Category: Rental Property Capitalization Rate

New York City Landlords Get Creative To Commit Tenants

Landlords face steep competition as thousands of new units emerge onto the market.

The New York Times published a great piece a couple of days ago about the rental market in the big apple. At this time of the year, college grads start looking for apartments and generally speaking see rents rise with the season, however, this year is more of the same sluggish growth that market has seen since coming out of the financial crash. New York rents have skyrocketed in the last 10 years – but professional salaries haven’t exactly kept pace. With renters unwilling or unable to pay ever higher rents, the market has flatlined – and now it’s become a tenant’s market. As per the piece, last year, 8,774 market-rate units opened in Manhattan and Brooklyn, with an additional 15,291 opening this year. For the first time in years tenants renewing leases have the upper hand.

February saw rents for studios and one-, two-, and three-bedroom apartments in Manhattan fall year-over-year, according to real-estate appraiser Miller Samuel. As a result, landlords are getting quite creative in offering perks to tenants who agree to rent their units. Everything is on the table. Netflix subscriptions. Free Uber rides. Even flat screen televisions are on the block. The market is also seeing reduced security deposits and even a month of free rent. These creative enticements to differentiate apartments in an increasingly cluttered market of rentals are called “concessions”, and there are growing number of them. According to the StreetEasy there’s been a significant increase of tactics like this.

…citywide, the share of rental listings on StreetEasy with concessions rose to roughly 14 percent of listings in October…

Overall, StreetEasy’s data shows that the share of concessions has grown substantially over the past five years, rising from an annual total of 2.7 percent of listings in 2011 to 10.4 percent of listings in 2016. It looks as if they’re working too, at least to get tenants to renew their leases. The number of new leases was down 28% from a year ago.

The biggest deals seem to be happening at the top of the market, where some luxury developments are offering up to four months of free rent on a 24 month lease. But deals are to be had in older, less expensive buildings, too.

As of April 2017, average apartment rent within the city of of New York, NY is $3074. One bedroom apartments in New York rent for $2732 a month on average and two bedroom apartment rents average $3510. Manhattan’s median rental price fell 0.9% year-on-year to $3,350 in February. Median prices also fell in Brooklyn and Queens.

 

Perfect Storm For Landlords in Alberta

The slow down in the oil patch is affecting Alberta’s major city residential landlords. Seriously. The market was once quite hot. Now…not so much. CBC reported a doubling of the vacancy rate late last year.

Edmonton is a renter’s paradise right now. Economic slowness, coupled with more supply than demand in terms of available units, has flexed adversity on Alberta’s landlords. Vacancy rates have increased steadily since last year, and now range from six to eight per cent, depending on property type. The average rent in Edmonton and the surrounding area has dropped between 10 and 15 per cent from a five-year high in July 2014. This has been forcing landlords to get creative about attracting tenants and signing leases, including free Wi-Fi, amenities, groceries, and even flat screen televisions as part of rental agreements. We touched on this phenomenon in Halifax late in 2013, when landlords there were offering free iPads to prospective tenants.

In Calgary – a city where mayor Naheed Nenshi famously criticized what he considered rent gouging in 2014, things are not that much better. Rents have fallen astonishingly fast. A 20% drop in January of this year from the beginning of 2015. The Calgary Real Estate Board is anticipating that the vacancy rate will rise to 7% by the fall. By the fall of 2017, CMHC expects the vacancy rate in the city to decline back to 5.5 per cent. Calgary’s 2016 civic census revealed that while the city’s population increased slightly to more than 1.2 million in April, more people moved out of the city than arrived here. More than 20,800 units were empty in April, a 67 per cent spike over last year’s levels, which brought the vacancy rate for dwellings to 4.3 per cent, according to the census. According to the Financial Post, the vacancy rate hasn’t been this high since 2004, when the city reported the lowest level of migration in 12 years. A city hall analysis of historical housing data shows there are more vacant units in 2016 than in any of the past 16 years. To put this into perspective, Canada’s national vacancy average for urban centres is 3.3 per cent.

