5 Plex In Ontario - Deal or no Deal?

Brik8 · Feb 12, 2009

I have a new opportunity that I`m interested in, but looking for some seasoned expert advice on this.

A 5 plex has been put up for sale privatly for $480,000

INCOME
Rent $4,375/mth for all units combined tennants pay their own utilities. All is fully rented.

EXPENSE
Utilities $4,420 Annual
Taxes $5,082 Annual
Insurance $1,200 Annual
Repairs & Maintence $2,400 Annual
____________________________________
TOTAL $ 13,102 divided by 12 = $1,092 in total monthly expenses

The mortgage rate on a this I beleive is going to be around 4.5%
The CMHC fiancing with 15% down will be about $19,000 for their fee
Bringing the total spent on building to about $500,000

I will need to use a line of credit to put the 15% down - About $72,000 at prime plus 1

Does this make sense to anyone to look into this further???
Does it sound like a decent deal?

Any advice? What would you offer?

I have been reading the posts for about 2 weeks now every night(3-4 hrs a night) and know there are some good people out there that privide expert advice...

PLEASE HELP

NorthernAlex · Feb 12, 2009

I learned once from invst4profit that the monthly rent should be min. 1% of purchase price, otherwise it is not interesting for him. I just bought a 5plex and am happy to have there 1.35 %.

Location is important. Do you want to keep it long term or do you hope that it will go up in 5 year alot? If it should be a keeper, FMPOV it is not worth it and way to expensive. If it is in a trendy and undervalued location and in 5 years it will be much more worth, perhaps.

But I am, as you are, a motivated reader here, who is just starting..... so just my 0.02$.

Best regards,

Alex.

billf · Feb 12, 2009

Hi,

By my accounting the yearly rent meets the 10% rule, It should carry itself with some cashflow.

Some of the other things to keep in mind are future renovation expenses(how old, can it be insured), legality of the building(does it meet current code), and most importantly the location. Is it in a top 10 REIN town, is there growth, will property value stay stable in this environment and grow in the future.

Best of Luck,

Bill F.

Thomas Beyer · Feb 12, 2009

QUOTE (Brik8 @ Feb 12 2009, 03:35 PM) I have a new opportunity that I`m interested in, but looking for some seasoned expert advice on this.

A 5 plex has been put up for sale privatly for $480,000

INCOME
Rent $4,375/mth for all units combined tennants pay their own utilities. All is fully rented.

EXPENSE
Utilities $4,420 Annual
Taxes $5,082 Annual
Insurance $1,200 Annual
Repairs & Maintence $2,400 Annual
____________________________________
TOTAL $ 13,102 divided by 12 = $1,092 in total monthly expenses

The mortgage rate on a this I beleive is going to be around 4.5%
The CMHC fiancing with 15% down will be about $19,000 for their fee
Bringing the total spent on building to about $500,000

I will need to use a line of credit to put the 15% down - About $72,000 at prime plus 1

Does this make sense to anyone to look into this further???
Does it sound like a decent deal?

Any advice? What would you offer?

I have been reading the posts for about 2 weeks now every night(3-4 hrs a night) and know there are some good people out there that privide expert advice...

PLEASE HELP

Expenses: you`re too low:
a) Your R&M expenses are on the low side. We use $650/suite/year minimum ..
b) You also should budget 10-12% management fee .. so we use about $3300 to $3500/suite/yr in total expenses

To assess true value please assist with the following questions:
Where is it ? Ontario ? BC ? Alberta ? In some provinces rent control will make future rent increases difficult or slow.

What is the state of common / major elements: roof, boiler, hallways, windows ?

What is the state of interior ? ugly ? average ? real nice ?

Age ?

balconies ?

sq ft per unit, roughly ?

views ?

C location ? A+ ?

paved parking stall ? one per ?

2BRs ? 1BRs ? 3BRs ?

condo conversion potential ?

use $3300/suite/year in expenses .. plus 4% vacancy .. then divide the total by 1.3 (or 1.5 if a small town): this will give you the debt coverage a bank would lend. Use 4.5% with CMHC and 6.5% conventional for interest rate to arrive at a maximum loan amount. This may or may not be 85% !

price overall sounds "about right" .. but many variables exist. Some answers to my Qs would shed light on this important question: Is this fair value ?

