There are many ways to create an investment portfolio while working on a job with a stable paycheque – you know exactly how much you can put aside for the down payment and how long it will take you to get there. However, if you are running your own business and do not have a predictable income every day of the week, it is hard to create an investment plan, let alone plan a retirement.

This strategy won’t be for everyone, it will be more fitting to someone running his own business and looking to create an investment strategy to comfortably retire from said business in 5 to 10 years. The idea is simple – we are using the power of the business (credit history, stream of revenue, business plan etc) to invest in real estate to produce income. Your business will create an investment portfolio for you! A word of caution, however, this strategy will work best for a business that has been a couple of years in operation, showing a positive Net Income on a financial statement and not afraid to scale up and relocate.


Condo Life

This is, probably, one of the most complex yet most rewarding strategies to achieve comfortable retirement through commercial real estate – turning a commercial property into a condominium. As always, subject to due diligence with regards to provincial policies and planning departments among many. Your lender must be onboard with your plans as well.

In general terms, with the help of your trusty commercial broker, you will source an underperforming commercial property (industrial or retail plaza, small office building etc) with high vacancy, low rents and/or something else that can be fixed. This property should be zoned for your business’ operation, as your business could occupy the property for the duration of the process (sometimes up to 2 years). Given the financial/physical state of the property, we should be aiming to buy it at 50-70 cents on the dollar (50-70% of the market price). If the property requires repairs, their estimate should not increase the property cost above 80% of the market value. The area of the property should be anywhere from 10,000 to 20,000 SF to keep it manageable for the first project. The property is then broken down into smaller units, and registered as a condominium.

I will keep the description as general as possible, as this approach works for retail, office, mix-use or industrial properties. Prices and fees will be an average for the Golden Horseshoe region.

Step 1. Assembling your team and finances

As with any commercial project, the professionalism of your team will be the key factor for success of your project. To better prepare yourself for success, you need to know all the potential costs associated with the condo conversion and planning. Have a list of professionals ready: You will need lawyers, inspectors, planners, architects, engineers, inspectors and real estate brokers. It is a prudent move to talk to each member of your future team prior to starting the project, find out their previous experience in similar projects.

To participate in such a complex commercial project you will need a working capital. There aren’t many deals with $0 down (I won’t say there aren’t any) and likely that your business won’t be occupying more than 50% of the property, thus, you need a good working capital. Today, there are plenty of commercial mortgages and business loans tailored for the small and medium businesses. You can check CSFBL and BDC websites as an example. Another possibility is tapping in your other property’s equity through a HELOC or refinance. Joint Venture partnership can also be a great alternative, especially if every partner can bring more than money to the table.


Step 2. Property search and Due Diligence

Because properties like that rarely come to the open market, your real estate broker should concentrate the search on the exclusive/pocket listings. One of the tactics would be to approach the plaza/building owners in a predefined area that aren’t doing very well.

There should be several dominating criteria in your search, with zoning as one of the prevailing factors. The property should have the most general zoning possible, allowing many different uses. This will help in the long run, when your condominium units will be up for sale or for lease, attracting a wider array of clients. At the same time, you would be better to stay within the same use ( i.e. industrial building to industrial condo). An attempt to convert an existing commercial building to a residential condominium would require a zoning amendment at very least and is restricted in many municipalities.

Another important issue is financing and not just for obvious reasons. The process of condominium conversion creates several titles to the property where there was only one. Your bank should have a procedure in place to provide you with some type of a “blanket mortgage” for the time that you possess most of the titles for the new condominium units.

Let’s say you were able to secure a property on a contract, negotiated a Vendor Take Back mortgage for a couple of years, and agreed on a 60 days due diligence period (anything less would be pressing on time). Your due diligence will consist of environmental inspection, building condition assessment, contractor’s estimates, pre-consultation meeting with the municipality and many other items. This is the stage at which the feasibility of the project is determined: if it doesn’t make sense – don’t get emotionally attached and hope that it will work out somehow – if numbers don’t work, nothing you can and should do, except going to the next property.


