Denser On The Inside – “A legal multi-family dwelling in the heart of First Shaughnessy, with 8 suites generating almost $150,000 per annum.”

multifamily
1926 Cedar Cres, Shaughnessy, Vancouver West-side
7,305 sqft 1912 SFH, on 121×149 lot
Sold 27 Nov 2012 for $4.49M
Taxes $18K pa

Realtor blurb: “Once in a lifetime opportunity to own this classic craftsman style home that is a legal multi-family dwelling in the heart of First Shaughnessy. With 8 suites generating almost $150,000 per annum this is the perfect holding property. The lot is 121×149 and the house is 7,305 SF. There are two “owner suites” that have been completely updated, each with their own laundry and parking.”

‘Almost’ $150K rental income, minus $18K tax, minus maintenance, minus property management cost, minus unexpected lost rent/lower rent — what’s the actual cap-rate on this?
The deal for the buyer is probably premised on rising property prices.
– vreaa

44 responses to “Denser On The Inside – “A legal multi-family dwelling in the heart of First Shaughnessy, with 8 suites generating almost $150,000 per annum.”

  1. I think I speak for all of us when I say, only eight?!?

  2. It’s a 2.93% cap rate. Not completely horrible relative to a 10 year bond (+125bps). I’d be surprised if its a spec. Yes, there will be some maintenance costs but at least the revenue won’t be single tenant dependent. My guess is very deep pockets bought this one. And deep pockets likely have some baked in capital gains in other assets. That would cut their after-tax capital risk a little bit.

    • Um what?

    • It’s a completely horrible cap rate. It’s lower than the cost of financing. Landlording isn’t supposed to be slightly more profitable than 10 year government paper, it’s supposed to be slightly more profitable than the best alternative investments. It’s VERY easy to build a diversified portfolio of stuff with growth potential that delivers an equivalent after tax yield better than 2.93% rents.

    • Like I said, it’s likely deep pockets and I doubt it’s financed. I’m a bear like the rest of you, but 125 bps over the 10 year is attractive to some of the old money out there. You throw the thing in a corp with some other old apartment buildings and pay an under-used handyman next to nothing more to deal with another building in the area. I’d bet it’s old money and unfinanced.

      • And Ralph, baby doll, I manage diversified portfolios for a living. Real money and a PM licence. To build an actual diversified portfolio, one that’s not stuffed with utilities, pipelines, reits, banks, and long/or reset preferreds (aka hard core interest sensitive/ aka “not diversified”) after tax 2-2.5% yield is more in the ballpark. And the real money out there already has plenty of that too. Flippers don’t buy properties that only 500 people in town can actually afford without financing. This one is long money parking it in the neighborhood.

      • Rf -> How are these guys assessing risk in the local RE market?
        (I ask this because I’d personally far rather have $4.5M sitting at close to no risk, making almost nothing, in the bank (not to say that’s exactly what I’d do with it) than $4.5M in this house).
        How are they assessing that the risk is worth the very small return?
        Are they not premising these purchases on the future strength of local RE prices??

      • “I doubt it’s financed”.

        That’s irrelevant. Even if it’s paid for, the opportunity cost of tying up capital in a low-yielding investment is every bit as real a cost as the interest on a loan.

      • Ralph Cramdown

        We seem to be arguing the same point from slightly different angles. I’m saying that this is a historically lousy cap rate, especially considering that it appears to be a property full of ‘B’ units which will attract ‘B’ tenants (= more hassle which should translate to a premium cap rate versus ‘A’). You’re saying that the likely buyer is doing it for capital preservation and/or inflation hedge, rather than the income stream or the capital gains potential absent inflation. Either way, it’s not a sign of a healthy, normal market.
        The search for yield continues.

      • I don’t believe you manage anything. Would love to see some proof of your profession, maybe a linkedin page or your company website.

        This is a very poor investment, however you dice it.