Brik8 · Feb 12, 2009

QUOTE (thomasbeyer2000 @ Feb 12 2009, 08:26 PM) Expenses: you`re too low:
a) Your R&M expenses are on the low side. We use $650/suite/year minimum ..
b) You also should budget 10-12% management fee .. so we use about $3300 to $3500/suite/yr in total expenses

OK I will need to raise my expenses to about 3600/year
I will manage property myself therefore no management fee.

To assess true value please assist with the following questions:
Where is it ? Ontario ? BC ? Alberta ? In some provinces rent control will make future rent increases difficult or slow.

It is in Ontario, yes I know limited rental increases

What is the state of common / major elements: roof, boiler, hallways, windows ?

All exterior, and roof looks good, overall condition is "B"

What is the state of interior ? ugly ? average ? real nice ? Have not seen interior yet...

Age ? about 30-40 years old

balconies ? NO

sq ft per unit, roughly ? No idea yet

views ? No view...well a view of the street!!!!

C location ? A+ ? Location would be a "B-"

paved parking stall ? one per ? Yes one spot paved per Apt with 3 visitor spots

2BRs ? 1BRs ? 3BRs ? All 2 bedrooms

condo conversion potential ? Don`t think so...

use $3300/suite/year in expenses .. plus 4% vacancy .. then divide the total by 1.3 (or 1.5 if a small town): this will give you the debt coverage a bank would lend. Use 4.5% with CMHC and 6.5% conventional for interest rate to arrive at a maximum loan amount. This may or may not be 85% !

I have checked with mortgage broker here in town and they say this is doable...I hope it is!!!
I don`t understand how I would calculate what you are saying Thomas??? 3300 X 4% vacancy / 1.5 (I`m in a small town)??? Hmm...I`m not getting this

price overall sounds "about right" .. but many variables exist. Some answers to my Qs would shed light on this important question: Is this fair value ?

Nir · Feb 12, 2009

way way too expensive!!!
do you strongly believe considering today`s situation that the property will be worth significantly more in 5 years? If the answer is NO don`t buy it!
WAY TOO EXPENSIVE. Sorry, a terrible buy whoever pays close to 500K for this. just my 2 sentences.

Thomas Beyer · Feb 12, 2009

DCR = debt coverage ratio !

take annual rent minus vacancy (say 4%) i.e. $50,400 in your case

deduct expenses incl. management even if self-managed (i.e. think like a bank, i.e use about $3300 to $3500/suite/yr) .. using $3400 in your case: $17,000 annually

This gives you Net Operating Income (NOI).. $33,400 in your case.

Divide NOI by DCR of 1.3 in big city and 1.5 in small town. Let`s assume they take 1.5 (as you did not say what city size) i.e. $22,267 for maximum annual mortgage payment.

This gives you the annual maximum payment the mortgage can be. Use 4.5% if CMHC or 6.5% if not CMHC insured, using a 25 year amortization. This gives you the maximum loan amount.

Assuming CMHC: about $340,000 with DCR of 1.5 .. about $380,000 with DCR of 1.3

conventional: .. about $315,000 with DCR of 1.3

not quite the 85% LTV envisioned at the asking price .. also with the description you gave 480K sounds too expensive .. maybe around 375K to 400K .. but I do not know the local ON market well enough .. B- location, no balconies, rent control, age ..

invst4profit · Feb 13, 2009

My rule of thumb when initially looking at a building is to assume expenses will be 50% if your income. Especially on an older building.Expenses including such things as insurance, legal, accounting, management, evictions, utilities when vacant, advertising, repairs, snow removal, etc..
I also assume 100% financing so as to provide a return on the money I invest.

In your example with a value of $500,000, and income of $4375/ month my calculations would show this with a negative cash flow of approx. $230/ month.
Not very good considering you should target positive cash flow of $100/ door/ month.

On the surface a poor deal and not worth the investment but since you are in a small town and the economy is bad I would go in with a very low offer.

How long has it been on the market, has he had any offers, are there other properties available, has he dropped his price?

I would offer $300,000 and not go any higher than $350,000. Do not hit $350,000 until at least your third offer. He will want to push you to $400,000 if he is willing to move.
Sit back and wait.