Step 3. Condo documents preparation

Upon closing, while your property goes through the renovation process, potentially, creating new units from the existing, your team of planners, architects and lawyers should be working in full force to prepare the condominium documents, deal with any planning issues that may arise ( i.e. parking allowance, garbage pickup, driveway widenings etc). This is the phase when the Condominium declaration is created and might be updated several times by the municipality’s recommendations. It is hard to predict the exact time required for the conversion to take place, anywhere from 9 months to 2 years is seen as an industry norm lately.


Step 4. Sales & Leases

At some point in time during the condominium documents preparation, you can start the sales of your newly built units. In my example, there are only 4 units to sell and 4 to lease, as the owner is keeping two units for his own use. It is a common practice to keep the majority of the units in possession to avoid the turnover meeting and the election of the board of directors, especially, in a newly created condominium investment property.

On a side note, when choosing a tenant for a property with your business on it, it’s a great idea to choose or attract a business that would have a complement your business. As an example, if your business does dog grooming, it would be great to have a neighbour with a pet food store.


Step 5. Repeat

Even though it is a complex process, a condominium conversion requires only one more repetition (at our numbers) to reach and exceed a $90,000 income mark in less than 5 years. Of course, this still requires months of searches and due diligence with many different properties before finding the right one. However, I doubt that someone would stop at 2 conversions and retire, as Commercial Real Estate is an interesting, challenging and very rewarding game that encourages out-of-the-box thinking.


As I have mentioned in the beginning - this strategy won’t be for everyone, however, if it would help an owner of a smaller business to start by buying a unit for his business with a little extra space to rent out and help with the mortgage, this would be a beginning of an investment that will grow in a long run. There isn’t a one-size-fit-all strategy when talking about an investment profile dependent on a risk tolerance and personal interest of the investor. The advice of a professional real estate investment broker can be invaluable to create a winning strategy!




For the first property we will consider a 10,000SF property, bought at 70% of the market price - $140 per square foot. Because we will be using this property partially for our own use, we should be able to get financing at 70% LTV, at around 4.2% amortized over 25 years.


Upon the sale of 4 units from the first conversion, we would be paying off the VTB, the working Cash Investment and the remainder will go against the mortgage amount. This way we generate enough money to add another property into the portfolio.


The second property we will be buying will be a little bigger – 15,000SF, and we should have just enough cash to close the transaction.


Following a similar pattern and paying off the VTB and the Working capital first, this time we’re selling off 6 units out of 15 to cover the expenses. This way, in several years work, we have created a comfortable net income and have returned all invested capital.


Note:

How to source your working capital:

  • HELOC from other property

  • Business loan for property purchase (if your business is occupying the property)

  • Vendor Take-back mortgage, should be interest only for the duration of the project

  • Joint-Venture

  • Private Lender

Author: Kirill Perelyguine kp@invsty.com


Commercial Real Estate INVSTY | Real Estate Services in Ontario


  • Kirill Perelyguine

Starting in Land Investment


“Buy land, they’re not making it anymore” - Mark Twain

Land investment is one of most lucrative ways of investing in real estate. Saying that, however, I must give a word of warning that this area requires an investor to approach land project carefully. A lot of due diligence must be done prior to securing a land project. A land investor needs to know far more than simply his exit strategy, potential growth rate in the area etc. Professional team is required to approach almost any land investment project.

Most popular ways of investing in land are Land Banking, Lot Severance, Single Home Construction and Subdivision Development.




Land Banking is usually associated with a Long-term investment with a main goal of waiting for the property to increase in price due to municipal changes or area development. The biggest challenges are the lack of available financing, high sensitivity to the investor’s knowledge of the area and underlying economic factors.

Land Severance is a process of creating several land parcels by dividing an existing parcel. It is a complex process, sometimes involving public input. Probability of success depends on neighbouring lot sizes and town’s planning department agenda. If successful, ROI (Return of Investment) of such projects can easily reach 25-30% (ROI = Net Profit / Total Investment * 100%). In some rare cases, the sale of one of the parcels allows investors to cover the initial costs of purchase and severance process.

