With interest rates and faith in the stock market at an all-time low, investors have been flocking to real estate investments as fast as they can. Most decent real estate investments are snapped up as soon as they hit the market – and some don’t even make it that far. For the really good deals, often times the listing agent will present the opportunity to his most qualified clients, by-passing the general market completely. That’s not to say there are no ‘good deals’ left, however they are few and far between and typically out of reach for the average investor. Additionally, acceptable yields on investment have come down considerably. At one time, investors wouldn’t even consider a deal unless it had a capitalization rate of 10% or above. Today, we’re seeing investments snapped up with capitalization rates of only 6% or lower.
Take, for example, a recent sale we completed. The building was a 16,000 sq. ft. industrial multiple in Oakville built in 1972. The present owner had occupied the building for the past 30 years, and had spent very little towards its upkeep. A review by our construction consultant, Tim Allsop of Sherwood CPM, revealed an investment of $300,000 to $400,000 would be needed just to bring the building up to modern standards.
We completed an investment analysis, considering the cost of the property plus the upgrade costs and time required to lease the vacant units, and came up with a yield of approximately 5.5%. Now, considering the risk profile of this property, a 5.5% yield is extremely thin and nowhere near the former benchmark of 10%. Despite the low yield, we received two competing offers only days after the property was put on the market. The building ended up selling at $20,000 over asking price.
As confidence in the stock market continues to be shaky and Canadian interest rates stay low, real estate will continue to become an increasingly attractive investment option. With interest in real estate investments rising, investors need to be willing to accept lower yields; however, those considering selling may be pleasantly surprised with the market that awaits their low-yielding property.