Canadians are notoriously overweight. 😛 Financially overweight in real estate that is. 😉 When it comes to buying houses we are even more gluttonous than our American pals. The Canadian median household net worth may be one of the highest in the world, but strip away the equities in our homes and many of us would feel financially emasculated. 😐
Foreign ownership, low interest rates, and a growing population in major cities all contribute to our strong real estate market, which many say is in a bubble. But whether properties in Canada are overvalued by 10% or 30% it really doesn’t matter for investors who keep the following points in mind.
- Diversification – Invest in more than one type of asset class
- Time – If we have a long term outlook then our risk of losing money is greatly reduced, especially if we combine this knowledge with diversification.
If we’re properly diversified and hold our investment long enough then we’re bound to make money in stocks, real estate, bonds, or any other market. Over 70% of Canadians are real estate investors. Fortunately most of these investors understand the benefits of a long term investment and forced savings. But it’s the first factor, diversification, that many seem to struggle with.
Having one’s net worth tied up in multiple condo units is not the best way to allocate assets. There are other types of properties out there like office space, restaurants, parking lots, etc. that are all available for anyone to purchase and rent out. With the recent lowering of interest rates and the falling Canadian loonie I’ve decided to take another look at real estate. Since I already have a residential property and farmland, I think it would a good idea for me to diversify my real estate portfolio and buy some commercial properties. 🙂
Here is what I’m looking for in an investment property:
Type: Industrial – usage would include manufacturing, warehouse, garage, etc
Location: Greater Vancouver Area – includes Burnaby, New West, Richmond, Surrey, and the Tri-Cities
Price range: $250,000 to $500,000
Zoning: I, M, C – Each municipality will have its own naming convention. For example M-1 in Vancouver is a flexible designation for a range of business types like animal clinic, catering, laundry/cleaning, work shop, cold storage plant, etc. And C-2 can be used as a barber shop or beauty salon. These zoning bylaws can be found on the local government’s city website.
Capitalization rate: 4% to 5% – Similar to the ROI (return on investment.) This kind of return would be comparable to a high-yield bond fund, but with less risk. 🙂
What I’m mainly doing now is looking on real estate websites such as www.icx.ca. Here’s an example of a store I recently viewed online. When I find a property that I like I would call the listing agent to ask further questions. I have also signed up for the Macdonald Commercial e-newsletter to receive information about new listings around Vancouver. I have scheduled 2 different showings this week so I will be visiting some locations with real estate agents and see how things go. Fellow blogger Asset Grinder owns a $384,000 warehouse in B.C. and collects rent from a tenant. I’m basically looking to do something like that as well.
One problem is I don’t have a lot of savings right now. So I will be contacting different banks to see if I can get a loan or mortgage. I might also need to find an investment partner. I’ll ask my family and relatives to see if any of them are interested. I’ll give updates later on. 🙂
Random Useless Fact:
How to troll a cashier. 😛
But we should be nice to them. The median income for grocery store cashiers in the U.S. is $28,000/year.
Good luck on trying to find something worthwHile in th eVan area at that price.
Yeah, that would be a toughie.
Thanks. It won’t be easy, but I’ll try. 🙂
Nothing like adding some diversification to your real estate holdings. I’ve got an outside shot on picking up a commercial property in the next year or so myself. An attorney I do some side business consulting for would be the tenant, and as a part owner of the property, vacancy risk would be significantly lowered. We shall see what happens!
Good luck. I hope you get the property. 🙂 Diversification is like insurance. We don’t always need it, but it’s good to have just in case.
Commercial real estate is great, but I don’t think you’ll find anything for that price in lower mainland. The good thing, I don’t think it’s necessary to be in the same area as your investment. I’ve looked around for some warehousing properties in 100 kms range, and I think you can find something more affordable if you expand your horizon a bit. My dream is to find a good warehouse property with some long term tenants 🙂
Yup, if I go outside of the cities I could probably find some pretty big warehouses for much cheaper compared to the metro area. One good thing about warehouse properties is the tenants usually sign for multi year lease agreements because they want stable expenses for the cost of running their business.
What is the typical Cap Rate to expect on a commercial property in Vancouver? Are you looking for a minimum? I think I read something a while back that 7-10% was a decent range, but can’t remember for sure.
I think 4% or 5% would be acceptable cap rates, but it also depends on the current state of the economic cycle. I don’t really have a minimum in mind, but would like it to be above 4%. 🙂
Wouldn’t it be easier to invest in a commercial REIT?
