Big opportunity, no guidance. Advice please?

[ReasonableDoubt]

Hello Folks,

Great website, I've been reading quite a bit through the threads here and I can tell there are many seasoned investors I hope to learn from. I have a situation right now where I realize I have potential to invest in an investment property but lack a mentor that has actually done this. Allow me to outline my current situation:

Current living situation essentially costs nothing so assume my monthly living expenses are minimal.
I own a 275k Condo
170k mortgage ($690 mtg, $220 strata, $150 tax/util /mo)
Currently rented to tenants for $1300 /mo (utilities not included)
This is cash flow positive but barely. The tenants are a dream, and have resided there for 4 years.
I can leverage ~$40,000 in equity from this property through a line of credit
I have approximately $95,000 in cash and securities, though I'd like to use $30,000 max of it toward an investment property. I have other assets totaling ~$35,000 some of which could be sold to free up capital if necessary. I am employed with a salary of ~50k /yr that I can use to help qualify mortgages.

I live in an expensive metro area where single family homes are insanely expensive and make no investment sense as rental properties and thus I'm looking in the Okanagan area of BC. My goal is to invest in properties I can hold long term and see good revenue from.

My most current idea lies in a property I found listed the mid 400s that I think holds value at 400k (20k higher than last assessed value). It is a side by side duplex with a suite in one side. It grosses $39,300 /yr, and nets somewhere around $32,000/yr.

Am I looking at the totally wrong type of property to buy? Should I sell the condo that has such a low return? Am I approaching this all wrong? I'm looking for any and all advice. Thoughts, advice, criticism, etc is all welcome.

Thanks for reading

 

[Thomas Beyer]

If condo is in an appreciating market, then keep it, for now. Condos generally make the poorest of all investments in income producing real estate. TH or 1/2 duplex is better. Duplex is a bad English word. I assume you mean you one 1/2 duplex, or both sides ? Very unclear from the word itself. Plus a suite in one side means it is a tri-plex ? Or what ? Please clarify.

Unclear why you would not buy where you live, and perhaps rent out a basement suite as any gains are tax free ?

Focus on your career too, as $50,000 is not that great a salary and with some skills you can get 40-75% more. Other skills matter (more in my book) such as sales skills, inter-personal skills, being able to handle adversity, sensible risk taking, financial acumen, excellent credit ..

Otherwise the (1/2?)duplex makes sense, although your expenses incl. R&M, property management, utilities, insurance and taxes are likely higher than stated. Each area needs some in-depth research - on paper first then on the ground - as the micro location matters. Impeccably managed, sensibly levered income properties make sense in almost any flat or growth market. There are many in Canada, the US or worldwide.

Also look at townhouses, better than a 1/2 duplex, and usually cheaper.

REITs too make sense as many yield 7-10% these days, paid monthly (albeit with heavy possibly volatility) which is tough to beat with a rental property once you figure in the time you invest and substantially higher risk. That is where I park a lot of our cash until we buy s.th. bigger.

Other related post: http://myreinspace.com/threads/how-to-get-started.4363/

 

[ReasonableDoubt]

No rush anywhere. If condo is in an appreciating market, then keep it, for now. Condos generally make the poorest of all investments in income producing real estate. TH or 1/2 duplex is better. Duplex is a bad English word. I assume you mean you one 1/2 duplex, or both sides ? Very unclear from the word itself. Plus a suite in one side means it is a tri-plex ? Or what ? Please clarify.

Unclear why you would not buy where you live, and perhaps rent out a basement suite as any gains are tax free ?

Focus on your career too, as $50,000 is not that great a salary and with some skills you can get 40-75% more. Other skills matter (more in my book) such as sales skills, inter-personal skills, being able to handle adversity, sensible risk taking, financial acumen, excellent credit ..

Otherwise the (1/2?)duplex makes senese, although your expenses incl. R&M, property manageemnt, utilities, insurance and taxes are likely higher than stated. Each area needs some in-depth reserach - on paper first then on the ground - as the mico location matters. Impeccably managed, sensibly lebvered income properties make sense in almost any flat or growth market. There are many in Canada, the US or worldwide.

Also look at townhouses, better than a 1/2 duplex, and usually cheaper.

REITs too make sense as many yield 7-10% these days, paid monthly (albeit with heavy possibly volatility) which is tough to beat with a rental property once you figure in the time you invest and substantially higher risk. That is where I park a lot of our cash untl we buy s.th. bigger.

Thomas,

Thanks very much for taking the time to reply. Let me clarify some points with you so you could possibly share further thoughts.

I agree the condo is a poor investment, it just recently became worth what I paid for it 7 years ago before the market crashed. Luckily I've had the rental income to float it while the market came back.

The property in question is a full side by side duplex. I would own both sides, one of which is suited. I suppose this would be classified as a triplex as it has three separate units. I would do my own property management (listing it, dealing with issues, small repairs), and contract out for bigger repair work when necessary. Perhaps I can give a better break down of the numbers so you can weigh in on if they are indeed suitable for investment:
$3275 /mo income
Expenses:
Insurance: $165 /mo
Tax: $165 /mo
Utilities: $415 /mo

I'm unsure of how much to allocate for repairs in regards to a ROI calculation.

