How to invest for success in a hot rental market.

How to Invest for Success in a Hot Rental Market

Featuring Russell Syme, Assistant VP, Commercial Financing at First National Financial LP
Monday, November 7, 2016

“The rise of permanent renters” has ignited a hot market for apartment buildings. However, investor demand far exceeds supply. There are several things borrowers need to know in order to qualify for financing and prosper in this complex, competitive real estate sector.

“We are seeing prices going up drastically, multiple bids, the whole bit,” says Vancouver-based Russell Syme, assistant vice-president, commercial financing, at First National Financial LP, Canada’s largest non-bank mortgage lender.

He points out three main requirements to qualify for financing: property management experience, equity and liquidity.

If the prospective borrower does not have sufficient experience managing multi-unit income properties, the lender may insist on having third-party property management.

“During the past 10 or 20 years, people were able to buy rental apartment buildings with relatively little focus on operational efficiency. They could potentially still do very well financially over time because of the drastic increase in values that we have seen in the marketplace. I don’t think that will be the situation going forward,” Syme says.

“I don’t want to discourage people, but having that experience, or partnering with somebody who does, is a good way to go if you are buying an apartment building. The values are high, so you need to find other ways − through managing the property − to add value. Buy something that is not operating at its best and improve management of it . . . that’s how you do well on these kinds of investments.”

The lender wants to know what the borrower intends to do to increase rents over time and what the borrower might do to reduce vacancy rates. “The primary source of repayment for a loan on an apartment building is cash flow, so that’s what we are looking at,” Syme says.

Financing considerations

The lender will want to see net-worth statements from all beneficial owners, satisfactory credit reports, resumes outlining the borrower’s real estate experience and details of additional real estate holdings or assets, including current debt.

Required property information includes a current rent roll, an account of annual expenses such as insurance, utilities, property taxes and details of recent improvements.

The lender will require a minimum down payment of 15 per cent of the lending value for an insured mortgage, although the amount may vary depending on location, quality and condition of the building and the potential for rent increases. Typically, the down payment would be substantially higher in a small community highly dependent on one or two industries. “In those communities, you see wide swings in vacancy levels. It might be zero vacancy today, but if one of the industries in those communities has a downturn, the vacancy rate in that market might be 25 or 35 per cent and you can’t rent out those empty units no matter what you do,” Syme says.

In addition to the down payment, the lender may expect the borrower to have a minimum net worth of 25 per cent of the loan amount. Syme also looks at liquidity – i.e., a borrower’s access to cash to cover unexpected expenses such as repairs to a roof or replacement of a boiler.

First National’s preference is that the borrower not be an absentee landlord. “It’s tougher to make sure the property is operating well if you can’t visit it regularly,” Syme says. “There is nobody who is going to care as much about your building as you do, so if you know how to operate a building and what to look for, it helps a lot.”

Russell Syme is an Assistant VP, Commercial Financing at First National Financial. Get to know Russell here.

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