwrite a building, you know, the deal is just not going to go through. The guy might tie it up, think he’s going to get a one-million-dollar, you know, mortgage and then he gets an 800 thousand dollar mortgage and all of a sudden he’s got to come up with two hundred thousand dollars more, and the deal falls apart. So oftentimes, as part of our, our sales process, we’re going up to the lenders, you know, in advance of taking the building to the marketplace and getting them to underwrite it and and just letting the buyer know and the seller know what kind of financing is available. And as you know, various lenders to go to private lenders, you know, chartered banks, life insurance companies, and so on. Sure, and is it important to, Derek, that, that, you know, our clients have good relationships with, for instance, their current lender or their current bank, is a good place to start? Yeah, you know, it really is because, you know, your bank knows you. I mean, you know, we do a lot of new apartment construction, and that’s a pretty new field. You want to go to a lender that knows you and I mean, you’re on the screen about, you know, the type of financing you can get. You know, whether to go CMHC, whether, you know, with your conventional, whether the vendor takes back a mortgage, but ninety percent of the mortgages I think are done are CMHC. And that probably leads to the next slide. Yeah, absolutely. Talk about CMHC.
– One of the things that make apartment so attractive in Canada, besides the fact that you know, it’s just a good place to invest money today, and that’s that there has been so little new construction that apartments are in strong demand ~garbled~ but that CMHC is available and it just gives you a bunch of different advantages, it you know, it substantially reduces your cost of boring, from 1500 points cheaper, you gotta pay insurance fee for sure but that’s added to the mortgage and you know you can get up to eighty-five percent financing on your property, so CMHC is an advantage when you’re buying apartments in Canada.
– So, just a little further on on the financing and also on the CMHC, you know, I know that we’re here at Rock and DALA, we often will do feasibility studies on behalf of clients that are looking to to build or develop apartment buildings and I know that,I think it’d be fair to say, that lenders appreciate the investor or the developer doing that amount of due diligence in terms of determining whether something would be successful. Would you agree? Maybe you can talk about the importance of just doing that due diligence. Yeah, you know, when you’re buying an apartment building, or building an apartment building, you’re gonna know what it’s going to cost the run it because you can get heat, hydro, water bills and so on. You know you’re gonna know what it’s gonna cost to fix the roof if it needs it. You know what it’s gonna cost to build the building. The big issue always is what’s the rent? What’s the rent on a new building? And on an existing building, where can I take the rent to if I renovated the building? I think I’ve said this in earlier webinars, you know, every one dollar of monthly net income is worth twenty dollars in values. So, if you can get a hundred-dollar lift in the unit, that hundred dollars x 12 ia 1200 dollars. And at a five percent cap rate, that’s 2,400 dollars in increased value. Wow, that’s significant.
– Next slide then. Derek – reasons to borrow. What are some of the reasons?
– What, you know, what makes real estate work is leverage, right so it’s boring money and then leveraging it, so you need to borrow money to buy a building. Sometimes you need to borrow money for estate planning, if you’re going to do an estate freeze, transfer the building over to your children, then there’s gonna be some tax to pay. Anything to pay it now so they don’t have to pay, you know, later on. It unlocked the equity in your building and just refinance up, and remember that’s a tax-free withdrawal of money from your building till the disposition, you know, at the end of the day. So people are borowing for miniatures, for CAPEX work, for retrofit, or just taking money out of their existing building and, you know, building their portfolio.
– So clearly, it’s a good time to be in the industry, would you agree?
