I am a real estate investor who has been investing primarily in GTA multi-family over the last decade. Recently, with inflation skyrocketing and mortgage rates bringing correction to the over-valued GTA market, I started to look elsewhere.

It occurred to me that smaller cities that aren't subject to such hard land speculation and coupled with every-growing demand (e.g GTA, GVA), hold their values pretty stable throughout RE cycles - or at least don't get hit with such violent volatility. Additionally, the mark up to market that real estate promises is difficult with Ontario's tenant friendly laws, but students turn over every year - allowing for a MUTM yearly, an effective inflation hedge.

I have found a great newly built student rental that is fully rented and cash flows exceptionally well. The cap rate is above market, yielding 6.35%. This will only grow as rent's rise in the next couple of years. Rates will start to drop in Q1 2023 and a variable rate mortgage will provide increasing cash flows throughout the coming months after which we will lock-in a fixed rate (See further comments below).

At the moment I am looking for 3 or 4 other investors who would like to come in with me on a joint venture deal (JV) and purchase the property for a buy-and-hold strategy. I can do the management since I have experience in this field and we will self-manage the property, yielding a higher return for all of us.

Please see the aforementioned listing below and my investment thesis on the property. If you have any questions or would like to see my full valuation / proforma model, feel free to send me a private message and we can dive into the numbers a bit deeper.

https://www.realtor.ca/real-estate/24671476/271-macdonnell-street-kingston

Executive Summary:

Opportunity to invest alongside 3 or 4 other investors in an inflation-hedged student rental property in Kingston, ON, home to Queen's University which allows for a mark-up to market every year thanks to student turnover. The property is very close to Queen's and offers parent guaranteed leases, commercial flooring, steel roof, brand new build with a well designed kitchen and deck, a washroom on every floor, all appliances, and much more. The property is eco-friendly 100% electric, helping to reduce the carbon footprint.

The yield is above market for student rentals, and a much higher yield than over-speculated Toronto or Vancouver markets (with impending corrections). Tenants pay utilities and hydro, leaving taxes, insurance, maintenance (low since it's a brand new build) and CapEx reserve.

Market rate will start dropping mid- to end-Q3 2023 - we get a variable now wait until rates drop and refi into a fixed mortgage to increase overall cashflow along with the rental growth because of MUTM.

Cap rate compression from holding in the mid- to trough-cycle period until the rise will result in ~$500k appreciation at the end of the hold period.

Key Terms / Assumptions:

Purchase Price: $1.4M - currently listed at $1.45 with a $50k reduction - dropping sales and higher rates can push the seller to negotiate - will start negotiations at $1.3M and top out at $1.4M

Down payment: 30% LTV recommended by previous mortgage broker conversations - $420k - split amongst 5 investors is $84k each. Early talks with the agent indicated the seller will consider a VTB. (This VTB can also bring down the price down to $999k so one of us can register as primary residence and pay 5% down - not my preferred strategy)

Gross Income: $111k in NN rents - students pay utilities and hydro. This will grow at much higher rates than in previous years.

Operating Expenditures: Property maintenance will be super low (5% of gross) since the build is brand new, insurance, property taxes = $20k | property will be self-managed by the partners, or, include a 8% (Kingston comp) of gross PM fee. Including a capital reserve, this is ~$30k.

Net Operating Income: $80k/p.a. or $89k/p.a. self-managed.

Cap Rate / Yield: 5.7% or 6.35% self-managed - compared to a 4.5% cap for student housing in Kingston. The yield will only grow as higher than expected rental income growth rates prevail in the upcoming years.

Market Analysis

Short-term Outlook

Rates - A growing concern for most investors at the moment. The SOFR curves are estimated to hit local maxima during Q1 2023. Goldman Sachs and other large institutions rely on these projections for the future as they have proved to be quite accurate. Rates will top out early next year, and will continue to drop as inflation is put under control. Large corrections in metropolitans such as Toronto and Vancouver will help to stabilize the market - leaving Kingston mostly unscathed. We can lock in at a variable now, still produce great cash flow, and then wait as BoC drops rates and we end up with larger CF's in the upcoming quarters. Once the rates and inflation storms have calmed, we will lock into a fixed rate.

Long-term Outlook

Cap Rate Compression - as rates fall and supply of new student housing will be limited, our cap rate will compress. Currently, the property is listed at 6.35% cap and this indicates they have already priced it post-correction (near the trough of the cycle). To be conservative, I'm expecting a 4.5% exit cap which represents a $580k increase just by riding out the cycle.

Demand - Queen's Enrollment Growth - Applications to Queen’s for 2022-23 remain strong with over 54,000 applications to undergraduate programs, representing year-over-year total growth of 7%. The Ontario Universities’ Application Centre (OUAC) reports that first-year direct-entry applications to Ontario universities for 2022-2023, from applicants in Ontario, have increased by 8.5 % as of February 9, 2022, compared to the same time last year. Queen’s has out performed the sector in this category with 13% growth. This year-over-year performance builds on a positive five-year trend: during this time, applications to Queen’s have grown by 48%, while the sector has seen a 16% increase.

Demand - Post-secondary Demand - an increasing amount of individuals are seeking secondary education than ever before. This trend will continue in the future as we get a more skilled/educated work force and Queen's remains the oldest degree-granting institutions which carries a pedigree unrivaled by other universities. International applicants are also seeing Canada as a viable option experiencing a 79% growth in international students from 2015-2020, a 12.4% growth year-on-year.

Supply - After the larger condominiums were built along Princess St., not much more supply has been added to the pipeline. Especially after the 2-year rise of costs (Steel, concrete, lumber), most developers have paused or abandoned some of their projects that were in the rezoning stages. Active listings are down of existing inventory and will continue to lag demand from the pause in construction starts. Even when construction resumes, the lag to get it on to market will mean that our resale (after hold period) will be selling on the upswing of the cycle and will be a seller's market.

Strong Lease Guarantees - Parents of students are the most educated and highest earners in Canada. Nearly 50% are making $125K p.a while the Canadian household income average is around 90K gross (non-seniors). Parents guarantee the leases, and since most students live away from home, this is a non-discretionary spend on education and therefore elicits a inelastic demand (will pay for higher rents).

City's Credit Rating - On Oct. 18, 2021, Standard and Poor's reaffirmed the City's credit rating of AA with a stable outlook. Kingston has excellent ability to borrow money or issue debentures, an important monetary policy function of the local governments.

Articles

https://perspective.ca/kingston-best-places-invest-canada/ https://www.canadianrealestatemagazine.ca/news/top-investor-edition-why-kingston-is-drawing-investors-and-developers-from-ontarios-big-cities-335200.aspx https://globalnews.ca/news/8604856/kingston-ont-highest-housing-price-increase-canada-2021/ https://www.thewhig.com/news/local-news/kingston-house-prices-increase-at-torrid-pace https://blog.remax.ca/kingston-housing-market/

Vancouver, British Columbia

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