Brik8 · Feb 13, 2009

QUOTE (invst4profit @ Feb 13 2009, 08:53 AM) My rule of thumb when initially looking at a building is to assume expenses will be 50% if your income. Especially on an older building.Expenses including such things as insurance, legal, accounting, management, evictions, utilities when vacant, advertising, repairs, snow removal, etc..
I also assume 100% financing so as to provide a return on the money I invest.

In your example with a value of $500,000, and income of $4375/ month my calculations would show this with a negative cash flow of approx. $230/ month.
Not very good considering you should target positive cash flow of $100/ door/ month.

On the surface a poor deal and not worth the investment but since you are in a small town and the economy is bad I would go in with a very low offer.

How long has it been on the market, has he had any offers, are there other properties available, has he dropped his price?

I would offer $300,000 and not go any higher than $350,000. Do not hit $350,000 until at least your third offer. He will want to push you to $400,000 if he is willing to move.
Sit back and wait.

Invst4profit, could you explain how you got to a negative cash flow of 230/mth???

It is not listed yet, this property is a private sale and heard about it from word to mouth. THere does not appear to be any other properties in my area, but who knows what will come this summer. I was just curious to see what people thought about this...

Interesting to hear that the offer would ave to be as low as 350K...I guess that`s the line in the sand???

NorthernAlex · Feb 13, 2009

Ohhh. I forgot one thing, which is extremely important to me:

Was the fire department there and did they make a fire prevention inspection? I asked for that and it was some sum to be invested to get it done (which they did).

Regarding your question, how the negative CF came:

I think he did this math (round about)

Monthly income - 50% for M&R, Tax, Insurance aso.
$4375 /2 = 2,187.50

100% Financing
$480k, 3.8%, f, 5y, 25y am. = $2,480

2,187.50 - 2480 = $ -292.50

He maybe used a different %rate.

Anyhow, there are many possibilities to make an offer, but I like the different approaches of the different forum members here.

BR,

Alex.

invst4profit · Feb 13, 2009

Sure:

Mortgage: 100% financed = $500,000
@ 4.5% Debt repayment (including return on any cash) = $2521/ month
Expenses @ 50% of income = $2187.50/ month

Income $4375-($2521 + $2187.50) = -$333.50/ month (not $230 as originally posted)

Negative cash flow $333.50/month

Private sale? He sounds greedy. If you make an offer ask for a VTB mortgage. Don`t suggest an interest rate unless he commits to go VTB and then let him suggest a rate first.

Just so you know I am not one of the members on the site that provides expert advice just my opinion!!!!
Take it with a grain of salt.

Thomas Beyer · Feb 13, 2009

QUOTE (invst4profit @ Feb 13 2009, 01:49 PM) Mortgage: 100% financed = $500,000
@ 4.5% Debt repayment (including return on any cash) = $2521/ month
Expenses @ 50% of income = $2187.50/ month

Income $4375-($2521 + $2187.50) = -$333.50/ month (not $230 as originally posted)

Negative cash flow $333.50/month

50% expense sounds a tad high .. also this calculation of cash-flow is NOT the usual definition of cash-flow .. as you would usually not include the "opportunity cost" of cash invested !

QUOTE (invst4profit @ Feb 13 2009, 01:49 PM) Private sale? He sounds greedy. If you make an offer ask for a VTB mortgage. Don`t suggest an interest rate unless he commits to go VTB and then let him suggest a rate first.
any price has to be win/win .. some folks don`t have to sell and stick to their sale price .. offer what you think makes sense to you .. if the seller doesn`t like it .. walk ..

invst4profit · Feb 13, 2009

You are right Thomas they are high and not normal but work for me in doing a very superficial evaluation to determine if I have any interest in a property I know little or nothing about. If it has possibilities of being in the ball park I move forward.

Hitting the 50% rule and basing financing on 100% is difficult to achieve but is a target I always negotiate toward.
Due diligence produces the real numbers and ultimately I expect $100/ door from day one.
Although I have fallen short of that target under very special circumstances where other positive up sides exist.
When giving advice to novices I never want to set targets that cuts there cash flow too thin, placing there investment in jeopardy, when the unexpected comes knocking.

The REIN system works to.

Brik8 · Feb 14, 2009

A big thanks to all that have replied to the post....I appreciate everyone`s insight.

