Wise Investor

THE TEN RULES TO REDUCE RISK & INCREASE PROFIT
POTENTIAL IN REAL ESTATE INVESTMENT

By Dino Nicosia, Broker of Record, Investpro Realty and Appraisal Ltd., Brokerage

1. Location, Location and Location: Only buy location.

   This also relates to the 4 Powerful Ps = Prime Properties, Produce Profit. It is a simple rule that really works. Always make location and prime properties your top priority.

2. Other People's Money (OPM):

   Use other people's money. You don’t need your own cash to invest. You need to have "access" to cash. Let other people's money profit for you. Keep your money as a safety net.

3. Cash is King:

   Buy properties that provide positive cash flow, and do walk away from properties that claim future potential cash flow. Avoid the "risky" no money down strategy with negative cash flow. Invest enough money down on a purchase that will allow a good return on investment and provide a comfortable cash flow.

4. Hold and Prosper:

   Buy for the long term holding and avoid short term strategies. History has proven over and over that values will increase in time. Unless you are a seasoned investor, avoid buying with intentions of flipping.

5. No income = No go:

   Avoid buying properties that do not produce any income at all. (For example; raw land and vacant lots). Unless you are a builder/developer, stay away from this type of investment.

6. Avoid investments with short term tenancies:

   Motels, hotels and seasonal properties are a few examples. These properties have a high turnover rate and a volatile vacancy factor which are directly affected by bad weather, gloomy economic or political climate, cost of gasoline etc.

7. Be patient:

   There is a relationship that exists between real estate and time. This means that there is no bad time to buy real estate as long as you have the time to wait. Eventually you will profit. You must have patience and endurance and you will be rewarded.

8. Start small:

   ...and grow slowly. If you buy too much, too fast, disaster could surely follow.

9. Don't confuse "real estate" with "business":

   A business grows in one way – through the sale of products. Real estate grows two ways – through cash flow and growth in value.

10. Be a "Wise Investor":

    Know the business before you make the plunge. Educate yourself! Learn about all the regulatory laws that will govern rental properties (such as fire, health and safety, landlord and tenant laws etc.) Learn all the real estate terms and formulas. Know the tax laws that will affect your investment. If you are looking for a partner, choose wisely.

WHY INVEST IN HAMILTON?

By Dino Nicosia, Broker of Record, Investpro Realty
April 15, 2010

COUNTLESS BUYERS FROM OUTSIDE THE REGION ARE INVESTING IN HAMILTON. SO WHERE ARE OUR LOCAL INVESTORS? ARE THEY MISSING THE BOAT?

I have been selling apartment buildings in the Hamilton area for over 20 years. In the past number of years, I have seen a major decline in the number of local investors. In fact, 90% of my clients are now from the GTA (Greater Toronto Area). The big question is why?

Hamiltonians are perhaps deeply wounded and scarred by the many job losses from our industrial sector over the years. I imagine many Hamiltonians probably have lost confidence in their "Ambitious City". Local investors obviously, are not in tune on all the positive growth and the transition in job creation. Today the Hamilton Health Sciences is the number one employer in Hamilton, bringing high paying jobs to the City.

It is interesting how our neighbors can see past the smoke stacks, and have great confidence in Hamilton's future, as the following articles will attest.

What will it take for Hamiltonians to realize that they are sitting on a gold mine?

DO YOU WANT TO INVEST IN REAL ESTATE
BUT YOU DO NOT HAVE AVAILABLE CASH?

Ever since the stock market meltdown, more and more investors have attempted to diversify their portfolio by exploring the real estate market. However, many have found themselves in a severe cash crunch.

During the past year I was able to assist Buyers find the necessary cash to buy Real Estate. What many investors do not realize is that there are many creative ways to raise the cash to invest. Investors forget the uniqueness of Real Estate investment, where the use of leverage allows relatively little cash to acquire large properties.

The following are some options available to find money to invest:

1. Vendor Take Back Mortgage (VTB) - Sellers that are retiring may not need the cash and may consider to loan the funds via a first or second mortgage.

2. Private money - With banks paying so little on savings accounts, some people have elected to invest in second mortgages. Consult with your local Mortgage Broker for availability, terms and conditions.

3. CMHC insured mortgages allow the investor to pay as little as 15% down payment (of purchase price). Although there are extra fees involved, the interest rates will be considerably lower than a conventional mortgage. Consult with your local Mortgage Broker on related costs and fees.

4. Home Equity – This is the most important way to access inexpensive cash. Take advantage of the equity in your home. With the lowest interest rates on record, (at the time of this article the variable interest rate was 2.25%) why not use the equity of your home to acquire a Real Estate investment? Remember that the interest charged on your home equity mortgage becomes tax deductible.

As a rule of thumb, "the investment property should cover all the financing" including your down payment. Therefore, any money borrowed that is used for the down payment should be paid by the property's income and not out of pocket. To protect yourself from rising interest rates, you may want to consider locking in the rates for the long term (recommended at least 5 years).

