Investment properties: condo or corner store?

With real estate prices sinking, it might be time to snap up an investment property. In Vancouver, the burst bubble is yielding some bargains. But as local real-estate guru Ozzie Jurock points out, capitalization rates-net operating income divided by market value-are still very low. You'll get better immediate return in Edmonton or Saint John, where the average home costs less than $600,000. But if it's capital appreciation you're after, the Vancouver area remains a good bet. Say you have a $5-million budget-should you buy residential or commercial? Avtar Bains, of Colliers International, says the two categories are tough to compare because they are such different asset classes. Let's try, anyway.

FAMILY VALUES

Your $5 million will buy you an apartment building in or around the city of Vancouver. Colliers analyst Joelle Wendt notes that multifamily properties typically carry less cash-flow risk than commercial retail spaces. The fact that Metro Vancouver has a rental vacancy rate south of 1% doesn't hurt, either. There is a trade-off, though: Income yield from multifamily is generally lower.

The future is anybody's guess, but one way of comparing is to find two recent sales and see how each property appreciated during the past few years. In March, 2004, a 69-suite apartment building went for $4.8 million. When it changed hands again in January, 2008, it sold for $7.5 million, a 56% increase in value, or 12% on an annual basis.

COMMERCIAL APPEAL

On the commercial end, you can find Vancouver-area retail properties in the $5-million range. Jurock says he might look for a small shopping centre with strong anchor tenants who can weather any downturn-a 7-Eleven and a liquor store, for example. At 4.16% as of December, according to Colliers, the Metro Vancouver vacancy rate for food-anchored shopping centres has almost doubled from 2007.

In June, 2002, a 32,600-square-foot, one-storey North Vancouver strip mall sold for $6.3 million. In April, 2008, new owners acquired it for $14.9 million-a 135% increase in asset value, 16% annualized.

IT'S YOUR CALL

The strip mall may have won in this exercise, but commercial retail isn't necessarily a better investment than multifamily. Because it's often lower-risk, residential could be a prudent choice in a tough economy. And whatever you purchase, it's how you buy, manage and divest yourself from the property, says Bains.

If you go the commercial route, Jurock says quality tenants are more important than capitalization rates. As for residential, he suggests haggling for 20 or 30 units in a new condo development whose builder can't find buyers. "I'd probably just leave the money in the bank and make lots of offers and see what happens. In fact, that's what I'm doing."

THE BOTTOM LINE Vancouver multifamily residential property is a more recession-proof investment than commercial retail. The return will be lower, but many smaller tenants and an ultra-low vacancy rate can mean less cash-flow volatility and higher risk-adjusted returns.

(prepared by Nick Rockel/Globe & Mail)