Even rural cities in Alberta have been affected.The Government of Alberta annually conducts the Rural Apartment Vacancy and Rental Cost Survey of multi-family dwellings in Alberta’s rural communities between the months of May and August. This survey does not include cities whose population is more 10,000 people. Vacancy rates have increased and decreased in a cyclical pattern with vacancy in rural Alberta communities being on an upward trend, having risen 3.7 per cent in 2014, up to 8.2 per cent in 2015. Not only are vacancy rates up in general, in a number of communities they are at their highest point since 2006.

Experts say the next big hit to the market could come in the spring, when many leases typically come up for renewal. Not good.

Questions? Comments? Are you a landlord in Alberta? We’d love to hear from you.

Colorado Based D.C. Landlord Shares Rich Person Problems In The Washington Post

Douglas Hsiao, a Colorado lawyer and occasional columnist with the Washington Post, successfully achieved writing a sort of pointless piece about the “challenges” associated with being a landlord in Washington D.C.

As you may or may not know, the U.S. national capital has been going through a bit of a resurgence to some degree. It’s become a trendy place to live. He wrote this piece about how he can’t make money on his unit – even though $3000 a month is common for 2 bedrooms in his Dupont Circle neighbourhood.

Some gems from Hsiao’s piece:

As I admitted before, I’ve refinanced the property several times, so much of the cash flow problem is my own fault; I’ve used the condo as a bank once too often, and thus I have a fairly substantial mortgage on it. But more than that, the growth in expenses has outstripped rents for several years now, and I rent it out with nearly no cash flow.

Um. Ok. Well refinancing the unit for a Porsche will do that. Here’s another one:

As some may recall, I chose a couple who were moving from Denver to Washington, and they turned out to be the “responsible, clean, quiet, long-term, reliable, uncomplaining” dream tenants I was hoping for. I received hopeful signs throughout this past year that they would renew their lease; they e-mailed me that they loved the apartment, the Dupont Circle neighborhood and the residents. They even had the property manager prepare the renewal papers. Just when every indication I was getting seemed to suggest that they would renew, they were lured away. And not by a real estate agent waving a luxury downtown high rise or a house in Chevy Chase in front of them but by an apartment in my own building!

So you found good tenants, had the unit paid for for a year, and then they decided to buy a unit in the building you own because they loved it so much? This isn’t exactly a problem. You own a unit in a building where “responsible, clean, and quiet people” decide to buy. Clearly, you’ll never be able to find another tenant, right? Oh wait….I don’t think you’ll have a problem. Also..you live in Colorado – don’t manage the unit yourself, and are complaining about having to pay the property manager?

The National Low Income Housing Coalition published a report last year on basically how if you work a minimum wage job, you can forget about living in D.C. The cost of living in the U.S. national capital is among the highest in the nation and it’s ranked as the 6th most expensive place to live in the whole United States! It also has a crazy lucrative short term rental situation going on.

Geez man. You own a unit in a rich part of a relatively rich city. Tenants love your building so much they look to buy the units. You’re mainly attracting an affluent tenant with this place. You’re admittedly running in the red because you refinanced the hell out of the unit. Expenses are going up for everyone on utilities and such. Maybe if the place wasn’t mortgaged to hell – you’d have a bit more money available to run in the black.

Some of the post’s readers have also been critical of Hsiao’s writing. A comment on the original article goes a little something like this..

Seriously, are you only keeping this place so you can write articles for the Washington Post? This has nothing to do with real estate. This article should be in the finance section as an example of how people were using their homes like ATM’s and that is how the housing market got in the mess it is/was. This has very little if anything to do with being a landlord. If this had been going on any where else other then (sic) DC Mr. Hsiao would be talking the hard times he went through with his short sale or his foreclosure. Sell this property and be done with it and stop whining about how your (sic) not making money as a landlord because of your own financial irresponsibility’s (sic).