You have now learned about some of the different options available on "how to find money for Real Estate investments." This is the time to ask yourself, "can you afford not to invest in Real Estate?"

MULTI-RESIDENTIAL UPDATE
For the Hamilton Region

By Dino Nicosia, Broker of Record, Investpro Realty
Jan. 2009

In 2009 Hamilton's real estate market is slated to continue to offer many fantastic investment opportunities in the multi-residential sector. The Hamilton region is still a great place to invest because it has maintained a healthy margin for potential profit and continues to offer the investor solid returns on their investment. In contrast, Toronto (GTA) investors are still plagued with extremely high prices resulting in very low cap rates, and leaving many landlords to face negative returns.

According to CMHC's "Hamilton Rental Market Outlook, (Fall 2008 edition); "Apartment vacancy rates will decrease further in 2009 to 3%. Rental demand will grow as the echo-boomer generation moves fully into their prime rental years…this is expected to have an impact over the next five to six years."

"According to the affordability indicator, affordability in Hamilton's rental market increased as compared to last year. This is the highest affordability level seen yet in Hamilton over the past 12 years. The increased affordability retained and attracted many households in the rental market."

As indicated by the following chart Hamilton's residential rents are over 20% lower than the Toronto rents. In contrast, prices for multi residential properties are 30 - 50% lower in Hamilton than that in Toronto.

RENT & VACANCY COMPARABLES - OCTOBER 2008

	One Bedroom	Two Bedroom	Three Bedroom	Vacancy
Hamilton	$666	$836	$986	Over 3.1%
Toronto	$900	$1,095	$1,288	1.9%
Niagara	$648	$777	$877	4.1%
Kitchener	$712	$845	$978	1.8%

YEAR 2004

	One Bedroom	Two Bedroom	Three Bedroom	Vacancy
Hamilton	$633	$778	$967	3.0 %
Toronto	$886	$1,052	$1,235	Over 3.8 %
Niagara	$611	$789	$829	2.6%

WHY INVEST IN HAMILTON?

With the current economic turmoil, investors and mortgage lenders are displaying serious concerns about Hamilton's economic future. The big question is why?

Consider that Hamilton's diversified economy continues to boast low unemployment rates and low apartment vacancy rates. Hamilton's investment properties remain reasonably priced with attractive cap rates and solid return on investment.

The following articles will highlight various optimistic viewpoints;

REAL ESTATE MARKET UPDATE

By Dino Nicosia, Broker of Record, Investpro Realty
Jan. 2009

In these uncertain economic times, the message from the media has been focused on the gloom and doom as a result of the stock market crash and how the real estate market is slated to take a tailspin in 2009.

What the media fails to recognize and properly relay to the public is that there are two mutually exclusive sectors to the Real Estate market, both of which are influenced by different factors.

1. The residential home market: This sector is influenced by consumer confidence and affordability (unemployment). If you become unemployed and you no longer have a decent income, it really does not matter how low interest rates drop; you simply cannot afford the payments without a good paying job. If you are still employed and are considering buying a home, the lack of "consumer confidence" will likely prevent a purchase in the near future. This will have a negative impact on the residential market.

2. The investment market (mainly multi-residential properties): This sector is influenced by income generated by these properties. The current drop in interest rates will enhance the income to make the investment property more viable and attractive. The major negative influences with this market would be a large vacancy factor and rising interest rates. Both are not the case today. If you have a fully occupied building or even one with a moderate vacancy, you will not be influenced by the economic downturn. As a matter of fact, the downturn in the economy will enhance this sector, because those people that lose their homes will most likely turn to the rental market. Furthermore, the renter who was considering buying their first home will delay their purchase and remain a renter until economic stability and confidence is revitalized.

The following article from CMHC (Canada Mortgage and Housing Corporation) elaborates on the two sectors of the Real Estate Market as referenced above.

STOCK MARKET OR REAL ESTATE

WHY REAL ESTATE IS A SOUND AND SAFER INVESTMENT IN CANADA

By Dino Nicosia, Broker of Record, Investpro Realty

Real estate ownership and investing in the stock market can bring wealth and riches and are both great long term investments. However a recent event in the stock market has proven how volatile and scary stocks can be. The stock market can fluctuate dramatically, exemplified by huge losses in October of 1987 (known as Black Monday) and the more recent meltdown of October, in 2008, where the TSX had lost about one-third of its value in a matter of days.

Real Estate owners are not shielded from the peaks and valleys of value swings, however Real Estate investment is unique from the stock market, because it is a tangible investment (you can see it and touch it) and you have some control on its viability, thus resulting in much less dramatic fluctuations and volatility. Another very unique aspect of Real Estate (not available with stocks) is that huge wealth can be created by using leverage; investing a small amount of cash to acquire a large real estate portfolio. eg. $100,000 down payment allows you to buy $1,000,000.00 property.

