Whether you’re aiming to take on a large-scale project or stick with something smaller (but still big to be honest), both strategies can get you to that sought-after fiveplex.
Why aim for a fiveplex? Better commercial residential refinancing terms and smoother scaling potential in the long run!
But how do you choose the right strategy? Today, we’re breaking down the pros and cons to help you figure out your next big move!
The Financial Setup: Big vs. Small
Let’s set the stage with similar capital requirements for both strategies. We’re assuming you can borrow 80% of both the capital and construction costs. Here’s what the breakdown looks like:
Smaller Project: You’ll need a higher down payment but spend less on renovations. Picture a $1.5M property, plus $500K for renos, meaning a total capital investment of $400K.
Bigger Project: Here, you’ll need a lower down payment since the focus is on acquiring the land. Think $1M for the property and $1M for renos, which again works out to $400K in capital.
So financially, you’re starting in the same place—but the paths diverge from here.
Value-Add Lifts & Cap Rates
In both cases, you’re aiming for similar cap rates based on market value. But, the value-add lift differs between the two.
Smaller Project: Expect a lower lift of about $500K, with a range between $400-600K. While it’s a lower amount, it’s also more straightforward and comes with less risk.
Bigger Project: The potential here is for a larger lift, around $1.1M, though the range is wider—from $700K to $1.5M. With this higher reward comes higher risk, and of course, more complexity.
Timing Considerations
Smaller Project: These typically wrap up faster, anywhere from 9 to 15 months. This shorter timeline means you can move on to your next project more quickly.
Bigger Project: These take about double the time—expect around 2 years, though it could stretch from 1 to 3 years depending on how smoothly things go.
What About Returns?
On paper, bigger projects yield better absolute returns and return on capital. However, when you factor in the time, the difference becomes less significant.
Not to mention, the bigger projects come with way more variability. If things go off course—whether prices shift or the timeline extends—you could actually see lower returns than with a smaller project.
Other Considerations
Resale: Larger projects are harder to sell due to the bigger price tags. If you’re going for less than five units, refinancing becomes trickier for bigger projects.
Refinancing: With a fiveplex, you can qualify for commercial mortgages like the CMHC MLI Select, which is why many people target five units.
Capacity: Bigger projects mean you’ll need to cash out double the capital each time, so by year 5, you could be juggling 4 projects at once.
The 7-Year Outcome
At the end of 7 years, either strategy could land you 7 properties.
Smaller Projects
Bigger Projects
Bigger projects will lead to higher valuations per property and better average returns, but they’re riskier, more complex, and require more management. On the flip side, smaller projects are easier to manage and offer more predictable returns, which could make them the better bet for most investors.
If you’ve got experience with large builds and feel confident hitting at least average-case scenarios, bigger projects can offer higher rewards. But for most investors, sticking to simpler, smaller projects makes it easier to reach your goals without the headache.
How We Can Help
Curious about investing in fiveplex projects and want to see our top picks? Let’s connect!
We’re a Toronto-based real estate sales brokerage that specializes in multiplex properties. Whether you’re looking to buy a turnkey rental property, convert an existing space, or even build from scratch, we’ve got the expertise to guide you.
Here’s what it’s like to start as a client with us:
- Initial Consultation: We’ll talk with you to understand your needs and teach you how to invest wisely in Toronto real estate.
- Market Search: We’ll search the market to find the perfect property for you.
- Renovation Support: If the property needs renovations, our trusted contractors are ready to help, and we’ll coach you as you manage the project.
- Leasing and Management: If you need help renting out and managing your property, our leasing and management team is here for you.
Ready to get started? Click on the link below, and let’s start working together!
What Toronto Real Estate Investment Is Right For You?
Check out our complete Toronto real estate investment guide for all the details and real-life examples. If you’re ready to dive in, just book a call with us!
