Why Own Real Estate?
Investment-grade real estate has proven to be an excellent medium to long-term choice for maximizing cash flow and capital appreciation while at the same time minimizing risk. Investment-grade real estate will often have a higher yield and lower over-all volatility than securities purchased in the stock market. For this reason, many institutional investors prefer direct investments in real estate assets as part of their asset mix when they become available. Since real estate investments have proven to react positively to inflationary pressures, they have long been considered as an excellent hedge against inflation.
Why Own Apartments?
For many individual investors, multi-family apartment properties are their best choice. Office and retail properties are expensive to refurbish if a tenant vacates. Hotels are very management intensive. Vacancy rates for office, retail and hotel properties are often higher than apartments in the same geographical area.
For the same amount of investment dollars, a multi-family property will have more tenants than other types of real estate investments. More tenants reduce the risk of a significant vacancy loss. Residential tenancies range from one month to one year whereas office and retail tenancies are 5 years or longer.
Apartment properties can be financed to a higher ratio than other types of properties. Through the use of CMHC insured mortgages, apartment investors can arrange mortgage financing up to 85% of the value of the property.
Condominiums
Langara has considerable experience in the condominium business in Alberta. Several apartment properties purchased by Langara for client-investors were converted to condominiums. The largest conversion was Lord Strathcona Manor in Edmonton. When the conversion took place, the entire project was sold out in just 8 weeks at a gross sales value of $21,000,000. At the present time, Langara is managing the development of a new 111 unit condominium project in Red Deer called Greyhawk Landing.
Investment Structures
Real estate investors can utilize a number of structures to own multi-family rental properties and condominium projects. It is sometimes advantageous for real estate investors to pool their funds with other real estate investors in private investment structures. Examples of private investment structures are limited partnerships, joint ventures, shares in corporations and private Real Estate Investment Trusts. There are times when owing individual condominium units in a multi-family property is advantageous for investors.
Langara recommends that for real estate investors who prefer the advantages of direct investment in real estate, the preferred structure for ownership of multi-family properties is through limited partnerships, joint ventures or holding title to individual condominium units.
Investment Horizon
Langara recommends that for maximum appreciation and above average cash flow returns, direct investment in multi-family rental properties should be for a period of at least five years, for the following reasons. Firstly, when investment-grade apartment properties are purchased rental rates and net income will often increase at a relatively steady rate over the medium to long term. Secondly, the longer the property is owned, the greater the proportion of the annual mortgage payments is applied to reducing the mortgage principal. Thirdly, the longer the property is held, the less likely any short term negativity in the rental environment will have on the value of the property.
Property Management
All rental properties acquired by Langara on behalf of its client-investors are currently being managed by third party property management companies.