Real Estate is the best form of investment for the long term. No other investment vehicle can guarantee (if held long enough) that it will exceed or keep in line with inflation. In 1945 the average home in Canada was valued at $5,500, and sixty years later (year 2005) the average house price had jumped to $260,000; by far exceeding inflation.

Here are some of the other advantages in a long-term real estate investment that is not available with stocks:

• Cash flow and residual income
• Tax free profit on a sale of your residential home
• Equity also increases through mortgage principal pay down.

Can anyone afford not to invest in Real Estate?

REAL ESTATE PARTNERSHIPS

By Dino Nicosia, Broker of Record, Investpro Realty

IS IT A GOOD WAY TO INVEST?

Real Estate Partnerships have been around for a long time. This is because people have learned to pool their resources in order to reduce risk and increase their leverage (buying power). Partnerships also enable the smaller investor to buy larger properties.

What is a partnership?

A partnership is a method of subdividing ownership amongst smaller investors where they combine their funds and resources to purchase real estate.

Is a Real Estate Partnership for you?

Remember…you are only as strong as your weakest partner. First you must consider who your partners are and how strong they are financially. Can you trust them? The fact that they may me a friend or relative does not automatically qualify them. It is also important to consider how long you will be tied up with your partner(s) and what your exit strategy will be if the partner(s) want to split up for personal or financial reasons. How about in the event of a death of a partner?

The perfect partner

It is very important that you have at least one person in the partnership with relevant experience. Partnerships seem to work well (or better?) when each partner brings with them experience/expertise in real estate, and have similar (what type of?) goals. Having a solid and structured agreement in place, along with an understanding of each partner's individual relationships and responsibility is also essential to maintaining a good partnership.

Occasionally, an investment may require a cash call and you should feel confident that your partner(s) will have the funds to contribute to the unexpected if necessary. For example, if there is a roof leak which requires immediate repair, the depth of your partner's pockets comes into play.

Types of Partnerships

The following are examples of the types of partnerships that can be created.

• General Partnerships

• Limited Partnerships

• Co-ownerships

• Joint Ventures

• Corporations

• Trustees e.g. XY Company in Partnership

ADVANTAGES FOR THE INVESTORS INVOLVED IN A PARTNERSHIP

1. REDUCED RISKS
   An unexpected cost such as a major roof repair of $30,000 - $80,000 for the individual could be devastating. Within a partnership it is much easier to absorb such a cost.

2. ENABLES THE PURCHASER TO BUY LARGER PROJECTS
   The small investor alone could only dream of owning a large complex. However, involving oneself within a group of investors and combining funds, a small investor can become part owner of a much larger project.

3. THE FEASIBILITY OF HIRING OTHERS TO RUN THE PROPERTY
   You will have the ability to hire Superintendents and Property Managers. By purchasing larger buildings you can now afford to hire other people to allocate responsibility. Investors with several smaller properties scattered everywhere will find themselves doing a lot of running around dealing with tenants. This is because they do not have a choice. A partnership enables the investor to have that choice (which means fewer headaches!)

4. DIVERSIFIED INVESTMENT PROTFOLIO
   You must have heard the phrase "Don't put all your eggs in one basket", right? If you have $100,000 to invest, rather than use if for one deal, why not get develop a partnership and purchase a smaller share in multiple projects. This is a much safer investment; if one purchase begins to go sour, you have others which can equalize the loss.

5. SHARE KNOWLEDGE AND EXPERTISE FROM FELLOW PARTNERS
   You may have a lawyer or accountant in the group or perhaps an experienced investor or contractor, with whom you can share ideas and expertise.

6. GROUP IS FINANCIALLY STABLE
   On their own, a single investor may not qualify for a multi-million dollar mortgage Since partnerships involve the combining of assets, the bank will be more inclined to qualify you and your group. If there is an unexpected negative cash flow, the group will have a greater likelihood of sustaining the shortfall.

7. PRIDE OF OWNERSHIP
   It is a tremendously exhilarating feeling for the investor realizing that he is part owner of such a large project, and knowing that he doing business with other professionals and experienced investors.

8. ASSISTANCE FROM OTHER PARTNERS
   In a case where an investor has run into some financial difficulty, the partners may help until the problem has been overcome.

DISADVANTAGES FOR THE INVESTORS INVOLVED IN A PARTNERSHIP

1. DISAGREEMENTS
   There are numerous disagreements that can occur amongst partners while partaking in investment strategies. When to sell? Who should manage? How much leverage? How much cash to invest? Long or short term financing? Such disagreements may cause hardship in the relationship, especially if a partner is a close friend or relative.