– You know, it is because interest rates are low and, you know, most of our clients are – I mean, they know that, you know, we live in a volatile world. They’re taking out 10-year financing when you can lock in, you know, you know, three percent, three and a half percent interest rates for 10 years, you can afford to pay a pretty low cap right now, makes sense. Ok, so that’s great. Derek, has just giving us somewhat of a, I guess that’s more of a macro perspective on financing and now I’d like to bring Manjit Virk in to talk about the micro, and talk what goes into and what are the variables that are involved when your financing. So, everything from income and expenses. And Derek as well, I encourage you to chime in when you think it’s appropriate. So, Manjit, sort of walk us through this, you know, as an agent you’re out there you’re dealing with with people on the ground. You gotta look at income and expenses. What are you looking for and what are these variables? Well, one of the, one of the first things that I need to get is an updated rent roll, highlighting the current rents, the deposits that are in place, the dates of the renewals of the leases, the laundry income, parking income (if any), and a lot of times these days, there are buildings where the landlords are maximizing their potential of their real estate, in the sense of, using their roof for income from signage
– Right location and, you know, Rogers towers, Bell towers.
– Right, so all those kinds of things.
– That’s right, so they use their roof for income, they use the parking lot, they use all sorts of avenues that are available today for increasing income. And what about expenses? Yeah, that’s priority. So then what we do is, I get actual bills of their hard utilities – heat, hydro, water, and waste disposal if they’re using a separate company or if even if it’s part of the water bill then the mixture, that’s in there as well. And when it comes to vacancy, every building is different, so therefore what I do is I use the city average, according to CMHC, and that gives us a safe, sort of, percentage that we can use for vacancy and bad debt. And then with regards to repairs and maintenance, every every landlord runs their building differently. So what I do is I put, depending on the condition of the building, I’ll gauge it and on the low end the RM number will be around $750, on the high end it’s around $1100 per suite, per year. And then with regards to management that’s, generally speaking, it’s between three to five percent.
– Great. Then, sorry, then you go on to talk about your professional fees, but I’m really interested in is that you have the property underwritten by lender prior to marketing the building. Maybe you can talk a little bit about that, now quick summary about how you that.
– For sure, what I do is, we’ve got good, excellent relationships with major lenders such as, first national, and CMLS, and there’s some other lenders as well that we go to but what we do is, it helps the landlord, as well as the buyer, to see something actually on these lenders and their letterhead. It really hits home when they see their letterhead and it’s underwritten by them. So then they get a good idea of what they’re expected, the buyers expected to come in with, and the seller is looking at what the buyer can get, so they understand the value better.
– So as, as a Rock agent, this is the kind of service that you will, that you bring to the mid-market. You know, we talk about, at Rock that we want to bring institutional type services to the mid-market, and it would be fair for me to say then, that you will do this on behalf of a client – actually go get it underwritten. Absolutely.
– By a lender, and I can – that’s clearly, that’s very powerful. Yeah, I think it’s important to do that. That’s, otherwise as Derek was mentioning earlier, that we can get great offers but we want to make sure it goes to the end. We want to go to the home base – home plate – so the way to do that is make sure that it’s controlled through the due diligence process.
– But that can only be done by making sure that everything is accurate and correct. Sure.
– Yeah, and Jim, I want to say something about, you know, doing mid-market transactions. You know, the kind that Manjit, you know, and our team here does is that oftentimes you’re dealing with, you know Manjit, pieces of information, right. You don’t get a great set of Records. You don’t get, you know, the, sometimes the sellers have the building for a very, very long time – maybe they’ve gotten older, they’re not keeping good records – so it’s important that the broker put the package together to maximize the value, you know, for the seller. Like, a simple thing is just, you know, oftentimes to say “here’s my financial statement from last year.” Well, as Manjit mentioned, we want the current rent role because we want to take that current rent roll, multiplied by 12, because that’s going to be a higher number than just last year’s rents, right. And from there were able to look at and see, you know, where can they raise rents, we do an individual market survey and things like that, so underwriting a building in the mid- market is sometimes given short shrift. I think it’s important that whatever broker use you make sure they understand apartment underwriting and the fundamentals you know of underwriting. Good advice. So Manjit, you’re, we’re on to this other slide here and you’re talking about a couple of your deals. Yeah. One of the, well, two of the deals, the most recent deals, that I was involved with was, where the buyer came in with no financing condition and they, what they generally do is they come in without financing clauses and they going to do their due diligence in terms of inspection, and looking over the bills, and they refinance after closing. That tends to grease the deal a little bit, make it go a little bit smoother, cleaner, quicker.
