Thread by @StephenPunwasi

People always say the vacant home issue is a myth, because "everyone would rather collect rent!"

Not true. Central banks & governments distorted markets so much, it's worse to have tenants.

Here's what investment firms think. You'll be outraged in a few tweets.

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2/ Capital is so cheap & plentiful, appreciation ripped higher. Countries like 🇨🇦 & the 🇺🇸 have access to capital cheaper than the rate of inflation.

Now you might not have access to that capital, but hedgefunds and institutions do. Heck, it's sometimes from your pension & bank

3/ That's important for understanding there's no rush for these companies. But why not collect rent in the meantime?

To understand this you need to understand how rental real estate is valued. There's two popular ways:
- the income approach
- gross rent multiplier

Quick intro

4/ Valuing commercial real estate by the income approach:

Net operating income (NOI): *stable* rent to be collected less expenses

Cap rate: generally the percent of rent valued in the market at that time.

(NOI) / (cap rate) = value

5/ If you collect $100k/year in NOI and other buildings are selling with 2% cap rates, your value:

$100k/0.02 = $5 million building.

Pretty easy so far, right? Hey, look at you. You're almost a real estate investment genius.

6/ The gross rent multiplier:

Gross rent (GR): rent collected before deducting expenses, unlike NOI.

Rent multiplier (RM): the multiple buildings are selling for in the hood.

(GR) * (RM) = Value

This is dry, but it's about to kick you in the gut in a couple tweets.

7/ So let's say a building sold that was collecting $200k gross rent and sold for a valuation of $1m. The rent multiplier is 5.

Now you find a building with $100k in gross rent down the street.

($100k) * 5 = $500k value building.

8/ the part most people miss is valuation isn't based on the rent you collect, but the *market value* that can be collected.

Your 70-year-old landlord probably knows you a little, and isn't trying to kick you out. Probably renting to you for 50% of market value.

9/ now the hedgefund with an office on Bay St, managing money from Hong Kong and apartments in Halifax? They have no idea who you are, you're just an input in a spread sheet.

They're also just getting more capital and are forced to allocate and buy buildings or lose it.

10/ Current landlord might be collecting $100k/year NOI, when the market of all units would be $200k/year. The problem is you get a building full of tenants.

Often these tenants are tricky to move, especially if they're middle or upper class. So obvs they buy working class ones

11/ Remember, it's market rent you CAN COLLECT. The old landlord might think turnover rate is low, so they'll accept a discount.

An investment firm thinks: What are all the loopholes so we can replace the tenants? They hire lawyers and scrap with them.

12/ Working class people don't have many resources & get booted out often without the proper reason.

One firm in Toronto went to immigrants that didn't speak english & promised them a bigger apartment for the same price if they terminated their lease. That apt never came.

13/ More often it's renovation. They make it uncomfortable with perpetual renovation & people move.

Some buildings only have 20% or so turn over rate, but if you REALLY want you can have almost all leave.

There are quite a few examples of this across Canada.

14/ Now the problem is you can't do that every year, so they keep them vacant. If property is rising 20-30% per year because of gov stimulus, you don't want new tenants that are locked into 2-3% rent increases every year. So now let's look at the valuation.

15/ Let's run two scenarios on a building over 5 years. Both gets new tenants producing $200k NOI w/ 2% yield.

Tenanted building has 2% rent hikes making NOI $216.5k in year 5.

Your investment:
- value: ($216.5k) / 0.02 = $10.8m
- 5 years of NOI: $1.04m

Value is $11.84m.

16/ But let's say it's vacant. Market rent that can be collected rises with the market with full realization, and rents are rising 10% y/y

Year 5 possible NOI is $292.8k

- 5 years of NOI collected: 0.
- value: ($292.8k) / 0.02 = $14.64m

You made $2.78m more doing nothing.

17/

the kicker is:
- you're helping to increase rents (there's no vacancies!)
- your NOI would be higher because you didn't have to deal with anything but security.

No one in their right mind would collect rent unless they had to focus on cashflow positive operations.

18/ But that's the beauty of the market since 2008 — rates are so low no one needs cashflow, they borrow against the asset or people seeking higher returns give the cash.

At 6% interest, it's hard to do. At 2% interest it's a walk in the park... filled with tent cities.

19/ That's before the gov programs to subsidize the renovations & REITs tax advantages.

It's really quite amazing. Either we elect the biggest predators or the dumbest people.

Incentives are stacked towards people like me explaining this to investors instead of gov.

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Before someone says I’m anti-investment, it should be pretty obvious I understand capital markets and real estate because I’m pro-investment.

I’m just pro-HEALTHY investment. We pretended it was the best economy ever post-2008, while helicoptering money like it was collapsed.

We complain about low inflation so rates can’t rise, not realizing inflation is low because people divert funds to non-productive asset debt servicing.

Of course inflation is low, the prime demographic of spender is 20-40 year olds & they’re spending all their money on shelter.

Also tagging commercial real estate genius @JShamess for a fact check, since someone will say I’m “anti-RE”

Yes, I’m anti-real estate. Just like Godzilla. Obvs.

Here’s an actual photo of me from 2017, when the mortgage lobby said I was going to cause a recession.

"there's no vacancies!"

No idea if this company is doing the same thing (@Martine_August would know better than me) but it wouldn't surprise me.

Low rates mean capital costs are so low there's no rush, which is why it leads to these social distortions.

https://twitter.com/StephenPunwasi/status/1555167961840844803?s=20&t=73xhGIRo-_Uq8XiBjB501g