The Canadian investment landscape flipped from promising to nebulous on a dime last year when the Bank of Canada began its aggressive interest rate-hiking regime. However, that merely prompted savvy investors to focus on the multifamily sector.
That’s because multifamily properties with at least five units may qualify for insured commercial mortgages, which are tied to the bond yield rather than the central bank’s overnight lending rate, says Calgary-based Natasha Phipps, founder of the Phipps Real Estate Group at CIR Realty in Calgary.
“In the commercial space, many investors want to go for the Canada Mortgage and Housing Corporation’s insured commercial mortgage financing because of favorable loan-to-value ratios that go as high as 95%, leaving only 5% equity in the property,” Phipps said. “The bond rate is significantly lower than the overnight lending rate.”
In a bid to help solve Canada’s housing crisis, the federal government created the MLI Select program through CMHC, which uses a point system predicated on affordability, energy efficiency, and accessibility to reward investors with better financing.
Phipps says Calgary in particular is an ideal market for MLI Select because there are a lot of multifamily dwellings in need of redeveloping, making it easier to satisfy the program’s criteria. She suggested there are paths to take advantage of this program. First, are purpose-built buildings that are designed to meet the criteria for energy efficiency and accessibility. Second, for existing properties, multifamily buildings that need a revamp are an opportunity to improve the building’s energy efficiency, and then designating a portion of the units as affordable can get you the points needed to obtain this desired financing structure.
“The program is set up to incentivize investors, developers, REITs, and other groups to provide the type of housing that these cities need to make housing affordable, reduce carbon footprints, and provide more accessible housing in these communities,” she said. “And CMHC is definitely favoring these types of properties.
“You can increase net operating income where the market allows it and in turn, you increase the value of your property.”
Additionally, the property’s amortization could increase to 50 years, stretching out investors’ payments and creating affordability for them, too.
Existing buildings will likely need to rely heavily on the affordability scale and lock these units in as affordable, however, Phipps noted that it would still be quite a high rent yield in Calgary because the city has Canada’s highest average household income.
“Buying a building that needs improvements and doing the work would improve the tenant profile, help you raise the rent while remaining below the affordability meter,” Phipps said. “And once you have completed that, you can access the CMHC-insured mortgage product, refinance, access the equity you have built, and implement a loan that will set you up for the long term.”
Focus On Mission
Phipps says the entire ring around downtown Calgary is replete with multifamily opportunities, but certain pockets like Mission, Mount Royal, and Bankview are all located in the southwest of Calgary, which is where investors will typically find a bright tenant profile. As a result, one-bedrooms in Mission rent for $1,500-1,700 a month and two-bedrooms go for $2,000-2,200, depending on the age of the building, size of the unit, and amenities.
“If you’re looking for higher rent and an A-quality tenant profile, typically the southwest of downtown is really, really popular. A good example is a community called Mission that’s very desirable from a multifamily perspective because there are plenty of older buildings that need attention and a lot of redevelopments actively taking place. Demand for that area is high, so a lot of buildings are being either torn down and new ones going up or they are being renovated and refinanced.”