– A lot smoother. Yeah, a lot smoother. So, that happens generally with larger clients, potentially institutional clients, and large funds. One of the other smaller deals that I was engaged with last year was where the buyer came in they did have a financing condition, but they, we knew that they have the cash to come in, but they had a lender – a private lender – that they wanted to work with. So what my job my role was to make sure that the numbers were accurate. And the only way to make sure of that is to get the actual bills, and the actual rent roll, rather than what Derek was saying was just an expense and income statement.
– Right, so you actually have to, basically prove to yourself, and to the institution, that the numbers make sense and they’re accurate.
– Absolutely. Ok, and moving on your so, buyer refinances after closing. Yeah, no. That’s where, what I was talking about earlier, when the buyer comes in. They, and a lot of times, what they may do is, they may buy it cash, make some improvements and refinance it at once they’ve improved the value of the building. And in that case, they obviously will get more, more loan-to-value. So they’re, so that way they’re winning as well. So they made buy a building that’s, kinda for lack of better words beat up or under-managed, and they’ll make some improvements and then they’ll go to the lender and say, “okay, well this is what we’ve got. This what we want to finance. Give us your best shot.” So that’s what, that’s what happens with a lot of the larger clients.
– Ok and, both Derek and Manjit, maybe just a quick summary, you know, sort-of take-home points for our listening audience. What are, what are some things that they should walk away with here having having listened to both of you? What are the essentials? I just think if I were advising a seller, you know, is to just make sure your broker does his homework before he takes the property out to the marketplace. I, you know, pick the broker you like and list the property. Maybe go to two or three brokers, and do a “broker bake off” and pick the guy that you feel comfortable with, that has the depth of market experience to, you know, to expose that type of building to the marketplace that’s gonna buy. Don’t just rush and take your building out there. There might be some things you need to fix up or take care of before you expose it to the marketplace. That’s my advice.
– Good advice. Manjit?
– I believe the same, I mean, I concur with Derek. I know we’re talking about financing, I think the most important thing is to make sure that, as a seller, you give honest and real information according to documents. To make sure that you don’t waste your time in the sale process and, and make sure that when the offer comes in you increase the chance of closing. And that can only be done through documents. Documents. Documents. Documents. That, and have as much as you can.
– Great. Well, good advice. Good, sage advice from two seasoned, apartment experts. I’d like both of you to stay on the call. What we’re going to do now is just take a look at some of the the transactions to date. And special thanks, obviously, goes to RealTrack for the following sales information. So here we are, number of sales. We’ve got 22 sales, year-to-date. Hundred and twenty million in value. Average price – hundred and sixteen. So, obviously, we’re comfortably north of the hundred-thousand-dollar mark. Largest transaction, and I just look at this number, $351,000 – highest price per unit last month.
– It’s, it’s a student housing building. So there, they typically transact in that, in that range in Waterloo because you got you know 4 to 5 students living in the building.
– Right, well that’s good to know. No, no surprises here. 13.59% in the GTA. So, let’s start off in Etobicoke. We’ve got a purchase price here at $3.1 Million. $134,000.
– That’s just becoming the standard number for buildings in that area. You know, everything is pretty much north of $100,000. And you’re going to see that, Jim, in the next couple of transactions. The one on Birchlea, if you go to that. – Yeah.
– You know, same thing here.
– There we go.
– Then the next building on Maynard again, this is a better, a better location, I think, closer to downtown Toronto. Hundred forty thousand. The next one on Islington, you know, Islington and Rexdale, you know. Not, not typically a – That’s not a great location. That’s what I was going to say was, even the quote-unquote less desirable areas, are demanding a higher price.
– Right, and look at this next one here on Tyndall. Tyndall is clearly a better area then Rexdale would be, a lot of repositioning opportunities here, for a hundred twenty-five thousand dollars. That looks like an expensive building, but you compare that to the previous one, maybe it didn’t. Now, who says you can’t get value in Toronto.
