building in SW ontario- does this deal make sense?
Looking to buy land for $279,000

I got quotes for building that range from $175-200/sq for a 7624sq, 8unit apt.

So the total cost of building (at $200/sq) would be 1,803,000

rent would be about $1250/unit, so $10,000/month. 

I calculated my monthly expenses as $2,762

Bringing it to a cap rate of 4.49%. A used property would go for 7% but are older and don't come by that often. I could also probably get the land for a little cheaper and the building cost should be lower.

Also, I calculated property tax at a rate of 1.2% and insurance rate at 0.4%. This is in SW Ontario, for anyone that has their own experiences with this.

I feel like that is way too low- almost Toronto returns, while this is a much smaller community. Am I doing something wrong with my calculations?

I have attached a screenshot of the calcuaticalculationsons. Love any feedback at all!

&amp;#x200B;

[https://docdro.id/xqFfPR4](https://docdro.id/xqFfPR4)
[{"id": "gh9df92", "text": "Overall, your calculations make sense, but you\u2019re making some unlikely assumptions. \nFirst, I would put in a market vacancy rate. You\u2019re going to have months where units are vacant, there\u2019s no way around that. Further, you\u2019ll have to pay leasing commissions or marketing expenses for vacant units. \nIs $1250 the going rate for new construction? I\u2019m surprised that isn\u2019t higher. \nAre you including utilities and landscaping/snow removal in repairs and maintenance? Even though tenants pay their own utilities, you\u2019ll still have common area electricity and water to pay as well grounds keeping and shoveling. \nLastly, cost approach isn\u2019t the best way to value a property. Just like a car depreciates as soon as it rolls off the lot, a building can accrue substantial depreciation as soon as it\u2019s delivered. Just because it cost $1.8M to build doesn\u2019t mean it\u2019s worth that. Use cap rates from comps to determine what the real value would be. \nI know Canada\u2019s RE prices are high but this seems unreasonable unless new construction for 8 unit buildings trade at 4% caps which seems unrealistic", "replies": [], "depth": 1}, {"id": "gh9ebj6", "text": "Another way to look at it quickly is calculating your YOC. NOI/Cost = 4.82%. Ideally you want your Yield on Cost to be higher than your Cap Rate (the wider the spread the better). With that being said and the other comment about not baking in vacancy factor etc (making your NOI lower thus lowering your YOC even further) this deal is pretty thin and doesn\u2019t really make sense at face value.", "replies": [], "depth": 1}, {"id": "gh9ertl", "text": "Your vacancy shouldn\u2019t be 0% for starters, and  if this is any place other than the GTA it should probably be minimum 5%-8%. This will further lower your returns. And, if anything, construction costs will be higher than you estimate. Land - who cares if you can get if for any cheaper, it\u2019s 10%-15% of your costs, you\u2019re probably better paying a bit more to ensure a good location, and saving a few thousand barely changes your overall costs. \n\nThe returns are tough to rationalize and that\u2019s why it takes deep pockets and a very long-term strategy to consider. \n\nThis is one of the fundamental \u201cissues\u201d that leads to housing shortages, when market rent doesn\u2019t justify the risk/reward to build new supply.", "replies": [], "depth": 1}, {"id": "gh9jbnq", "text": "I can\u2019t speak to the land cost, but your construction costs seem good given the scale of the building.  The problem is that the rent at approx. $1.60/sf/month is just not strong enough to support new construction.   That number really needs to be above $2.00/sf for a ground up build.\n\nAs other have pointed out you need a vacancy allowance (particularly as you have no leasing costs in your numbers) and I would also recommend a capital reserve or the yield will fall off a cliff in about 5 years (you will need to replace systems and repair units as tenants roll).   These will drop your yield to 4% or less.   \n\nDevelopers will build for yields this low, but those are typically passive investments.   As you have no management fee in your numbers, this is an active investment and unlikely to be worth the effort/risk.   Adding a management company would push the operating margin over 35%+ (compared to the 27% you underwrote) which kills the yield.   \n\nUnless rents are growing significantly and you can add 200 bps to the yield in the next 2-3 years, this will be hard to exit, and even if you could it\u2019s a heavy lift for marginal gains.", "replies": [], "depth": 1}, {"id": "ghatpko", "text": "What is the zoning of the land? \n\nIn general build to rent works in Canada only if you have other advantages such as you are your own GC, and you get 0% financing from CMHC.  \n\nYou'd be better off building to sell in my opinion, though you still need an advantage. Developers paying full market price for everything don't make money.", "replies": [], "depth": 1}]