2. CARRYING A FINANCIALLY TROUBLED MEMBER
   As mentioned earlier, there is a benefit to having a partnership if they are able to assist you during times of financial trouble. However, this can work both ways. If another partner is in financial difficulty, the rest of the group (including yourself) may have to come to the rescue. It may prove to be difficult if the partner in trouble is unable to recover for a long period of time as it could put a strain on the group financially, possibly leading to disagreements and/or personal conflicts.

HOW RENOVATIONS CAN MAXIMIZE VALUE

By Dino Nicosia, Broker of Record, Investpro Realty

Everyone at one time or another, has made the conscious effort to create "a good first impression" - a rule of thumb that is applied across many situations in life, from nailing that job interview to getting that second date. When it relates to real estate, I truly believe that the 'first impression is everything'.

Many landlords make the assumption that as long as their building is full and vacancy is not an issue, spending money on upgrades and improvements is fruitless, unless it absolutely necessary.

With this type of attitude, you can expect the following chain of events to unfold. As the building deteriorates, looks tired and outdated, good tenants will slowly begin to vacate. The landlord, in an attempt to quickly occupy the unit, keeps the rent the same and in some cases lowers the rent in order to keep the building full. He believes that reducing the rent will be less expensive than renovations. WRONG!!!!

Gradually, the good tenants will be replaced with an undesirable tenant profile. As a result, the landlord will begin experiencing the following issues on regular basis;

• NSF cheques

• Need to serve Notices for non-payment

• Noise complaints and late night parties

• Units and common areas damaged or vandalized

• Police calls for disturbance

In addition to the above problems the value of the property will depreciate substantially for two main reasons.

1. As the landlord reduces his rent and expenses continue to rise, the net operating income (NOI) will decline, thus reducing the property's value.

2. A unattractive and poorly maintained property combined with an undesirable tenant profile will be less attractive to Buyers as well as to Lenders.

EXAMPLE

The following is an extreme example nonetheless, it is a true story regarding a neglected property with a bleak future and how it was restored in less than six months with the value increasing exponentially.

This 13 unit apartment building was purchased for $405,000 by an "out of town" Buyer. At the time of purchase the property looked tired and worn, and as expected, was primarily occupied by undesirable tenants. The property manager, who was hired by the Buyer to operate the property, experienced all the problems related to an undesirable tenant profile. As any prudent property manager would do, he began to evict the tenants one by one to address the issues at hand.

Fast forward a year later. The property was now occupied by only two tenants. The rest of the units were vacant. The property manager could not attract good tenants to move in, therefore the units remained unoccupied.

The problem of course was that the manager did not adhere to the principle of 'the first impression is everything'. They were spending money to renovate the units, but the common areas were left looking like a "war zone". The result - 85% vacancy.

I was approached by the Lender of the property explaining that the owner was in dire straights and needed to sell. I had subsequently purchased this property for $260,000 with a plan to renovate, improve the appearance, rent the units and increase value.

After only five months the renovations were complete and the property was fully rented with an improved tenant profile paying higher rents (compared to the previous tenants). The property was resold for $475,000.

Again, the example presented above is somewhat rare although it effectively illustrates the point at hand – that first impressions can make all the difference.

I want to emphasize that maintaining your investment property is extremely important. Keep it in a good state of repair, especially the common areas, and give it that curb appeal. You should also note that a good tenant is likely to decide if they want to live in your property long before they see inside the unit itself. They have made up their mind once they have stepped into the lobby, thanks to that very first impression.

PURCHASING MULTI-RESIDENTIAL APARTMENT BUILDINGS

By Dino Nicosia

There hasn't been a better time since the mid 1980's to invest in apartment buildings, and with the recent changes to rent controls, lower vacancies and rising rents, multi residential properties have become a very popular investment for the wise investor.

For those investors who are venturing into the exciting and sometimes complicated and highly specialized world of real estate investment for the first time, we hope this and future articles will unravel and simplify any questions you may have.

The first and most important tip we can offer in this highly specialized area of real estate is to work with a salesperson that is both experienced as well as knowledgeable in the field of apartment building purchasing and ownership.

Most investors prefer to finance their purchase with a low down payment for leverage purposes. Because of the demand for apartment buildings and stability, there is a very good appetite for this type of investment amongst lenders. It is also comforting to know that there are many lenders out there who specialize in the financing of apartment buildings.

Accordingly, it is very important that you select a broker who is familiar with investment financing and one who can direct you to the lender that is "right" for your purchase. Choose a lender who wants and knows how to satisfy your requirements with the least amount of hassle.

It is also critical that your Realtor have an understanding of financial statements of a building's performance and make appropriate adjustments where necessary. Your informed agent will usually look for financial records of at least three years and will know the income and expenses "norms" within the industry. He/she should be familiar with such things as vacancy rates for the area as well as the normal operating expenses that relate to apartment buildings. He/she will know appropriate expenses for management and costs of superintendent as well as the annual maintenance cost of a building. He/she should also understand and be able to explain the terms such as "Cap Rate", GIM" "NOI" "Leverage" "Debt Coverage" and "ROI", etc. We will be discussing these terms in future editorials.