I agree that my salary is on the low end, but it is very much in line with what's available to my age group (mid 20's). I am actively pursuing higher positions within my employer. This does tie in to another question you had about why I wouldn't buy a home where I live and rent out the basement. The reason being that a single family home in my area is approaching $700k and basement suites rent out for ~1500/mo. Not only can I not afford the 20% downpayment, but the income seems quite low.

I am invested in a REIT paying a 15% dividend through my TFSA which is part of the funds I was hoping to exclude when purchasing this next investment property. I appreciate your ideas to diversify to something less traditional than an actual property though.

Very much look forward to your thoughts.

Thanks

 

[Thomas Beyer]

Read this, too, on how to get started: htp://myreinspace.com/threads/how-to-get-started.4363/

For a house you live in you need only 5%, not 20% downpayment. Worthy a consideration if you intend to live there at least 5 years, and do not mind a basement tenant as a mortgage helper.

Which REIT pays 15% ?

Your ROI needs to assume vacancies, R&M of say $1500/year on average (some years 0 and some years $10,000) and property management of 10%.

 

[Owenb]

Is the duplex you are looking at in Rutland?

 

[ReasonableDoubt]

Is the duplex you are looking at in Rutland?

Not in Rutland, no. But I have looked in that area as well at some single family homes with suites. The income seems not bad. Open to any insight you may have on the area Owen.

 

[ReasonableDoubt]

Read this, too, on how to get started: htp://myreinspace.com/threads/how-to-get-started.4363/

For a house you live in you need only 5%, not 20%. Worthy a consideration if you intend to live there at least 5 years.

Which REIT pays 15% ?

You ROI needs to assume vacancies, R&M of say $1500/year on average (some years 0 and some years $10,000) and property management of 10%.

NYSE:MITT

Ok factoring in all those expenses I'm still seeing a positive cash flow of just over $600 /month.

 

[Matt Crowley]

My most current idea lies in a property I found listed the mid 400s that I think holds value at 400k (20k higher than last assessed value). It is a side by side duplex with a suite in one side. It grosses $39,300 /yr, and nets somewhere around $32,000/yr.

Hi Reasonable Doubt,

I think you may want to revisit your numbers as the above is certainly incorrect. You do not have all of the expenses included in this investment.

The property in question is a full side by side duplex. I would own both sides, one of which is suited. I suppose this would be classified as a triplex as it has three separate units. I would do my own property management (listing it, dealing with issues, small repairs), and contract out for bigger repair work when necessary. Perhaps I can give a better break down of the numbers so you can weigh in on if they are indeed suitable for investment:
$3275 /mo income
Expenses:
Insurance: $165 /mo
Tax: $165 /mo
Utilities: $415 /mo

You are missing some major items in your expenses here: repairs and maintenance, property management, accounting, vacancy, and legal.

I'll make some assumptions: R&M at $700 / unit / year* (*I will discuss more below), property management at 12% (doesn't matter if you do it yourself, it is a real cost), accounting and legal at $50/unit/month. Take off 5% for vacancy.

Rent $3,275
Insurance $165
Tax $165
Utilities $415
R&M $175
Acctg $150
PM $393
Operating income $1,812
Vacancy (5%) $91
= NOI $1,721

If property price is $400,000 then we can solve for the annual yield on the property. Yield = (annual NOI) / (property cost)

Yield = (1721 * 12)/400,000
Yield = 5.2%

This looks like a good property. A big caveat here is to reexamine the tax, insurance, and utilities. Those look low to me. I would suggest pulling the zoning on the suited duplex to ensure it is legal. This property would look a lot different with only 2 income streams instead of 3!

On debt: generally, debt should be ignored in the initial analysis as you survey many different properties for performance. Debt has zero productive capacity. It is a cost that needs to be repaid. First, you need to ensure that the property itself makes money. It can never make more money than the NOI. No amount of debt will ever change that.

I'm unsure of how much to allocate for repairs in regards to a ROI calculation.

R&M (repairs and maintenance) falls in two broad categories: cyclical and non-cyclical. The cyclical expenses are the big ticket costs like a roof or furnace that need to be replaced every "x" years in order to keep the property running. For a typical year, if you were to take revenue - expenses you would expect Net = (NOI*12) = (1721 * 12) = 20,657. Now, if you deduct the cost of replacing the shingles for the building you have to deduct the expense of cyclical expense of $12,000. Now, our net in the year of the cyclical shingles replacement is only $8,657 (20,657-12000). Just a heads up this will not even cover your debt service for the year most likely! Our yield on the property plummets from our expected 5.2% to a weak 2.2%. Terrible.

