Who Should Not Be Buying a Small Apartment Building in Ontario?

We’ve recently discussed the compelling reasons why investing in small multi-family buildings, especially if you have experience with one to four unit properties, can be a smart move. But today, let’s look at the other side of the coin. Who shouldn’t be buying a small apartment building in Ontario?

There are definitely individuals for whom this type of investment might not be the right fit. Here are some key reasons why you might want to reconsider:

You’re Not Prepared for the Upfront Hurdles:

The process of acquiring a small apartment building involves significant upfront paperwork and due diligence. This includes navigating financing hoops, particularly when seeking a mortgage with CMHC, and undertaking inspections, appraisals, building condition reports, Phase One and Phase Two environmental assessments. If you’re not ready for this initial heavy lifting, this investment might not be for you.

You’re Uncomfortable with Unit Turnover Strategies:

A key aspect of maximizing the value of an apartment building is the ability to increase income. Strategies like “cash for keys” to encourage unit turnover for renovations and higher rents are often necessary. If you lack the confidence or ability to implement such strategies, you might struggle to optimize your investment. Successful apartment building ownership often requires a proactive approach to managing vacancies and increasing revenue.

You Don’t Understand Expense Reduction:

Boosting the net operating income (NOI) of a building isn’t just about increasing revenue; it’s also about effectively managing and reducing expenses. If you’re unfamiliar with the various ways to cut costs, you might miss out on opportunities to significantly increase the value of your property. Decreasing expenses has a direct and positive impact on your NOI, just like increasing income.

You Expect Immediate Cash Flow:

If your primary goal is to generate substantial cash flow from day one, a small apartment building might not meet your expectations. It often takes 18 to 24 months to stabilize such an asset. Even after stabilization, cash flow can fluctuate, with some months potentially showing negative figures. The real financial power of apartment buildings often lies in the ability to refinance the property every three to five years, rather than consistent immediate cash flow.

Your Partners Won’t Contribute When Needed:

If you’re entering into a partnership, it’s crucial that all partners understand the financial demands of owning an apartment building. There will be times when capital calls may be necessary for renovations, cash-for-keys initiatives, or repairs, potentially exceeding the building’s current cash flow. If your partners are unwilling or unable to contribute additional funds when required, it can severely hinder the project’s success and your ability to refinance in the future. A disengaged or non-contributing partner can be a major obstacle.

These Are Just A Couple Of Reasons

While small apartment buildings in Ontario can be a rewarding investment, they aren’t for everyone. If any of the above points resonate with your current situation or mindset, it might be wise to explore other investment avenues or partnering with another investor.

What are your thoughts? Let me know in the comments below!