Yes, and cheaper too as I won’t have to deal directly with legal fees and accountants lol. But I can’t leverage with REITs the same way I can if I buy directly. I’m planning to use at least 5 times leverage. 5x would create a 25% return if the property itself only returns 5%. There’s a risk of losing 25% as well in the short term if the property value drops by 5%, but I’m pretty confident about the long term potential. For comparison purposes my condo was purchased at 15x leverage, and farmland was 8x leverage lol.
Real Estate is often said to be the best investment. It can lower your taxes which is the easiest way to increase your wealth. An investor can have multiple tax write-offs for various things and plus your depreciation is on the full value of the property.
That’s right. 🙂 I don’t know anyone who has invested in Canadian real estate and have consistently lost money.
You should try 10-15 cap, anything lower than that REIT would be a better option.
The advantage of having a real piece of property is its yours after you paid it off. I’ve been eyeing on loopnet.com for 2 years now. But I’m kind of scare how things would go as, if renter are successful, they could move to a bigger place and I’ll be stuck not knowing where to get the next customers. Unless I’m willing to start my own? Lots to consider. But definitely see if you can get a lain first. As you are highly leveraged, hehehe.
10% cap rates would be great, and I know many residential properties have high returns from rental income. Unfortunately for me those deals are more common in the U.S., and not so much up here. If interest rates normalize then eventually the cap rates in Vancouver and the rest of Canada will start to go back up. 🙂
Nice article Liquid. Out of all the bloggers out there you are one of the more diverse and I always look forward to your articles.
Thanks Gareth. 🙂 By going down our own individual and unique paths we’ll be more likely to discover places no one has ever been before.
What will be the good website or any other resource to buy warehouse in Alberta?
(search for “alberta” and choose “Industrial” under the Looking For option. It will take you to a map. You can zoom in to specific areas and filter by price range.)
If you are looking within a particular city, for example, Edmonton, then you can narrow down your search and use real estate company websites like Century 21.
loopnet.com is also a good resource
And of course there is always kijiji
Thanks for the shout out buddy! Commercial property is fickle in metro Vancouver I find. Tough to get a good long term tenant I find. My cousin owns about 8 commercial units in richmond, burnaby and vancouver and its tough for him to find good long term tenants. If you have trouble you should try a property management company like remax to help you market the place as they tend to find higher quality tenants. 4-6% cap rate is the norm. You could always shop for commercial properties direct from management companies as many times they are not listed for sale on ILX. Call a few companies and tell them how much you want to spend and cap rate you are looking for. I wouldnt be surprised if you find one already with a good lease in place.
Be aware for commercial properties mortgages can get a lil sticky with higher down payment needed and higher rates too.
Great info, that’s really helpful. 🙂 Using property management companies to find tenants is a good idea. If I do become a warehouse owner some day I might have further questions.
Great idea to diversify with some commercial property! I have a dream of eventually adding a little commercial spot to my portfolio built around the business I’m in, but it’s a long way off. Good luck finding the right property!
Thanks. It didn’t work out with this property, but I’m sure other opportunities will present themselves.
Great idea on diversifying with commercial properties. I see you’re looking to leverage so makes sense to invest directly rather than through REITs. Commercial properties can get tricky if you can’t find a long term tenant. There are a few properties in Vancouver that seemed to be tenant revolving door. None of the stores last more than a year, then the properties sit for vacant for a few years. A good example is that building on Broadway where Wonderbucks used to occupy. It has been vacant for 2 or 3 years now I think?
That’s a good point. Vacancy risk is a lot higher for commercial properties than a residential apartment building. 🙂 And pandemics really put a strain on the situation.
Hi, I’m a high leverage investor from Mississauga, ON and I have been eyeing commercial properties. I called a few banks but none would lend with less than 30% down for existing building. I found new commercial builds can be done with 5-10% down. You might want to consider that option. For me, its a race for compound interest and I couldn’t justify the numbers. I am looking to buy a farm and rent out the land like you do. I was wondering if you get to use the farm loss credits (up to $17500) since you lease the land. That would make a significant difference in the properties immediately profitability.
I can’t claim any farm losses since I don’t operate a farming business myself. I just rent out the land so my business is purely about real estate. 🙂 Yes, I’ve heard 30% down payment is typical for what banks want to see.