I purchased two assets in 2019.
The first is an addition to my first student housing property in Kingston. I purchased a 10 bedroom property for CAD$575,000 or $57,500/bedroom, which is much lower than the normal price of about $100,000/bedroom. It is lower because it is North of Princess, three of the bedrooms are in the basement, a few things that will require some capital investment, and because of poor marketing into a soft real estate market. The property was listed for $660,000, and was on the market for about 120 days, and so the sellers were interested in entertaining a lower bid. The discount occurred over the two offer periods: the initial offer, as well as the revised offer after the home inspection. This tiered approach to negotiating can be effective when there is a large bid-ask, but where the seller is emotionally tied to an arbitrary price. Note in my first investment, I was unable to negotiate the price down after the home inspection, and chose to buy the property anyway. One interesting point is that because of my purchase of the first property, the second purchase was entirely effortless. I had decided that this was a good investment very early on, and simply tried to negotiate the price as low as possible. My level of due diligence was not as vigorous as a similar sized transaction should be. As an example, I found out after closing that the previous owners paid around $5,000/year for insurance. In my model, I expected $2,200/year for insurance. This large difference was highly stressful when I found out. I had underestimated the insurance cost. I should have gotten a quotation before I made an offer. With that said, the actual insurance cost $3200, which although higher than my estimate, was within a reasonable margin of error. As I said, I knew the returns were high that the price I paid was not based on cashflow, but rather what the lowest price the seller would accept.
The second asset I purchased is a studio in New York City. I have been interested in New York real estate for three years, but was unable to get comfortable with the market, until now. First, I was able to find a property that had cap rates in the 4-5% range, which is much higher than the ~3% for most condos in New York City. The reason this apartment is cheap is because it is very investor-owned, and allows short-term leases. As a result the property does not benefit from real-estate friendly US tax laws that encourage home ownership. Second, mortgage rates had dropped precipitously, and I was able to get a 2.95% Interest-Only 10-yr ARM with a 70% LTV. This made the cashflow profile very attractive. For reference, it takes about 5 years for an 80% LTV mortgage to amortize down to 70%, so this option is vastly superior to a 30-yr 80% LTV fixed-rate mortgage. I was being quoted about 4% for a 30-yr fixed. Finally, through anecdotes of friends, rents in NYC seem to have bottomed (honesty they never really imploded as people were expecting), but this made me feel good about the yield I was underwriting.
Purchasing a property Canada is relatively simple. The deposit is CAD$5,000, typically. And the lawyer works with all the parties to close such that there is very little buyer involvement. Closing can comfortably occur about a month after an offer is accepted. Lawyers are not engaged until after an offer is accepted. An offer in Ontario is boilerplate, with limited possibility of modification. Closing costs in Ontario are also relatively low. In addition to the transfer tax, which is about 1.5% of purchase price. Other costs might be about CAD$3,000.
The process is New York is unbelievably complicated. A certain level of coordination is required by the buyer. I did not use an agent so perhaps some of my responsibilities were agent responsibilities. There was a lot of liaising between the mortgage, the building and the lawyers. Lawyers are retained prior to offer, which takes about a week. After, it took me a little over a month to close. It would have taken longer had I not pushed the process. One trick I used was to get the bank to give me a commitment letter contingent on appraisal, and used the commitment letter to start the building approval process. Putting these on a parallel track reduced the time to close by about 2 weeks.
Closing costs are particularly high in New York City. The costs including a 2% mortgage tax was about $17,000. The deposit is 10% of the purchase price, which puts all the power post offer in the seller’s hands. One particularly uncomfortable nit is that the buyer typically needs to go through with the purchase after a commitment letter is issued from the bank, even though there are reasons the bank might withdraw its commitment. This nit can result in buyers defaulting and losing their deposit. The most amusing part of this process is closing. In Ontario this would take 15 minutes and involve a notary and an iPad. In New York, it’s three lawyers around a table, a wad of papers and 2 hours of time. In our process the seller had provided the incorrect payee for the checks. Both the bank and I had to go to the nearest bank branch and get checks reissued. Let’s just say the process is not fun, and I would seriously advise people to only buy in the city if the opportunity is compelling (please read this article before buying any property you will live in, it’s very important). If I had to do it over again, I would seriously re-consider. But now that it’s over, I am happy with result.
Putting these three properties all together, my exposure to real estate is very high, though equity exposure is obviously much lower. One important consideration of asset exposure is that most people’s NPV is much higher than current net worth, which means that borrowing money to purchase assets results in better asset allocation. Real estate allows for an accessible way to employ a lot of leverage.