And finally, it is critical that your lawyer is familiar with real estate transaction and be experienced with investment properties. We cannot stress this enough, since not all lawyers have the expertise and understanding that is necessary to complete the purchase of an investment property without unnecessary complications, and costs to you.

UNDERSTANDING REAL ESTATE TERMS AND FORMULAS

ANALYSING THE FINANCIAL STATEMENT

In this exciting world of investment Real Estate, understanding financial statements terms, formulas and strategies will assist you in making a wise investment.

In this article, we will cover Operating Expenses which are the important factors in determining the investment cash flow of a building.

Operating Expenses

As apartment building specialists, we come across many financial reports on investment properties. It never ceases to amaze us how many operating expenses are "streamlined" to expand the "Net Income", thus artificially increasing the market value of the property. In addition to expenses for heat, hydro, water, taxes, etc., the next time you review an income statement, also look for the following expenses.

• Management Fees - Whether you intend to manage the building yourself or hire a property manager, this item should always be expensed at 3% to 5% of the gross income. Your time and effort are worth money!!!

• Superintendent/Janitor Wages - Again, whether or not you intend to do the work yourself, always expense this wage to determine the true operating expenses. Use approximately $20 per unit per month as a guideline.

• Maintenance/Repairs - This cost will vary depending on the type, age and condition of property, as well as quality of tenants and the past maintenance level of the building. A good guideline is approximately $500 per unit per year. Often the cost of elevator maintenance and garbage disposal charges are missed in a statement.

• Insurance Coverage - The property must be insured for fire and other hazards (tenants should cover their own contents). Premiums will vary depending on age and size of building and be aware that premiums are on the rise.

• Laundry Expenses - On many occasions, you will find the laundry income included in the gross revenues. However, the laundry rentals are often forgotten in the expense column and unless the laundry equipment is owned, look for rental charges of approximately $50 a pair per month.

• Advertising/Promotions, etc. - In a tough rental market, you must allocate a reasonable monthly charge for advertising or costly promotions.

A good "rule of thumb" for expenses in a building can vary from 45% to 55% of the "Effective Gross Income" (a term that will be discussed in a later issue). There are always exceptions where income is higher (and expenses lower) because tenants pay the hydro costs. Always remember that it is the Net Operating Income (N.O.I.) that sets the probable value of the building.

GROSS RENT MULTIPLIER & LEVERAGE

GROSS RENT MULTIPLIER

The "gross income multiplier" is what you get by dividing the gross rent into the sale price of a building. For example an investment property sells for $1,000,000.00 with gross rents of $250,000.00, which tells us that the "Multiplier" is 4 times the gross income ($1,000,000.00 divided by $250,000.00). This number can be a good thumbnail approach to valuing other buildings when you know their gross income.

The problem with this method of valuing buildings is that the gross income does not allow for expenses, and the best example would be in comparing two buildings, one where the tenant pays hydro and the other building where the owner pays hydro. If hydro was $600.00 per year, the net operating income in a building where the owner pays hydro would be that much less than the building with the tenant paying their own hydro. The impact on the value of the building where the owner pays will be significant. This income, if capitalized at 10% would represent about $60,000 ($600.00 divided by 10%) in less value than the building where tenants pay the hydro costs.

In summary, the GRM (Gross Rent Multiplier) may be used as a benchmark but the conclusion amongst investors is that the best approach to valuing buildings is by capitalization of the net operating income, which will be discussed in a later article.

LEVERAGE

The beauty of using leverage in a real estate venture is that for a small amount of cash you can purchase a large investment property, for example $100,000.00 can purchase a building worth $1,000,000.00, (so long as the income is able to support the venture). As time goes by, you will benefit from both mortgage reduction, and as history has proven, value will increase.

Cautionary words, however - With leverage you may run the risk of unexpected capital expenditures or reduced cash flow that could destroy the investment. Remember that "cash flow" is king, and unless you have deep pockets, a good reserve fund or easy access to cash, you should avoid this approach to investment.

NET OPERATING INCOME & CAPITALIZATION RATE

NET OPERATING INCOME

The net operating income (N.O.I.) is the amount of cash available after deducting the operating expenses from the Effective Gross Income. We obtain the true net operating income by expensing such things as taxes, hydro, insurance, management fees, superintendent wages, along with other fixed and variable expenses. Statements are not always accurate and if you are not careful you can easily be fooled by a lean expense ratio that can show an artificially high net income. Next months article will deal exclusively with expenses and how they can affect value.

CAPITALIZATION RATE

This is the most important term in the industry and investors should be familiar with it. Mostly referred to as the "Cap Rate", this term represents the percentage return on investment in an ALL CASH PURCHASE.

For example, if you purchase a 20 unit apartment building which generates an annual net income of $60,000 with a purchase price of $600,000, you are looking at a 10% Cap Rate, or in other words, you will earn a 10% return on the $600,000 investment.

