Toronto, Canada ... Commercial 6-Plex Purchase Advice
(Throwaway account for privacy etc. reasons)

Hello All,

Thank you for stopping by.

I am looking to make my first commercial investment in the form of a 6-plex in Toronto. For anyone remotely familiar with the area, the prices are insane, the Cap rates are low, and Cash Flow, if breaking even, is a boon.

I know my real estate agent for about 4 years, he helped us buy our primary residence, and has gone out of his way to help us since then about questions, property advice, trends, showing us things that he knew we were not going to buy, started giving us advice a few years ago and started pointing us towards commercial real estate when we were looking at buying one more townhouse to have one more tenant....that sort of thing. Of course, he was probably also thinking that we will go to him when we decide to buy, and even then he is giving up some of his commission to get us a good deal. 

Great, so we find a property, fully renovated, fully tenanted with new tenants (so market rate rents) for about 2.5million.

The issue is this....this property, while a 6plex, is legally listed with the city as a duplex (I had a lawyer pull the MCAP report). The seller is saying that it is grandfathered as a 6plex?? I don't know what that means, or even if it means anything.

My mortgage broker and my lawyer both say that this COULD cause problems when I look to sell, or when I refinance....also if the city finds out, they could ask for permits and evict 4 tenants...etc.

Now all units are separately accessible, they all have proper washrooms and kitchens each (no shared living spaces....not a student housing setup)

My real estate agent says that this is fairly common as we see a lot of "non confirming' 5plex or 6plex or whatever, and yes, I see them in listings as well)

It is not really a FOMO, but it seems like a good deal, and I am getting 4-5% NOI, and breaking even with the debt service (I also have the option for a 40 year amortization, which will help with cash flow)

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What do you think I should do....proceed or walk away? I am leaning towards proceeding, but I would appreciate an objective and detached point of view...

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Thank you very much
[{"id": "i0xryuo", "text": "It will make some things harder, for example:\n\n1. Can't do any permitted reno's or updates\n2. Disgruntled tenants can rat you out if they know\n3. Always scared the neighbours might report you\n4. Hard to rezone or redevelop because you have to report the existing tenants and floorplans\n5. Fewer lenders \n6. Insurance nightmare if there is a serious loss -fire/flood\n\n\nPersonally if it were me I'd buy 3 SFH with suites.  You get more land, same # of suites, similar price, easier to underwrite, and easier to convert/legalize if discovered", "replies": [], "depth": 1}, {"id": "i0xxavb", "text": "Normally I'd recommend not using a broker that sells houses to sell you an investment property.\n\nLeaving that aside, you should talk directly with the city to clarify if this property is legally non-conforming (*grandfathering*, as a term has a very ugly history). Do not take any consultant/lawyer at face value.\n\n Typically that means you can continue to use it as is until such time as you substantially renovate or the property ceases in its existing use. So if you keep the building functioning as a 6-plex it *should* continue to be non-conforming indefinitely. \n\nI personally would not be affraid of having a legally non-conforming building if you believe you can continue to utiilize the building. There's risk involved sure, but there always is.", "replies": [{"id": "i0y05mb", "text": "You said call the city to confirm whether it is legally non-confirming or not. How would I do that? What would I say to make sure the current owner does not get into trouble ? \n\nI have written an email to the lawyer who did the title search and asked him the very same thing as well, but I thought to ask here as well.\n\nI agree with your first point that keep residential and commercial separate; however, mine was one of the last residential purchases he did, he has been in the commercial game ever since...he himself has bought and sold commercial multi plexes and mixed use properties (for himself) a few times...so I think that part is ok. I do appreciate that advice though.\n\nA previous post states that there might be insurance issues...do you have any idea about that?\n\n&amp;#x200B;\n\nThanks very much.", "replies": [{"id": "i10wwvr", "text": "Typically you get ahold of the zoning department. Often times you just call the city and they make a ticket for the correct department to call you back. But I'm not in Toronto.\n\nInsurance shouldn't be an issue per se,  but you never really know until you try and get insured. Go talk to a broker or two.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i0ybua3", "text": "Just another note here if you need an appraisal to secure financing for this deal.\n\nAn appraiser can only value based on the legal use, so it will be valued as a duplex and not a 6-plex. So the appraisal may not stack up to the numbers you are paying", "replies": [{"id": "i0ygr3b", "text": "You are quite correct,  of course. I have been fortunate in that regard that I have 2 lenders who are willing to finance it at my price...not sure how...but these are A lenders....so fingers crossed.", "replies": [], "depth": 2}, {"id": "i10woqn", "text": " That's not accurate. An appraiser will value the existing income and note that it is legally non-conforming.", "replies": [{"id": "i11rebq", "text": "Firstly goes back to whether it\u2019s a legal or illegal non-conforming use (grandfathered in argument) but if it is illegal\u2026\n\nAccording to the AIC Professional Excellence Bulletin on Zoning and Land Use controls.  \u201cAn illegal use should be valued in accordance with the definition of highest and best use employed in the report, which typically refers to (or assumes) a legally permissible use.  The only basis for valuation under the existing illegal use would be where a variance or change to the bylaw could reasonably be expected to be secured.\u201d", "replies": [{"id": "i11vvc6", "text": "You hold an overly rosy assumption about the appraisal profession.\n\nRegardless, it's almost certainly a legally non-conforming use.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i0yn1mu", "text": "Sounds too sketch.", "replies": [], "depth": 1}, {"id": "i0z9bob", "text": "Maybe go to the building department and ask if you can pull all of the permits on file / site plan (or maybe you can do it online).  If they are not permitted as a 6plex then they may have done unpermitted work to get there.  \n\nSometimes just calling the building department they can be helpful to answer your questions about what's ok and what isn't.\n\nJust try to remain vague enough to not rat out your seller.", "replies": [{"id": "i0zcbz6", "text": "Was definitely planning on doing something like this,  but trying to figure out how I can ask without giving away the address of the building.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i0zdq7c", "text": "Just for my piece of mind....is it just me, but I seem to remember quite a few listings with the phrase \"legally non confirming\" in mls?", "replies": [], "depth": 1}]