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Technically, I suppose an apartment building could be considered both residential and commercial. Though they may exist in traditional residential zoning, apartment buildings absolutely qualify as a commercial investment.
Here’s why.
As commercial real estate agents, we use multiple approaches to value property as do our commercial appraisal colleagues. A comparison approach, which lends value to other “like” sales, is a good evaluator, but not always the most accurate.
The condition of the property, the suite mix, parking and many other features make it hard to compare one apartment building to another.
We want to review the comparison approach to see if the property falls in line with other properties in the area, but to me that’s not the most important factor in determining whether a property is saleable.
Pure investment buyers are typically interested in the income approach, where net rental income is weighed against an expected capitalization rate (rate of return).
However, you need to get to the net rental income first.
Is this normal?
When reviewing financials, often there can be expenses that need to be normalized such as major capital expenditures. Once an owner has paid for a boiler replacement, for example, a buyer is unlikely to incur that cost in the near future.
Vice versa, we normalize the income.
Are the rents at market rates? Is there any vacancy? If so, is it within the range that CMHC is reporting for the neighbourhood?
There can be a variety of factors we want to go over before we arrive at the bottom line of the income after expenses.
Using a professional experienced in deciphering that value is crucial as sometimes inexperienced owners can’t articulate their own net return.
The return is king
Most investors are not out paying cash for their investment properties. Those that do can give me a call immediately.
Joking aside, an investor has to be assured the net profit will be within an acceptable range to service their debt.
However, buyers won’t only be satisfied with simply servicing their debt. They’d like to see some cash flow on top of that.
Because they’re safer investments, multifamily buyers do tend to have an appetite to buy properties at lower cap rates (lower returns) than other commercial investments.
For example, if an apartment building has 12 suites with one or two vacancies for any great period of time, there’s a good chance the building will still sustain.
The same cannot be said of other commercial investments where you have only a few tenants, or a single tenant, to rely upon.
If you’re a multifamily buyer or seller, do your homework and try to work with someone who is equipped to properly evaluate and market your property.
Big investments like apartment sales call for a good, thorough review of finances, so take some time to make sure you know what you’re buying or selling!
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