Life’s tough Douglas. We know. I dunno… try being a landlord in Moncton, New Brunswick or Detroit or Richmond, Virginia where the vacancy rate has been at 15%.

 

Why You Can’t JUST Look At A Cap Rate

I sat down for lunch at Union 613 with Ottawa realtor Dimitrios Kalogeropoulos (a.k.a Agent DK) a couple of days ago and took the opportunity to discuss income properties and some other real estate stuff in the Nation’s Capital. Agent DK works with Royal Lepage and returned to Ottawa from Toronto last year (where the market is quite different). He’s a fountain of knowledge and full of good tips when it comes to rental properties in Toronto and Ottawa, and he’s a guru to any potential landlord looking to add to his or her property portfolio. He brought up a few really great points over a discussion about what to look for when purchasing an income property and debunked some buying myths along the way. One myth in particular is that the only real thing that matters when sizing up a property is the cap rate.

First off, what is a cap rate? I’ll explain…

A cap rate is a measure of the purchase price of an investment property compared to the net income you make from that property. Or, the rate of return on an investment property based on the expected income that the property will generate. This is calculated by dividing the income the property will generate (after fixed costs and variable costs) by the total value of the property.

If you want to get technical, it is basically the discount rate of a perpetuity.

But if you want it in layman’s terms, you could consider it the official return on the property if you bought it outright in cash. The amount after fixed costs — what is typically referred to as the net operating income — that would go into your pocket with no loan to service. This amount (if you had no mortgage) would go into your pocket. This is how you compare the placement of your money to other investment vehicles like RRSPs, stocks, etc. For the majority of investors, the cap rate is what you would use to determine how much you have to service a mortgage with — and if you play your cards right — what you have left over.

Dimitrios Kalegoropoulos

Agent DK brought up that the capitalization rate on a property — while important — is not the only thing you should be looking at. Different areas of any given city will tend to have different cap rates and they’ll vary quite a bit. This is why you should also consider the following:

  1. Tenant Quality – this is a huge one. Inheriting tenants is the passage of a relationship between one individual to another. Reliable tenants who take care of a property, who are reasonable, and who pay appropriate market rent should be a big consideration when mulling over a purchase. Evictions and chasing rent cost money, so if that’s what you’re in store for maybe you should think twice. Just because a property has a big cap rate, it doesn’t mean you can’t suddenly find yourself in a difficult situation with bad renters in exchange for that big return. Is it worth it? I have a friend who endures 6 enraged voicemails a month from a tenant who can’t control his emotions, but he pays the rent on time and contributes to an 11% cap rate on a triplex. Yikes.
  2. Property Condition – houses, like anything else, deteriorate. It’s inevitable. Some houses will be more expensive to fix than other ones. What condition is the place you’re buying in? If it’s a fixer-upper then you’ll have some work to do. But if it’s a turnkey property your overall maintenance expenses will be low. A big cap rate is great, but not if you’re looking down the barrel of a major renovation or a glaring structural issue that will need to be eventually addressed.
  3. Appreciation Potential – this is another huge one and particularly applies to areas of a city that might be improving, gentrifying, or seeing other commercial development that might have benefits to residential property values in the next 2 to 5 years. Appreciation potential is equity potential, and equity potential is beneficial not only in net worth to the buyer, but in the ability to refinance and purchase something else — or pay off a personal residence.
  4. Income Potential – see above. If you can determine that a 10-20% increase in the rent roll is a possibility then this absolutely needs to be considered.

Now with all of this to say it’s important to be balanced in your view on a cap rate. The above are a few of the things you should consider with respect to a purchase. If you’re selling, you need to be sensible and recognize that the cap rate is an important part of the equation and undoubtedly will be seriously considered by any smart investor. If anything, this is the best way to ensure you’re maintaining a market-appropriate rent roll and keeping your building in good shape — regardless of where it is. A good rental property purchase will have a favourable rating on all of the above five points.

Questions? Comments? What are your thoughts on cap rate?