Net Income $60,000 / 10% Cap Rate Purchase Price $600,000

The market capitalization rate is what an appraiser looks for in his research of the market since it is the capitalization rate that is given the greatest amount of weight when determining the value of investment properties. The Cap Rate will fluctuate with the market forces of supply and demand along the political climate.

EFFECTIVE GROSS INCOME

EFFECTIVE GROSS INCOME

When we purchase a Real Estate investment, we are really buying the potential rental income, and not the bricks and mortar. As we had discussed in the previous issue, the gross income multiplier is sometime used to determine the market value of an investment property. However, in the real world, the gross potential rents are not always achieved due to factors such as vacancy and bad debt.

The effective gross income is the amount of actual income after deducting vacancy and bad debt.

VACANCY AND BAD DEBT

Every rental property experiences tenant turnover. The frequency in which it occurs will depend on many factors such as; location, condition, rental charge, economic forces, tenant profile (age, etc.), and property management experience, etc. It is very important that you become familiar with the vacancy rate of the area of the subject property and also the track record of the property turnover rate.

Be sure to also investigate the monthly collection reports to assess the delinquency factors (non-paying tenants) to truly assess the bad debt ratio.

Vacancy rates will vary from one community to another, and statistics for vacancy rates are available through C.M.H.C. or should be available from any experienced apartment building realtor. As a rule of thumb, a vacancy factor of 3-5% would be used in the Hamilton market, unless in extreme cases where other factors come into play as mentioned above.

This finally brings us to the Effective Gross Income. This represents the Gross Potential Rents less the vacancy and bad debt adjustment, providing us with a more accurate income base.

MULTI-RESIDENTIAL MARKET UPDATE

The apartment building market over the past several years has seen unprecedented growth, and 2004 was no exception. And the spin off from the Toronto market has had a tremendous impact throughout southern Ontario, with Hamilton and district a major recipient of the flow of investors from Toronto.

Today's investors are facing much higher values than past years. For example, in 1998 Toronto experienced an average prices per unit of approximately $58,800, and a cap rate around 9%, in contrast to today's price as high as $80,000 per suite, and a cap rate as low as 6%. During the same period, an average one bedroom suite rental increased from $700.00 to as high as $1,200. per month.

Unlike the real estate boom through the late 80's and subsequent bust (compliment of the NDP Government in early1990's), this real estate cycle, which started in about 1992, has seen a steady and slow increase in demand, with values showing growth in all sectors. This has resulted in reduced availability of apartment buildings, as the inventory is quickly bought up by hungry investors.

The attitude and investor confidence has remained on a high for the several years. The main contributors for that confidence is attributed by historically low interest rates, rising rents, positive changes in rent legislation, as well a high employment and growing economy.

We recently attended a presentation titled "Global Export Forecast" delivered by Mr. Richard Egelton, Senior Vice President of the BMO Financial Group. His message, in summary was that the Canadian economy is in great shape, and that we do lead the group of seven nations in all aspects of our finances. The economic future, subject to all things remaining equal, is all positive.

Our Forecast: Apartment building values are showing signs of stability regardless of higher vacancies, (low interest rates are allowing more people to buy their own home). We expect demand for investment properties to remain strong, thanks to low interest rates and a strong economy. All these factors combined with investors reluctance to invest in the stock market has helped to fuel the steady demand for real estate. The year 2005 is expected to be another strong year for investment properties.

MULTI-RESIDENTIAL REPORT

Hamilton and Niagara Regions offer great investment opportunities.

There is a vibrant investment market outside the Greater Toronto Area that currently offers many fantastic investment opportunities in the multi-residential sector. The "Hot" Toronto market continues to be fueled by speculators, and the over building of rental units and condos which have had a great impact on vacancy and rental rates. The Hamilton and Niagara Regions have been discovered as an alternative "place to invest". According to CMHC stats, Toronto's "vacancy rate rose to the highest level since the inception of the survey".

Unfortunately, Toronto investors are currently surrounded with skyrocketing values and very low cap rates. Due to the highly speculative Toronto market, and limited supply of available units, GTA investors are in many cases accepting zero or negative returns. The last period this was witnessed was the "speculator driven" market of the late 1980's. In contrast, the Hamilton, St. Catharines and Niagara Falls market continues to offer their investor solid returns on their investment.

Consider that Hamilton boasts a low unemployment rate, and a vacancy rate which remains around 3%. The average rents continue to offer great potential for rent increases as the vacancy remains low. Hamilton's investment properties are still very reasonably priced with attractive cap rates. In this market positive cash flow is the norm, not a wish.

In the past few years, the City of Niagara has experienced a profound change in rental market activity. Since Casino Niagara opened in 1996, the vacancy rates have dropped drastically allowing rents to rise dramatically. We truly expect that investors will continue to enter this market as it provides excellent returns on investment as well as fantastic potential for capital appreciation.

