After you’ve paid all your bills and you have cash to spare—whether it’s in the thousands or the millions—the question will arise, what do you do with it?
Typically, your number one goal will be to preserve your cash. To be absolutely guaranteed that it will be there for you tomorrow, you can either bury it a jar in the back yard or you can put it into an account at a federally insured bank.
The biggest problem with taking the zero-risk approach is that over time, your cash is almost certain to lose value. The currency itself won’t change, but its buying power will. This is because of inflation, or the fact that goods and services tend to rise in price over time. The loaf of bread that cost $2.00 today will cost $3.00 next year. In a few years, you’ll need more dollars to buy the same stuff that you buy today.
So while putting your cash in a jar gives you maximum safety with zero risk, it also gives you a negative yield. For most people, that’s unacceptable.
Investors have many choices. In every case, the task before the investor is to strike the right balance between risk and yield. There are many investments that feature low risk and low yield, such as treasury notes and savings bonds. They make sense when you absolutely must preserve your capital at all costs. At the other end of the spectrum are the investments that are high risk with the potential of high rewards, such as venture capital.
If we analyze the range of possibilities, it’s clear that if you’re looking for the optimum balance of risk versus reward—that is to say, the lowest likely risk coupled with the highest likely reward—you’ll arrive at multifamily apartment properties in Canada. Three good reasons support this conclusion.
1. Transparency Means Low Risk
When you evaluate the price to pay for a multifamily apartment building, all the information needed for your decision is clearly available to you. If you do your due diligence, then you can get the facts and weigh them accordingly. If the results point to a profitable investment, then you proceed. If they don’t, then you walk away.
You have the ability to know the market and the comparable properties. You can learn about the building itself and have it professionally inspected. You’re entitled to see the amount of cash flow from rents. All of this information, and more, is available to you when you perform your due diligence. (It’s worthwhile to point out that this is precisely what we do for our investors, so you don’t have to do it yourself.)
Wise investors (we count ourselves among that group) create a current and as-complete real estate proforma, for every property they buy. The plan details the amount of the investment, including capital improvements to the property; the operating expenses into the future; historical and projected revenue; possible risks and the profit margin. If the numbers look good, then the investor will move ahead and make a bid for the property. Ideally, there are no surprises, and the deal unfolds as expected.
2. Value Stability Through Commercial Real Estate in Canada
The last thing an investor wants to see is a sudden plunge in value of the asset he or she owns. As we saw with the stock market in the spring of 2020, disaster can happen virtually without warning. Stocks go up and down in price, often with no clear reason.
One of the most disheartening things about investing in the stock market is that unless you buy enough stock in a company to own it, then you have no control over its fate. For example, let’s say that in January 2013 you bought a big chunk of stock in Exxon Mobil Corporation. You paid roughly $88 per share for this “blue chip” oil stock that for thirty years had shown steady growth. Having done that, you thought about other things, leaving control of the company in the hands of its managers. Over the next few months, the price climbed to $100 a share. But then circumstances changed, and in August 2014 the stock took a nosedive. Should you sell? You thought, no, it’s Exxon, so I’ll hold on. After a rally in July 2014, the slide continued. Then came the 2020 oil war between Russia and Audi Arabia, and then coronavirus, and the price nosedived to $34 on March 20, 3020. Since you bought the stock in 2013, it lost over half its value.
And guess what? As an ordinary shareholder, you had absolutely no control over the fate of your investment. You could do nothing but watch as the price collapsed, or sell and cut your losses.
In contrast, prices for multifamily real estate tend to be more stable, with fewer abrupt changes. Even during times when the economy falters, the vast majority of owners of multifamily apartment buildings hold onto their assets, knowing the bad news will fade and the turnaround will come.
3. Your Apartment Tenants Buy the Building for You
Perhaps the most attractive part of owning multifamily properties is the fact that your tenants provide you with the money you need to buy the building! Think about that for a moment. Let’s say you buy an apartment building for $1 million. It has 10 units, all currently paying rent. You figure that your net operating income (NOI) is $80,000 per year. This number includes income from rents and other sources (such as vending machines or laundry) minus all the expenses necessary to operate the building, such as taxes, utilities, maintenance, and insurance. It does not include mortgage payments, because they aren’t relevant to operating expenses. (By the way, the ratio of $1 million to $80,000 gives you “cap rate” of 8 percent. We’ll discuss the cap rate in a subsequent article.) Let’s say that your mortgage payment is $5,000 per month, or $60,000 per year. You need to pay this from your net operating profit, which is $80,000. That’s no problem, because your tenants are giving you the money that you’re using to buy the building. In addition, for as long as you’re paying the mortgage, you’re still making an annual profit of $20,000. Then, when the mortgage is paid off, you’ll be making an annual profit of $80,000.
In contrast, if you build a house and then sell it, you receive income only once. If you buy a house and flip it, the same applies—you make a profit only once. With a multifamily apartment building — whether it’s a duplex with two units or a vast complex with hundreds of units—the tenants pay you every month, month after month, year after year. Of course, there are risks and responsibilities, but the responsibilities you have as a landlord are clear and are true of any multifamily building. To fulfill them takes planning and execution, but generally there are no surprises. And there are risks, which apply to any structure, such as fire, tornado (wind damage) and other natural hazards. But that’s why you have property insurance!
When you take a good hard look at multifamily property ownership from an investment perspective, it gets better and better.