Finding the Sweet Spot!

Please enjoy the following article from Canadian Real Estate Wealth

New investors are always looking for advice on the best place to start, and invariably, writes industry vet Paul Kondakos, the six-plex comes into view.

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

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 valuable knowledge and experience and they want to save the costs associated with hiring a superintendent 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 geography 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” and a six-plex is financed as a commercial property as a rule.

We have some great deals on commercial mortgages, so contact us if you would like to know more.

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