Quote:
Originally Posted by donk.  "Can you please send in your offer again, we need to sell now"
"Ok my offer is 50% of my original offer" |
This is more or less what we did back in 2009. Sometimes as low as 30%.
Any downturn is good time for us. I'll elaborate in a bit.
Now, getting back to cap rate. For those who doesn't know, cap rate is basically (rent per year received)/(sale price)=cap rate.
Now given the equation, in order to get higher cap rate, you either need to adjust the rent per year or price or the price. Regardless what happens, the higher the cap rate, the better the property as a deal. Different property types have different cap rate on the market. Something like a hotel usually demands 10%+ whereas a warehouse is probably 4% (figures in the US market, as it's the market I'm familiar with)
In YVR, given the increase in property prices in the last few decades, we have grown to accept extremely low cap rate. I haven't checked for a while, but it used to be that 0.5-1.5% cap was the norm here. But it's no longer the case. Since it's no longer increasing and even decreasing, we are seeing deals that circle the 4-6% range, at least on a proforma level.
Now, getting to downturn is good. There are many landlords in YVR that has had very crappy cap rates because they thought RE in general would continue to grow in value. Banks were ok with it because that's what the market dictated. Now, the cap rate of the market is increasing rapidly. Making financing their property difficult.
Remember the bank's calculation on valuation? x*cap=rent or rent/cap=value. The cap went from 0.5-1.5 to 4-5. Using the same 50k yearly rent as an example. at 1%, the property was valued at 5M given the 50k/1%. Now with the cap rate increased to 4%, the value becomes a mere 1.25m at 50k/4%. And if they were putting 30% down to finance it, they are now severely underwater. Bank would no longer be willing to finance it at 5m valuation. Thus, the landlord needs to sell. And this is where we go in.
Of course, the example might be rather extreme. But the idea is there. If bank/lender is unwilling to finance it at a much higher valuation, the landlord or the borrower has 2 options, either pay off the debt, or prop up whatever difference to make it to 30% downpayment or 70% LTV (Loan To Value). This was one of the reasons why some sellers were willing to take huge cuts on their price because they either make up the difference, or risk losing their entire portfolio.
Realistically, 2009 was kind of a once in generation event. So, I don't think the market now anywhere in Canada is quite there. But the concept doesn't change.
And why I thought it was a good time to start writing this? Because now it's an awesome time to be starting to do your research. You need to start checking on new listings, be it for lease or for sale on a daily basis. So much so that if I ask you what's the going price in whatever area that you dedicate yourself into, you can tell me without thinking twice. Only this way, when something comes onto the market, you know if it's a good deal or not.
Let me put it this way... if I ask you about the listings I posted before and they were asking for 4m, was it a good deal? It's now at 3.3m, is it a good deal now? Tomorrow it drops to 2.8m, is it a good deal then?
Without knowing the market, you don't know what a good deal is. I've had deal of lifetime that I didn't get because I didn't know the particular market well enough. And by the time I looked at all the data, they have already had an accepted offer.
In short, know what cap rate is and the market you want to be in. This way, when a deal comes along, you can pick it up before anyone else.
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