RENT & VACANCY COMPARABLES FOR YEAR 2004

	One Bedroom	Two Bedroom	Three Bedroom	Vacancy
Toronto	$886	$1,052	$1,235	Over 3.8 %
Hamilton	$633	$778	$967	3.0 %
Niagara	$611	$789	$829	2.6%

Compared to other major Canadian Municipalities in 2004, Hamilton's vacancy rate is the 16th out of 28 reported regions in Canada.

We at Investpro Realty and Appraisal Ltd. specialize in the listing and sales of apartment buildings in Hamilton, Niagara and Southern Ontario. We have accumulated a long list of serious cash buyers ready and anxious to present offers.

JAN. 2004

Update for Hamilton Region......continues to offer great investment opportunities.

Despite some negative news around the steel industry, Hamilton has diversified and maintains low unemployment levels as well one of Ontario's lowest vacancy rates in multi residential.

And to prove our point, it is interesting to note that 90% or more of our inquiries for Hamilton properties come from Toronto investors. The latest statistics show that vacancies in Toronto and area have increased and that rent levels are suffering accordingly.

According to the C.M.H.C. Housing Outlook Conference recently held in Hamilton, they confirmed that Hamilton and the area boasts both a low unemployment rate, as well as multi-residential vacancy rates that remain steady at approximately 3%. And although interest rates are at forty five year lows, they are expected to "inch up" only slightly in late 2005. However they should remain near existing levels for the foreseeable future.

Rents continue to offer potential for increases at the Government allowed statutory levels as the vacancy rates remains low. We recommend that if you are considering entering the multi-residential market, or increase your holdings that you give the Hamilton market area serious consideration.

EFFECTIVE PROPERTY MANAGEMENT

You want to invest in Real Estate, however you are holding back because you are inexperienced or you do not have the time to efficiently look after your investment. Your problem is solved. Consider hiring a solid and reputable property management company that specializes in the area of real estate you are purchasing.

Ideally to be cost effective the investment should be large enough (15 units or more) to sustain the extra management fees. It is important to note that good property management will pay for itself in the long run. If not in control, vacancy, bad debt and high maintenance cost can quickly destroy any cash flow. When shopping for a good property management company, make sure you ask for references and inquire on what type of real estate they specialize in.

The following is a list of duties that should be covered in their service.

• Cost effective rental marketing and tenant retention

• Efficient maintenance programs

• Complete monthly reports of property activity

• On-site managers

• Paralegal service for tenant matters

• Consulting and arranging on mortgage refinancing

• Serving all legal notices per the Tenant Protection Act

Management fees will range from 3% (for a very large complex) to 8% for smaller buildings. The fees are calculated based on the percentage times the collection for the month of invoicing.

REAL ESTATES LONG TERM INVESTMENT STRATEGY
AS COMPARED TO THE CHINESE BAMBOO

Worth Waiting For...

North American investors who are obsessed with the next quarter's results - in contrast to their Japanese counterparts - might draw a lesson from the example of the Chinese Bamboo.

"Consider the Chinese Bamboo: the seed is planted. It is watered. It is fertilized. But the first year nothing happens. The second year it is watered and fertilized again, but nothing happens. The same process is repeated during the third and fourth years; still nothing happens. Yet, during the fifth year, in a period lasting no more than six weeks, the bamboo grows 90 feet.

Did the bamboo grow 90 feet in six weeks, or 90 feet in five years?

The answer is five years, because at any time during that interval, had fertilizing and water not been maintained, the plant would have died."

As the bamboo, real estate in the long term will pay off big dividends. Be patient and take care of your investment, in the end it will take care of you.

History has proven over and over, that in the long term, Real Estate is a solid investment. Real Estate is true hedge against inflation with the potential to bring excess wealth to the Wise Investor.

With the continuing increase in population, the old saying that you should buy land because "they do not make it any more" has never been so true.

APARTMENT BUILDING FINANCING

If your mortgage is coming due for renewal or you wish to apply for a new mortgage on a purchase, allow plenty of time for the approval process of the lender. The lender may need a new appraisal which can take as long as one month to complete, which when added to the approval time needed by the loan officer and head office can be lengthy.

You must be organized and be prepared to provide information as outlined below; but may vary according to your own circumstances;

• Financial Statements of your company.

• Three years statements of income and expenses for the building, if applicable.

• Complete personal net worth statement.

• Current rent roll for the building.

• Any relevant Tribunal documentation.

• Current appraisal., if you have one in your possession.

• Survey or site plan.

• Tax/Assessment information.

• Environmental, Phase 1 Study and Structural Report may be required.