– Yeah maybe, Derek, you’ve got to give us some insight on this one how is it possible. Well this, this is a building owned by a public company out west, and it was, i think, their last asset to sell. and this part of Jane Street, I think, is particularly tough. And this, this building just, I think, had its challenges. It was up for sale for a long time but, I think you know, by the pound gosh, you can’t replace this thing for three times the cost. It’s a bit of an anomaly in the marketplace today.
– And Waterloo, here, here it is.
– This is the student housing building. And we we sold, you know, 300 million dollars in the student housing sector. We have a, you know, a team dedicated to it. Led by a chap named Brad Miguel, but this is not unusual price to pay. But, you know, you tend to think of student housing on up on a per bed basis here and typically sell in, you know, eighty to ninety thousand dollars per bed for this type of product.
– Just for our audiences edification, and in light of the fact that we do a lot of student housing, what are what are rents like for student housing on a per-square-foot basis on average? Yeah, they’re certainly higher than average apartment rents and I would say that, it’s a very global, global answer that I’m going to give you, but maybe a dollar per square foot higher.
– Dollar per square foot higher?
– A dollar per square foot higher than the conventional apartment building across the road in the, you know, in urban areas. Probably less than that in suburban areas.
– I find this next one, you know, we talked about you can still buy you can, this is sort of, by the pound, but a hundred thousand in Belleville. This is, this is quite surprising. It’s a big number for Bellville.
– And typically, you know, the thing is you don’t, typically you don’t get big growth in these, in these secondary and tertiary markets, but I guess when you’re paying a hundred forty thousand dollars in Rexdale, you know, hundred thousand double doesn’t look too bad.
– Yeah, but insofar as by the pound, here we go to Niagara Falls. Still some, some fairly good deals to be had at sixty-six thousand dollars per unit.
– Yeah, and that, that’s clearly becoming, that’s clearly becoming, you know, obvious in terms of Toronto prices, because of their ability to fix the building and raise the rent are going up. Whereas, you typically, that typically is not happening to tertiary areas. Mm. Well, that brings us to an end. And I thank our guests very much. Thank you, Derek. Thank You, Manjit. For those people that would like some more information, obviously, please feel free to give us a call, or call one of our, our great agents. Manjit here, his contact info is on the screen, and Derek’s info as well. We are really, really excited about some of the next webinars that we’ve got coming up. Our next one is so on energy management – that’s a very important topic and we’ve got great guests that are going to be helping us. April, we’re getting into building design trends, and then new apartment construction in May, and then, of course, on we go to the end of the year. We encourage you to visit our website, and we’ve got some great resources there for you. Derek has produced some very fine quality and, and really, you know, really deep (from an educational perspective) videos that talk a lot, a lot about the industry and if you want to educate yourself on our industry that’s a great place to start. We’re always looking for good people to co-broker with. We’ve got some great information. And Derek, I’d like for you to maybe talk about this, our third annual Canadian apartment symposium. Yeah, you know, we’ve done this now for 3 years, and we run two seminars back-to-back. The first one is on student housing, and the second one is on new apartment construction. And you can get the links from our webpage, you know, to attend this. We’re really stepping up this year, Jim, we’ve booked the Sony Centre in downtown Toronto. We’ve taken on a partner – media communications and marketing department magazine – to help us run the show. And it’s going to be, you know, I think really the premier real estate event in our sector this year. And unlike other symposiums, this is a deep drill on a specific topic. So we’re spending the entire day just talk about student housing. And we’re going to spend the next day just talking about new apartment construction. Everything that a developer, financier, landowner, and the Landowner would need to know. So we’re very proud, very proud of this work that we’re doing and really bringing and continue, our hope is to bring thought leadership to the, to the apartment sector in Canada. Well that, that’s very exciting. I’m certainly looking forward to as, I know, Manjit, and for those that are listening – save-the-date!
– It’ll be a lot of fun. Yeah. Thank you very much for joining us everyone. Have a good day. Thank you.