      • @vreaa. as far as assessing risk….I don’t think a lot of people understand how the fixed income side of the market looks at rates. If you pull an inventory list on bloomberg for the fixed income dealers, they don’t even list the yield on a bond. It will only list the spread over the relative benchmark. For example, a 5 year bank bond will just say +55. They don’t sit around like the rest of us saying, “that’s only 1.5%!”.A 5-year BBB+ corporate will just say +125. The fixed income guys don’t look at that and say “yummy! 2.5%!”. They look and say “A little junky. I could lose 15% of my capital. And my returns will look like crap relative to the index if spreads go out 100bps”.

        I’m not saying it’s a good investment or a risk free rate (no matter how many hacks try to put those words in my mouth). I’m just saying that deep pockets with a yield/fixed income component to their portfolio think of their rate of return on a relavant basis, not an absolute basis. If the Scotia bond index is down 4.5% and they’re down 2.5%, they’re happy.
        And i’m saying that the buyer of this property is likely long money that views this as a parking spot with a +125bps yield in a prime area. They’ll take their chances that the capital risk comes with a bit of an inflation hedge with the rents/yield.
        Ralph’s right that it’s not a sign of a healthy market, but 1.6% on a 10-year bond in a 2% inflation environment is not a healthy sign either. The “real return” on risk free money is negative as well. They can park this money here and maybe build their new house on it in 10 years.

  3. I’m not too familiar with Shaughnessy as its slightly out of my price range. My question is, do people rent in Shaughnessy? Isn’t the area reserved for people rich as hell that down want renters in the area?

    • There are boarding houses and single rooms for rent in Shaugnessy. Some of them are dives in the middle of a very nice neighborhood.

      • Real Estate Tsunami

        Farmer, so you live in Shaughnessy!?
        How many acres? How much live stock?

      • Never heard of backyard farming?

        Actually I did live in Shaugnessy at one time. It was a small rental that fit my budget out of high school. You would be surprised how many rooms they can fit into those big old houses when they try. The place was a zoo with so many coming and going day and night. It was the creaky stairs that finally drove me out. That and the very long walk to the bus in the rain.

  4. 150k divided by 8 suites divided by 12 is about 1500 per suite per month, I think that is a bit low for Shaugnessy. I mean I would expect much higher rent for that area but I guess the income in Vancouver cannot support sky high rents. You’d need quite a down payment to buy that house for it to be a money maker. Even with 50% down payment, at a low 2.49%, monthly payments would be 10k, barely covered by the rentals. Add in maintenance and taxes, and you’re speculating. I’d rather put that money in other investments.

    • Brian: “..about 1500 per suite per month, I think that is a bit low for Shaugnessy.”

      If you read between the lines, the suites are not in good shape (only the two ‘owner’ suites are ‘completely updated’). Besides, renting an apartment/condo is one thing, renting a room/suite in an old house is another.

      • Vreaa man on the beat

        this anecdote needs photo’s of the property, lots of them. Get some hustle here!!!

    • Brian: “You’d need quite a down payment to buy that house for it to be a money maker.”

      There have been many discussions regarding this point in the past. We are aware that classically RE investors (in more typical RE markets) would put down a downpayment of varying size, have the tenant pay off the financing and expenses, and in ‘x’ years own the property outright. Very attractive (even though the deal usually involved uncalculated hours of the investor’s own sweat equity). Current Vancouver metrics make cash flow positive properties rare to non-existent.

      When doing the math, one has to consider opportunity loss of the downpayment. In essence, when calculating return on any property it’s best to imagine that you paid cash for the whole deal. The size of the downpayment doesn’t make a deal a “money-maker” or not.

      • Ralph Cramdown

        It’s tough to find a property with the right risk/reward for an all-cash deal, because all the landlords you’d be competing with will use leverage (excepting recent situations in the US when financing was very hard to get). Of course, the math is made much simpler when the cap rate is below the financing rate — you just pass on the deal.

    • Rank Speculation

      Its true, I was a paper boy on Shaughnessy as a kid in the early 80s and delivered to a few houses that had been chopped up into a lot of suites. Those houses have a very different vibe from the rest of the neighbourhood, I can tell you. I wonder how they ever got those suites approved by the city?

