Frank O'Brien, Western Investor, July 11, 2017
The average price for a detached house in Metro Vancouver is now $1.54 million and the average condo apartment is selling for $524,600, according to Landcor Data Corp. You need a large down payment – starting at $100,000 – to make even condo rental payments work at covering your costs, which must include a property manager.
But there is a quieter, proven route to riches in residential real estate that involves investors pooling nominal funds and then sharing in the cash flow and appreciation on a managed property that they may never even have to step into.
These are often structured as limited partnerships (LPs) and, in the past few years, have generated substantial returns of up to 20 per cent or more.
The concept of a residential LP is that investors put money into a development where a management team has already done the leg work in acquiring the zoning, development permits, construction contracts and exit strategies. Depending on how it is structured, investors can receive a share of rental income and a share of the profits at exit (usually in less than five years.) In many cases, investors also have the option to purchase one of the housing units at a discount.
We present the following such projects as examples only. Western Investor is not recommending them, though they are in parts of British Columbia that have the potential for sterling real estate performance.
The first is a condominium project planned for downtown Squamish, which has been posting some of the strongest home price increases recently.
Here’s the deal from Performing Equity Development (Squamish) Ltd.:
The land has already been purchased and a contractor hired to build a 48-unit condominium project with 36 one- and two-bedroom units, 12 penthouse units and two to three ground-floor retail units.
The offering to investors is to put down a minimum of $25,000 in limited-partnership units. The promoters are aiming to raise $4 million with the offering and say they have already raised in excess of $3 million. “We have people putting up $300,000,” we were told.
The play is for a 22-month investment and projected returns are 50 per cent. Which means that, on pro forma, if you put up $50,000, you get back your investment plus $25,000 within the 22-month window.
The benchmark price of a Squamish condo in May was $402,000, which was up 21.7 per cent from a year ago.
Western Canadian Properties Group (WCPG), which has been active with residential LPs from northern B.C. to Phoenix, Arizona, is offering a limited partnership in the Victoria capital region, one of the hottest housing markets in Canada.
The partnership is for the purchase of a 78-unit apartment building in Langford, about eight miles west of Victoria. WCPG is looking to raise $4 million, and, according to the company, much of that has already been achieved. Minimum investment is $25,000.
Estimated cost to purchase the land and complete the building is $22.1 million, including legal costs and capital-raising fees.
WCPG has set up the investment with the option of three exit strategies.
The first is to complete the building within 18 months and then sell the entire development. It estimates a sale price of just over $25 million, resulting in an annualized 20 per cent return to LP investors.
The second exit option is to complete the building and sell the 78 units as individual condominiums for an estimated $26.4 million within 24 month.This projected annualized return is 24 per cent.
The third exit scenario is to complete the building and hold it as a longer-term rental property. Estimated rental income is $120,100 per month. This option is for a four-year hold for an annualized return projected at 20 per cent.
Under any option, limited partners would receive 80 per cent of the profit share and, in lieu of fees, WCPG would receive the remaining 20 per cent profit share.
This is a quick LP land play, with the plan to develop higher-density housing on an “undervalued” RM4 (multi-family) zoned 3.14-acre site in the uptown area of Kelowna. The land would have its valued increased by subdividing it into three to four multi-family townhouse parcels with a total of approximately 140 housing units.
General partner Performing Equity Development (Kelowna) Inc. plans to sell the property in less than 12 months, selling the lots to small developers at around $51,000 per unit.
The general partner owns the land already. It is seeking $1.9 million from investors, with a minimum buy-in of $25,000. The company is projecting a return of approximately 35 per cent within 12 months.
Kelowna’s average townhouse price is $360,700, up 16 per cent from a year ago, Landcor said.