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Why savvy investors should take a look at apartment buildings

  • First National Financial LP

Uncertain economic times and a saturated condo market in Canada’s urban centres have prompted more commercial real estate investors to consider purpose-built apartment buildings as a savvy, safe investment.

“Commercial real estate in general has typically generated a higher rate of return than some other types of investments and multi-family is the most stable sub-asset class in commercial real estate,” says Darryl Bellwood, Assistant Vice President of Commercial Financing at First National Financial LP, Canada’s largest non-bank mortgage lender. “From one year to the next you typically know what your expenses will be and if you run a good operation, you've got consistent vacancy figures.”

By comparison, office and retail developments are more vulnerable to business cycles and the vagaries of the market; witness the effect of the Target flameout on mall owners or of low oil prices on Calgary’s office landscape.

“People have to live somewhere, so especially in major markets, finding tenants for your apartment building is not difficult,” Bellwood says, noting the low rental vacancy rates across the country. “On those assets, as opposed to some of the other ones that might experience higher vacancy rates, your return would be very stable.”

“Right now, he adds, “there’s not a lot out there where you can generate the same amount of return that you can with an apartment building.”

Purpose-built apartment rentals appeal to younger people who can afford to pay a higher rent for the amenities they want but are not looking to invest in a condominium or home. Baby boomers looking to retire and downsize are another target market.

Apartment buildings can also be economically advantageous for developers. Brokerage fees are less than for individual condominium sales, for instance. Marketing and construction costs are also typically lower. As well, selling an apartment building involves a single transaction, rather than multiple condominium sales, reducing risk.

According to Colliers International, the multi-family class of commercial real estate remained the most stable in major Canadian cities as of mid-2015. It reported that the total value of transactions in major markets increased by 21.7 per cent from mid-2014.  Over that period, the average price per unit was relatively stable, from $132,607 in 2014 to $131,724 in 2015. Year-over-year rental rates and vacancies also remained stable, with a 2.8-per-cent increase in rental rates and vacancy rates at 0.2 per cent.

First National has over $90-billion of real estate financing under administration.

Succeeding in the market
The key to success for would-be investors is a good relationship with a lender who understands your financial situation and objectives and, secondly, knows the market and can move quickly when the timing is right. In competitive markets, fast turnaround times can make the difference between closing a deal and letting it slip away.

Borrowers should be cautious about who they choose as a lender, experts stress. The reputation of the institution and its overall experience in the multi-family market is important; but it’s also essential to work with an individual within the institution who has experience in this area, who asks the right questions and understands your plans.

Small landlords and large institutional borrowers alike are advised to avoid choosing a lender based solely on interest rate. Rates fluctuate, but a partnership with a lender is an investment that helps to achieve long-term goals.

“We’re someone who goes a little bit farther than just saying, ‘Here's the mortgage we can offer you’,” Bellwood says. “If you have a strong relationship, your lender will know exactly how to structure the deal that you want to do.”

He often finds himself providing advice, for instance, about how much to put down and which loan term is the most appropriate when a borrower is seeking to purchase or build a building. Sometimes a second mortgage on another property makes more sense in terms of raising cash. Sometimes a borrower might be better off with an improvement loan to upgrade an existing property to increase cash flow before investing in another building. A lender familiar with the details of your portfolio is in the best position to provide this type of strategic advice and to update you on market changes.

Five- and 10-year loans insured by the Canada Mortgage and Housing Corp. are most typical for apartment-building financing, Bellwood says.

He often finds himself countering common misconceptions, such as the urge to refinance in this low interest-rate environment. “Sometimes people think they’ll pay a penalty to opt out of an existing mortgage and refinance a lower rate to save money. But then when you do the analysis, it might not actually be saving them money because the penalties are stiff,” he says.

While the figures must add up, there is also the less tangible question of trust when choosing a lender. If you have a strong relationship, you can trust that your lender will structure the deal that is right for you. And since trust is a two-way street, a lender who trusts you might be more willing to take a chance on your pet project.

“If you know someone, you can trust them to do what they say they're going to do,” Bellwood says.