  5. Who knew GIC’s were so attractive. This property has negative cash flow. Unless it’s the only property on earth where tenants don’t want stuff fixed and the infrastructure doesn’t need maintenance, common areas don’t require cleaning etc.

    Rent here so your landlord can subsidize your rent…

  6. They have forgotten to mention that the $150,000 ‘income’ is also before the CRA get’s their slice, so you can take about 45% off that figure.

    But, the realtor might also be suggesting that tax evasion on rental properties is so common that it doesn’t matter.

    • Great point.
      Most argue that rental income from illegal suites would largely be written off to expenses if the suites were legal (interest on mortgage, taxes, maintenance, etc).
      But how much of that $150K could a landlord write-off?
      So, yes, taking into account declaring the income and paying taxes makes this an even more abysmal investment.

      • @ 4.49M purchase price, I don’t think the landlord needs to worry about income tax. Even cash flow positive properties are likely to have very low income that will be taxed, until late in the cycle when mortgage are more than 50% paid off.

  7. This is how the rich get poor.

  8. Another landlord subsidizing renters.

    • UBCghettodweller

      Ssssshhhh, it’s good for students like me.

      I’m paying far below market rate for a non-shitty basement suite rental since my landlords want a quiet responsible grad student rather than some snot nosed undergrads.

      • Do you have to mention that you are a grad student every single time you post a comment on this site? How could your occupation/student status be relevant to every real estate anecdote that comes up?! Typical grad student–love to put down undergrads and talk about yourself.

      • Real Estate Tsunami

        Told you the basement hound is a self absorbed Generation Y’er.

      • UBCghettodweller

        >Typical grad student–love to put down undergrads and talk about yourself.

        Some of us make poor life choices, we need some way to make ourselves feel better 🙂

      • UBCghettodweller

        Real Estate Tsunami you’re little better than a school yard bully. Only that you have the pseudo-anonymity of the internet to hide behind.

        Do you talk to people that way face to face as well?

      • Real Estate Tsunami

        UBC,
        Anti-Bully day coming up soon. Let’s all wear a pink t-shirt.
        However, if I offended you, my apologies.
        Most of my posts are tongue in cheek.
        And yes, I am a in-your-face kinda guy. Not your typical warm and fuzzy Vancouverite.

  9. I wonder what the First Shaughnessian neighbours think about being around the corner from a rooming house…

  10. 50% off on waterfront properties in Blaine, WA. Will we catch up?

    http://www.liveatmarin.com/?source=5387

  11. Westside Princess

    I rent a lovely graceful single family home in Shaugnessy south of King Ed. We have some older neighbours but the homes are mainly empty which makes the neighbourhood sleepy and quiet which we love. It is a well known fact that the part of Shaugnessy closer to 16th ave is full of older homes converted to rooming houses which happened after the Great Depression. Anybody in the know who wants to buy into Shaugnessy is not interested in that part of the neighbourhood precisely because of this.

  12. Did anyone else see damaged realtor signs recently? I have seen two this week – they looked like someone kicked or punched through them. Is this realtor-hate or is the quality of the signs going downhill?

    • The Poster Formerly Known As Anonymous

      No, but I have seen four signs on our short street for 7 months, since we moved in. One went but another appeared in its stead to keep the number constant.

  13. with the City of Vancouver pushing it’s density agenda I wouldn’t be surprised if this property is eventually divided into 3 or 4 properties with rezoning. If this is also the new owner’s assumption, the value of the land alone could be worth the sale price. The income from current rentals could be deemed the gravy. But yes, there is probably speculation in thinking that rezoning will happen; or maybe the buyer knows something we don’t.
    I’m surprised no-one mentioned the land value here

    • This is assuming that the land value holds or keeps going up. What happens if there is a crash with too much inventory? Will the city then change regulations that go against greater density like coach housing and rezoning for 3 or properties? Or if there is a crash, nobody will want to build so many units on one property.

  14. When shaughnessy first opened up the rich families made the move from the west end to there. The mansions that they left behind became the famous west end rooming houses. Funny.

    I also help to manage fixed income. We most certainly do not look at RE and think oh that’s a nice simple safe spread off the government bond.

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