I will see how much the seller is willing to move on the asking price. Now that I see how some of the calculations are done, I will:

[list type=decimal][*]Set my maximum price I`m willing to pay to make the numbers works for me (cash flow)[*]Make an offer that is significantly lowerHopefully get a reasonable counter offer that can start the process of agreeing on a mutually respectable priceDo all this all while trying to stay under the price set in #1[/list type=decimal]Just as an additional question, how many offers/counteroffers do deals usually go though? Whould I do this 2-3 times, or 5-7 times???

GarthChapman · Feb 14, 2009

Brian, I like your take on what has been posted for you, except that your step #4. reads "while trying to stay under the price set in #1". Makes me think it`s not a figure you will be truly commited to. This business eats people who don`t make their decisions coldly by the numbers. The test is, if you find a property that you really like for some reason and you really want to buy it but it doesn`t meet your buying criteria at the best deal the Seller will do, will you walk or will you buy it?

Thomas Beyer · Feb 14, 2009

QUOTE (invst4profit @ Feb 13 2009, 02:15 PM) You are right Thomas they are high and not normal but work for me in doing a very superficial evaluation to determine if I have any interest in a property I know little or nothing about. If it has possibilities of being in the ball park I move forward.

Hitting the 50% rule and basing financing on 100% is difficult to achieve but is a target I always negotiate toward.

ok .. a good coarse initial filter ..

QUOTE (invst4profit @ Feb 13 2009, 02:15 PM) Due diligence produces the real numbers and ultimately I expect $100/ door from day one.
Although I have fallen short of that target under very special circumstances where other positive up sides exist.
When giving advice to novices I never want to set targets that cuts there cash flow too thin, placing there investment in jeopardy, when the unexpected comes knocking.
noted .. but you do not need cash-flow from day one necessarily .. especially if you buy under-managed assets with significant upside in rents (and thus value) ..

if this formula works for you .. great .. but consider a different formula where you buy .. fix it up .. then re-finance a year, 18 months or 24 months in .. pull out all or most of the cash to re-deploy elsewhere .. a likely even more profitable strategy .. (the one we use and have used extensively between 2000 and 2007 ..) .. but yes, more cash intensive upfront ..

That`s why I say:

Cash is King - Cash-Flow is Queen 

invst4profit · Feb 14, 2009

True enough but when starting out, at least in my case, I had no extra money and was forced to have cash flow from day one on my first property.
I had no system and barely survived. Now, 30 years later, I am on the back side and ready to take things easy (ish).
I will retire this year (age 56) and will concentrate on buying to reno and flip.
I will hold my last remaining property (33 site manufactured home community), continue to increase the income and sell in about 10 years.
The park along with my company pension gives me all the money I need so the flipping will be more of a profit making hobby (in theory).

Brik8 · Feb 14, 2009

QUOTE (GarthChapman @ Feb 14 2009, 10:09 AM) Brian, I like your take on what has been posted for you, except that your step #4. reads "while trying to stay under the price set in #1". Makes me think it`s not a figure you will be truly commited to. This business eats people who don`t make their decisions coldly by the numbers. The test is, if you find a property that you really like for some reason and you really want to buy it but it doesn`t meet your buying criteria at the best deal the Seller will do, will you walk or will you buy it?

Garth,

What I should have said was "trying to stay as low as possible under that number". I agree with you 100%. If I set the target price and the seller and I cannot come to terms on that, I WILL WALK. I do realise that the numbers are the true test if the property works for you or not. The numbers do not lie...

There will be many more fish in the sea in the near future I think (and hope)...

bizaro86 · Feb 25, 2009

QUOTE INCOME
Rent $4,375/mth for all units combined tennants pay their own utilities. All is fully rented.

EXPENSE
Utilities $4,420 Annual
Taxes $5,082 Annual
Insurance $1,200 Annual
Repairs & Maintence $2,400 Annual
____________________________________
TOTAL $ 13,102 divided by 12 = $1,092 in total monthly expenses

Now I`m a pretty significant newbie myself, but it looks to me like you`ve included utilities in your monthly expenses, ie taken them off your cashflow. But if your tenants are paying them separately, then you`re not paying them, so why would they come out of your cashflow? Its not like a five-plex would have common areas to heat/light would it?

Michael