Single Home Construction is a complex process that can be divided into the pre-construction period and construction. Time and complexity of the pre-construction process depends on the lot, plan and municipality; cost of the process may vary from $50,000 to $200,000+. Cost of construction will vary depending on the complexity of the build, materials selected and the crew. Current costs may vary from $150 to $500+ per SF. If successful, ROI of such projects can easily reach 30-50%

Subdivision Development Project is the most complex, requiring previous experience from at least one of the participants and a team of professionals. Time and complexity of the pre-construction process depends on the land, plan and municipality. In Toronto, the time expectancy of the project from the starting stage to the building permit is in the range of 3 to 5 years, while the soft cost of the process may exceed $1M. Cost of construction will depend on the complexity of the project, builder’s experience and materials selected. Current costs vary from $120 to $350+ per SF. If successful, ROI of such projects can exceed 50%, as higher risk may lead to a higher return.

As a steppingstone into the land development play, the investment into the small lots construction could be the best opportunity. Given the complexity of the process, it is important to start on a smaller scale.

For the purpose of this article we will consider a small, 0.3 Ac land lot purchase in a municipality 2 Hours drive away from Toronto, ON, located within 10 minutes of walking distance to the lake. Three simple exit strategies for this investment property that we will consider: (1)Recreational rental, (2)Residential rental and (3)Build and sell. Usually, the lot’s location and zoning will determine the best use and potential exit strategies. In our case, the zoning will allow for 1 single family home or a cottage and, given the location, the best use would be to build at regular 3-bedroom house that can be used as a recreational rental.

To successfully transition from ideas to blueprints to finished product, beginner investor would require a professional help of an architect, engineer and a construction (project) manager. Sometimes the latter can provide their clients with the “full package” turnkey solution including assistance on the drawing and permit stages as well as construction.

The drawing and permit stage in our case will take around 4 months, with the site preparation. Followed by the pouring of the concrete slab foundation and another 3 months of construction, the full process should take under a year (depending of the complexity, of course). Not to get sidetracked but worth a mention, there are several methods of construction (i.e. modular, panel etc.) that can reduce the construction time (and sometimes the price) significantly.

To be able to calculate the profitability of the project, we need to carefully consider all the costs involved at different stages:

Land Purchase: usually an outright purchase, with a chance of a Vendor Take-Back mortgage (VTB). In our case - $125,000 including closing costs. Where we will finance $62,500 - 50%LTV(Loan-to-Value) at a rate of 4% per year (Cost of financing – $2,500).

Soft cost: drawings, permits, deposits, charges etc. - usually outright payments, not part of the construction mortgage. In our case - $75,000.

Hard cost: construction cost – most of the times can be financed up to 70% LTV. In our case, the construction cost will average at $175 per square foot, and given a 1,500 SF house, the cost will be $262,500, where we will finance $183,750 at a rate of 6% per year (Cost of financing – $11,025).

A simple proforma for this project would look as follows:


Even though the third exit strategy does seem more profitable, any of the strategies are plausible, depending on the long-term goal of the investor.

In conclusion, being somewhat biased as land development is one of my favorite ways of investment, I would like to add, that there are usually many more potential exit strategies that are presented for the purpose of this article, and all pros and cons need to be carefully weighed before making a land buying decision. To summarize – work with an experienced team of professionals and never cut corners on your due diligence! Every case is different and if you need help figuring out a better strategy for you, I will be glad to help.


Bubble 1:

Additional Cost To Keep In Mind:

  1. Building permit fees

  2. Lot levies/ development charges

  3. Septic permit/Sever Hookup fee

  4. Septic Installation/Sewer Hookup

  5. Well/Municipal Water Connection

  6. Electrical connections

  7. Landfill and landscaping

  8. Roads/Driveway

  9. Decks

  10. Professional fees: Architects, Engineers, Lawyers, Surveyors, Planners

  11. Contingency (10-15% of the cost)


To find a good commercial agent for your transaction in Toronto ( or anywhere) You will need to find a specialist with a skill set that corresponds to your task. For someone who works with land development, the knowledge of zoning by-laws and new developments in the area is crucial. Meanwhile, for someone who works with industrial space, the research skills and ability to sift through a complex lease paperwork is necessary. If an agent is specializing in investment properties, the agent should be an investor him/herself to understand the process inside out. Also, the knowledge of Math is particularly important – income projections and pro-formas are crucial when completing a due diligence of the property.Don’t forget to interview your commercial agent prior to signing the contract with them, to see if you can work together and if the skill set matches the task.


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