Hi Rickson9,

What cap rate do you look for? 

Gary

kirkkimberley

I am going to be asking $375,000 for this income property - with $38,000 per year revenue.  Is it attractive to an investor?

The house is worth $280,000 as you stated. Why would someone pay $375,000 for it ? The rents are not sustainable, and likely not legal either, thus at risk by the city to shut one or two of the suites down if someone complains in the neighborhood.

10% of value for annual rent is excellent, and not so common in major cities in Canada. You find 10%+ multipliers in the US, or weak economic towns with a risk of property value loss. 6-7% gross rent to price is more common in decent Canadian cities, maybe 8% if you dig long and hard. Then deduct expenses and most houses woudl be a 3-4% CAP rate .. maybe 5% if you're lucky.

Careful screening of properties and locations is critical to make money in single family houses for a long term hold, and a low enough mortgage that allows sustainable cash-flow for a long term hold so you can pay the mortgage down or get the value upside .. in time !

garyyeung

 Hi Rickson9,

What cap rate do you look for? 

Hi Gary, I'm looking for a 10% cap rate after 50% of gross revenue is taken away for expenses.

 

kirkkimberley

 Hello Gary,


I am getting $1600 for the basement suite, $1800 for the main level, and $1000 for the upper.

I have been in property management for a while, and am able to yield manage the unit to their full potential.

Thanks,
Kirk

I just went to Kijiji and examined the activiites in Llyod...
The first 3 pages were just people looking to rent...

With so much demand, this sort of explains  why you can separate a house into 3 suites like this.

What the heck is going on in Lloydminster?   Must be oil.


Kir.

 Hello,

Thanks for your reply.  I am thinking the house is worth $375k, based on a 10% down on a mortgage, giving a 100% return on your investment in the first year.

It actually is legal.  It was grandfathered a rental property.  There is a two car driveway in the front, and a two car drive way in the rear.  We have a very good relationship with neighbors, and being that it has been a rental for years, they do not have any problems with it.  We keep it well maintained.

Realize that Lloydminster is an anomaly when it comes to real estate and rentals (because of the lack of doors).  It is a community that is crying out for rental properties.  Apartments are built, and filled before they are finished.  

I managed a 97 unit apartment.  It was just being built in 2010.  At $1200 a unit, I had it 90% filled before the doors opened, and the few left over filled after it was move-in ready.  That company has built 4 Apartments in Lloyd in the last few years, and fills them quickly.  I maintained 100% occupancy while I was the manager, and had a waiting list (just like my rental house).

So, until there are enough apartments and rentals that are vacancy rate dwindles to less than 0, homes like mine will be fine.

On top of this, companies (oil) are bringing in workers by the hundreds, and are paying for their employees rentals/lodging.  Because there are none, they put them up in hotels for $2000 - $5000 per month, per employee....  So my rental amounts look sweet to them!

Kirk

 Oil Oil, Oil.

As I said in another post, oil companies are bringing in employees by the hundreds.  If there are no rentals, they put them up in hotels, to live, for $2000 - $5000 a month.

Not only do we have our unit filled, we have  a waiting list.

Our one bedroom was going to move out, so we went to our list.  We had guys offering us $1500 a month for a one bedroom!  No washer and dryer.

As I said before, we are always looking for investors.  Let me know if you are interested.

Kirk

kirkkimberley

Thanks for your reply.  I am thinking the house is worth $375k, based on a 10% down on a mortgage, giving a 100% return on your investment in the first year.

Banks and appraisers won't see it this way.  They don't care about cap rate or investment return.  They care about comparable sales value.

You will never sell for that simply because no one will be able to get financed at that purchase price.  If it appraises at 280k then an investor will be able to get a mortgage for .8 * 280k =  224k which will require them to come up with $151,000 in cash.  What does this do to your investment return?  You can't buy at 10% down unless you owner occupy.

Since this appears to be an excellent cashflowing property what you should do is JV out your equity (be sure to charge a premium!  you have lots of room!)  and keep it. I think this may be your only option to put big $$ in your pocket because a large part of the investment performance is due to your personal involvement.  What if these cherry O&G contracts go away after you sell?

 Hello,

Thank-you for the information.

Based on my dealings with my bank, and my current assests, my bank lends to me, if I have 10% down.  I was looking for someone in a similar situation, where your assets hold the backing to purchases - and not the house itself.

Can you explain more on the JV idea you mentioned?  Talk about the premium too.  I'm not too proud to admit I don't know anything, so baby steps help!

Thanks,
Kirk

 Cap rates only apply to commercial products like a 4plex.

Residential real estate like SF, TH, Duplexes ect are on market value or replacement value.  Great insight that Greg Habstritt said about comparing residential real estate vs commerical.

Residential real estates is more prone to "emotions" dictating the value of a house.  So for example, a home buyer vs an investor buying same property.  Home buyers usually will typically pay more for a property than a investors. Not saying investors don't over pay also but much less than home buyers who "fall in love" with a property cardinaal sin of a Real Estate investment.

Hence you'll never see "residential' properties in a REIT.  Commericial is "non-emotional" and totally about the numbers. Like a business hence uses cap rate for valuation

To purchase an investment property with only 10% down requires you to owner occupy.  That's the way it works with all major banks.  I think if you dug into the dirty details with your bank you would see the conditions on the loan and you'd learn about their true guidelines.

You aren't a REIN member... so you can't access the private forums regarding joint ventures.  The premise behind the REIN model joint venture is you find an investor with cash and you bring the expertise/property and you split things 50/50.  Typically this means the money partner brings the 20% down payment and you do the work.

If the appraised value of the property is low relative to the income it generates then the 20% that the money partner would have to bring would be smaller.  I would simply charge them more for their 50%.  Whatever premium you can negotiate.  You'd be in at over 100% loan-to-value though so your investment return would be almost entirely cash flow based rather than appreciation based but that's not a bad thing to most money partners.

To get a property performing like this you obviously have some talent and are well networked.  I think before you do anything else you should attend the next edmonton REIN monthly meeting and seriously consider joining.  You will learn all you need to from them and it after doing so you will have a lot more options.  You'd probably end up leaving money on the table if you offloaded this property without doing so.

I agree with Brett.  ....but as well have no idea why you would consider selling a property that cash flows such as this.  

RebeccaBryan

I agree with Brett.  ....but as well have no idea why you would consider selling a property that cash flows such as this.  

I agree.  I am fortunate enough to have one massive cash flow property like this (although completely different situation behind it).  I have one word for it.....MINE! :) 

kirkkimberley

  there has to be something said for a house generating $4200 per month in revenue.

 
1000+1600+1800=$4400
on the other hand it's your property you know better :-)

kirkkimberley

 Do I get to add the value of the asset with the income profit, or is it only worth $280k?

 
no u don't get to :-) pls distinguish between a 'market value' of a product/business/property and the value you give it. The 2 are very different. 

ThomasBeyer

kirkkimberley

If I am buying a company, I want a 100% return on my money in the first year.  

Impressive.

What kind of companies are those ?

If you can consistently do that then real estate may not be for you.

You can do 100% cash-on-cash ONLY in rare circumstances in a (re)development deal with high debt. In a buy-and-hold it is more like 8-15%.

You need to value your time somehow.

cash-on-cash is one figure (green $s), hours spent is another (blue $s.)
 

 
Exactly. RE IS probably for him as significantly less time is spent per $ earned!