There is a good appetite for apartment building financing at this time, however a word of caution, some lenders are unrealistic with their demands, and then there are lenders with more experienced and more reasonable requirements. Select your lender carefully, with this in mind. Also be aware that buildings with existing C.M.H.C. insurance may not have the option of being increased. For those who are buying a building with an existing mortgage may not have mortgage discharge as an option, or the discharge is penalty is such that a vendor cannot afford to complete a sale if you ask for discharge.

There are certain criteria that are requested with each application, with variation to the requirements depending on circumstances related to the application. Typical standards/expectations would be;

• Debt service ratio of 1.2 to 1.4.

• Vacancy and bad debt of possibly 3% to 5%, often based on the most recent C.M.H.C studies.

• Maintenance costs of approximately $500.00 per unit per month, depending on the age & condition of the property.

• Capitalization rates of as low as 7% to a high of 12% or more.

• Loan to value ratio of 60% to 75% without C.M.H.C. insurance, higher if insured.

• Interest rates at the time of writing of this article are as low as 4.15% to a high of 8%, dependant on the risk and size of loan.

STATUTORY RATE INCREASE THROUGHOUT THE YEARS

The following percentages are the statutory rent increase that the Government allowed throughout the years.

Ontario Historical Rent Increase Guidelines

Date        Percent
Oct  1979       6.0
Jan  1985       4.0
Jan  1987       5.2
Jan  1988       4.7
Jan  1989       4.6
Jan  1990       4.6
Jan  1991       5.4
Jan  1992       6.0
Jan  1993       4.9
Jan  1994       3.2
Jan  1995       2.9
Jan  1996       2.8
Jan  1997       2.8
Jan  1998       3.0
Jan  1999       3.0
Jan  2000       2.6
Jan  2001       2.9
Jan  2002       3.9
Jan  2003       2.9
Jan  2004       2.9
Jan  2005       1.5
Jan  2006       2.1
Jan  2007       2.6
Jan  2008       1.4
Jan  2009       1.8
Jan  2010       2.4

OFFER PRESENTATION ON INVESTMENT PROPERTIES

So you have decided to buy an investment property. You have found the property just right for you and now you are ready to make an offer. Wait! Before you proceed to make the offer, you must be assured that an experienced realtor or lawyer that is familiar with investment properties represents you.

Consider that when you are buying a home you are basically buying bricks, mortar and land. However, when buying an investment property, you are also buying rental income and are inheriting tenants along with all the tenant rules, regulations and laws that accompany them. There are also extensive regulations and by-laws such as Fire, Zoning, Health and Safety issues and so on. Your offer must have the appropriate clauses and conditions to address all of the above-mentioned issues.

Your offer should request tenant acknowledgments whereby a tenant confirms in writing the following:

1. Monthly rent,

2. Rental deposit paid,

3. Move-in date,

4. Whether any appliance is owned by the tenant,

5. Which utilities (if any) do the tenants pay?

Other information that the offer must request, is confirmation of all equipment and chattels that belong to the property, e.g. lawn equipment, vacuum cleaners, appliances, snow blowers, supplies etc.

The offer should request a copy of the following;

• All existing contracts, warranties and invoices for recent capital expenditures.

• Utility bills for at least 2 years

• Financial statements for at least 2 years

• Zoning verification

• Existing survey

• Insurance policy

• Current rent roll

• Provide all reports in possession eg. Structural and Engineering, Appraisal etc.

• Any Rent Review Order available

• Letter confirming Fire Retrofit compliance

Consider including a clause allowing for a full inspection of all units in the property with an escape clause terminating the offer, if you are not completely satisfied with the said inspection.

Unlike residential purchases, the conditional period for arranging financing should be extended (10 - 20 business days), since commercial lenders will likely request an extensive appraisal and environmental and or structural studies before final approval.

Failure to address any of the above matters may result in unnecessary grief, potential lawsuits and possibility of paying too much for the property.

HISTORY OF REAL ESTATE VALUES IN CANADA

1945 to 2005

By Dino Nicosia, Broker of Record, Investpro Realty and Appraisal Ltd., Brokerage

History has proven that Real Estate values will grow exponentially over the long term. The last 60 years (since end of World War II) has been very indicate on how Real Estate values double about every ten years.

No other investment vehicle can guarantee, if held long enough will exceed or keep in line with inflation. The following chart clearly shows Real Estate values increasing over the last 6 decades, and the trend is sure to continue. However you should expect some economic turbulence along the way, but in the long run expect tremendous growth.

According to the Bank of Canada, a basket of "goods and services" in 1945 that would have been worth $5,500.00, would be valued at $64,421 today, as a result of inflation. Comparing this relationship to home values; in 1945 the average home was valued at $5,500, and sixty years later the average house price has jumped to $260,000; by far exceeding inflation.

The Hamilton Market.

In the last 25 years, local real estate has flourished. The price of a home in Hamilton has soared an average of 325 per cent since 1981. The cost of living for the same period has climbed 121 per cent. In comparison, the average income has increase by 172 per cent.

Can anyone afford not to invest in Real Estate?