The way of dealing with this is through the use of cash equity. These big cyclical expenses are treated as a new investment into the property which increases the cash equity invested. So initially, your cash equity invested is equal to your initial down payment, legal closing costs, and property inspection. Approximately $21,700 at 5% down. If you put in $12,000 for a roof in cash then your cash equity invested in the property increases to $33,700. You then calculate your cash on cash equity return on that higher investment.

Non-cyclical R&M are things like appliance repairs, painting, and cleaning. These are expenses just to keep the property running on a monthly basis. These are deducted as monthly expenses in calculating the NOI.

CMHC has a great overview of planning for major maintenance items. It is designed for condo corporations but if you are looking at a leveraged investment of a multi-unit property I think it is worth a review: http://www.cmhc.ca/en/inpr/afhoce/exsoho/exsoho_005.cfm

Hope that helps

 

[SVS]

Hi Reasonable Doubt,

I think you may want to revisit your numbers as the above is certainly incorrect. You do not have all of the expenses included in this investment.



You are missing some major items in your expenses here: repairs and maintenance, property management, accounting, vacancy, and legal.

I'll make some assumptions: R&M at $700 / unit / year* (*I will discuss more below), property management at 12% (doesn't matter if you do it yourself, it is a real cost), accounting and legal at $50/unit/month. Take off 5% for vacancy.

Rent $3,275
Insurance $165
Tax $165
Utilities $415
R&M $175
Acctg $150
PM $393
Operating income $1,812
Vacancy (5%) $91
= NOI $1,721

If property price is $400,000 then we can solve for the annual yield on the property. Yield = (annual NOI) / (property cost)

Yield = (1721 * 12)/400,000
Yield = 5.2%

This looks like a good property. A big caveat here is to reexamine the tax, insurance, and utilities. Those look low to me. I would suggest pulling the zoning on the suited duplex to ensure it is legal. This property would look a lot different with only 2 income streams instead of 3!

On debt: generally, debt should be ignored in the initial analysis as you survey many different properties for performance. Debt has zero productive capacity. It is a cost that needs to be repaid. First, you need to ensure that the property itself makes money. It can never make more money than the NOI. No amount of debt will ever change that.



R&M (repairs and maintenance) falls in two broad categories: cyclical and non-cyclical. The cyclical expenses are the big ticket costs like a roof or furnace that need to be replaced every "x" years in order to keep the property running. For a typical year, if you were to take revenue - expenses you would expect Net = (NOI*12) = (1721 * 12) = 20,657. Now, if you deduct the cost of replacing the shingles for the building you have to deduct the expense of cyclical expense of $12,000. Now, our net in the year of the cyclical shingles replacement is only $8,657 (20,657-12000). Just a heads up this will not even cover your debt service for the year most likely! Our yield on the property plummets from our expected 5.2% to a weak 2.2%. Terrible.

The way of dealing with this is through the use of cash equity. These big cyclical expenses are treated as a new investment into the property which increases the cash equity invested. So initially, your cash equity invested is equal to your initial down payment, legal closing costs, and property inspection. Approximately $21,700 at 5% down. If you put in $12,000 for a roof in cash then your cash equity invested in the property increases to $33,700. You then calculate your cash on cash equity return on that higher investment.

Non-cyclical R&M are things like appliance repairs, painting, and cleaning. These are expenses just to keep the property running on a monthly basis. These are deducted as monthly expenses in calculating the NOI.

CMHC has a great overview of planning for major maintenance items. It is designed for condo corporations but if you are looking at a leveraged investment of a multi-unit property I think it is worth a review: http://www.cmhc.ca/en/inpr/afhoce/exsoho/exsoho_005.cfm

Hope that helps

Great Post! I never considered long term expenses in that light, thanks.

 

[Thomas Beyer]

Great Post! I never considered long term expenses in that light, thanks.

That is why some "expenses" or cash-outlays are expensed and other capitalized, then amortized over 10 - 25 years. Hence the "mythical cash-flow" as cash come in on one side of your jeans but leaves on the other side. As such, a realistic cash-flow plan is required for every asset, depending on condition. Many an asset we own today has had little if any true cash-flow but has produced much wealth / value-upside.

Related post on cash-flow vs. ROI: http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/

 

[ReasonableDoubt]

Thanks for all the great insight Thomas and Sweetzone. Thomas, I noticed you're involved in Western Canada...wondering if you could share what areas are actually working in BC to cashflow? I find it very challenging as a newcomer to find properties that make even close to the quick rule of 10% gross revenue of purchase price. The Okanagan and Vancouver Island are best I've found in my price range of $400k and under.

 

[Thomas Beyer]

Yes 10% is tough to find.

REIN has a top 10 BC town report. Townhouses in the outer areas of MetroVan, V Island or interior cities work better usually, or single family houses with down stairs suites. And less leverage, not 20% down.

Go to ACRE this weekend in Vancouver, then decide.

If it were easy everyone would do it and be an instant millionaire.

Personally, in BC: We are buying mobile home parks in BC for that reason.I also own a 2BR condo in suburban Kelowna that comes close.