When buying multi-res buildings, I apply all that standard research but I also consider the Investment Wave and something I call the Quad Market Position.
The Investment Wave.
The market is in one of 4 investment wave positions; boom, bust, flat or pick-up. See Diagram 1. I start by determining the national investment wave position which motivates media spin. A national negative media spin can affect the mood of the public which helps me to ask for lower prices. The national investment wave position has little to do with reality because all real estate is local therefore I determine which investment wave position the city of focus is currently in. I like to buy in flat market periods because tenancy is high (less new builds, harder to finance, salary freezes, layoffs and lost homes) and building owners can’t see past 3 years therefore uncertain about the future value. I buy multi-res in the flat period closer to pick-up. If the national investment wave position is at boom, but the city of choice is flat, I will buy. If nationally the investment wave position is flat, but the city of choice is boom, I will not buy at those high prices. If the city of choice is not flat, I find a city that is flat and buy there.
The Quad Market Position
The next indicator that I use is the quad market position. I divide the city into 4 quadrants; expanding, trendy, stable and down-turn. See Diagram 2.
Expanding areas include farmland conversion to new construction where people look to start new families or downsize. Usually on the outskirts of a city with newer house developments and mega shopping complexes. This area has new condos instead of old multi-res buildings so it’s too expensive and the buildings already efficient.
Trendy areas include hip, sexy, energetic pockets where everyone is rushing to buy at high prices. New trendy is sometimes close to down-turn because it was an old factory area or brownfield environmentally rehabilitated area like a train yard. This area has great multi-res buildings but because of the high energy, the prices are more than the value, and usually the first area to drop dramatically in a bubble burst.
Down-turn areas include depreciating property tax base pockets, rise in crime, less city dollar allocation, rough schools, and higher unemployment. The quality of tenant is inconsistent, sometimes entitled, yet do little to improve their space. This area has the best prices for multi-res but there are more building maintenance issues due to past owner neglect and more rental tribunal issues to handle. I decided not to buy here anymore after 2 very minor but last straw issues at my last building in this area. I know you are curious so I will tell you. The first was a tenant who called the fire department on me because I would not let him store items on the fire escape. Guess what the fire department told him? But I still had the full surprise inspection and a few matters arose from that. The second is the old janitor, upset that I replaced him with a new property manager, decided to follow her home. She noticed him following, called the police, they redirected her to the police station where he followed her and parked a few cars away. The police met him out front to inquire his purpose and intent. Guess he had a problem with thinking two steps ahead.
Stable areas include older neighbourhoods where baby boomers grew up and mainly owned by seniors about to retire or new families in pursuit of a quiet mature safe neighbourhood. These houses and buildings were built in the 1960 – 70’s and need updating. This is the area that I buy multi-res because the owners of the buildings are ready to retire, their kids have no interest, the buildings need to be made efficient, and updating can bring more rents. I am able to spend the first 2 years improving efficiencies (reduce cost), upgrade units on move-out to charge higher rents, and use wear resistant materials to reduce tenant turn around cost. After 2 years, I receive the bump in value and hold steady for the next 3-7 years to sell or refinance and allow my JV partner to exit.