Buying a Triplex with below market rents?

[RandyDalton]

Hi All,

I am looking at a deal on a Triplex. Owner occupied on main floor is willing to stay with far below market rents so we will be purchasing conditional on her vacating. She will stay at 650/mth and market rent for a 2 bedroom in this area is around 800/mth.

Problem is two other units are being rented by an elderly couple. They live on the top floor and their son lives on the second floor. Both units are about $100 below market rents. Should I buy or should I run?

If I buy, what options do I have? Can I purchase conditional on renegotiating rents (tenants are good and couple have lived their for 9 years)? Note we are talking about Ontario. Should I purchase based on vacant occupancy?

Purchase does cashflow about 100/mth if I buy with existing tenants and rates and only source new tenants to replace the owner occupied. However if I can get the other two units to be paying market rents than I am looking at a positive cashflow of about 300/mth. I must say I am also concerned that these tenants will never leave and I will be left with an impossible place to sell with rents that will remain far below market rents.

Has anyone had experience with this before? All your comments are much appreciated!

Regards...Randy Dalton

 

[invst4profit]

Because it is Ontario I would not buy this property with the existing tenants. You are probably right they will never leave and you will lose money. You can not legally renegotiate rents in Ontario.

You have a few of options:

1) Make a very low offer to compensate for the low rent. There would be no negotiating only one offer.
I would determine the purchase price based on subtracting $300 (cash flow) from 50% of the present monthly rent to determining your maximum amount of mortgage payment @ 5% on 100% financing.

2) As a condition of purchase the existing landlord must vacate and evict all tenants for the purpose of sale. This is not strictly legal but is commonly done and, as the existing LL will be doing the eviction, it does not reflect on you.

3) Purchase as is and notify tenants to vacate due to renovations.
The existing tenants will have the right to return when renos are completed (at the old rent) but hopefully they will not. Unfortunately you will lose income.

4) Move a relative into the unit, where the old couple lives, for 6 months to a year and hopefully the son will move to stay with his parents.

I personally would make two offers giving the seller a choice between #1 and #2.
Chances are #1 will be rejected and some other newbie will snap up this property at full price but
unless I got everything I wanted on this deal I would walk.
.

 

[Jeffrey2144]

QUOTE Purchase does cashflow about 100/mth if I buy with existing tenants and rates and only source new tenants to replace the owner occupied. However if I can get the other two units to be paying market rents than I am looking at a positive cashflow of about 300/mth.

Hi Randy,

As a fellow triplex owner I would not be satisfied with $300/month (assuming the purchase price is in the $250K range) and certainly not satisfied with $100 per month. The reason being is that triplex`s (and other multi-units) typically have higher maintenance costs and foreseen expenses. Issues with excess garbage, tenants complaining about other tenants, snow removal and lawn maintenance, shared utilities (furnace & hot water tanks wear out faster), fire code requirements, additional property management requirements, risk associated with a "non-conforming" triplex, etc., etc.

All these issues are 100% manageable but in my opinion deserve a higher return than $300/mnth. and that`s assuming you have accounted for 100% of the vacancy and maintenance costs going forward. There`s always something and a healthy cash flow will help keep you in the game. If not, the costs and headaches will eat you up.

Headaches... what headaches??? Get this... just the other week one of my tenants calls me (I do my own property management) to ask that I call the other tenant who lives in the front unit to get her to move her car because she was blocking the driveway. This is happening while he is in the driveway honking his horn and she won`t come out of the house. She finally came out after he sent his 8-year old son to the door to ask her to move it. Can you believe that!!!!

No joke... I got this call while I was at the Toronto zoo with my 3-year old daughter watching the Mandrill exhibit (a type of baboon) and couldn`t help but remark at their amazing level of intelligence. I`ll just say that "humans" didn`t appear too smart at that moment in time and I could no longer tell whether the "primate" was behind the cage or talking to me on the phone.

Just something to consider... that`s all.

 

[Nir]

QUOTE (jvarcoe @ Jun 8 2009, 07:51 PM)
"I could no longer tell whether the "primate" was behind the cage or talking to me on the phone"




Hilarious!

 

[RandyDalton]

QUOTE (invst4profit @ Jun 8 2009, 10:03 AM)
3) Purchase as is and notify tenants to vacate due to renovations.

The existing tenants will have the right to return when renos are completed (at the old rent) but hopefully they will not. Unfortunately you will lose income.






Thank you for laying things out for me. We decided to go with option 3 as my Realtor is telling me that after renos are complete the old tenants have first dibs on the property however it is at current market rates. Do others have any experience on this issue?



Regards...Randy D.

R&B Properties

 

[RandyDalton]

QUOTE (jvarcoe @ Jun 8 2009, 09:51 PM)
Hi Randy,



As a fellow triplex owner I would not be satisfied with $300/month (assuming the purchase price is in the $250K range) and certainly not satisfied with $100 per month. The reason being is that triplex's (and other multi-units) typically have higher maintenance costs and foreseen expenses. Issues with excess garbage, tenants complaining about other tenants, snow removal and lawn maintenance, shared utilities (furnace & hot water tanks wear out faster), fire code requirements, additional property management requirements, risk associated with a "non-conforming" triplex, etc., etc.



All these issues are 100% manageable but in my opinion deserve a higher return than $300/mnth. and that's assuming you have accounted for 100% of the vacancy and maintenance costs going forward. There's always something and a healthy cash flow will help keep you in the game. If not, the costs and headaches will eat you up.



Headaches... what headaches??? Get this... just the other week one of my tenants calls me (I do my own property management) to ask that I call the other tenant who lives in the front unit to get her to move her car because she was blocking the driveway. This is happening while he is in the driveway honking his horn and she won't come out of the house. She finally came out after he sent his 8-year old son to the door to ask her to move it. Can you believe that!!!!



No joke... I got this call while I was at the Toronto zoo with my 3-year old daughter watching the Mandrill exhibit (a type of baboon) and couldn't help but remark at their amazing level of intelligence. I'll just say that "humans" didn't appear too smart at that moment in time and I could no longer tell whether the "primate" was behind the cage or talking to me on the phone.

Just something to consider... that's all.




Hi Jeff,



I appreciate your insight.



Any thoughts on what cashflow should be expected? This is a question I have been struggling with for sometime now. Please note Vacancy Allowance at 5.4%, Property Management at 8%, and Repair and Maintenance at 8% as well as heat, water, insurance, mortgage, and LOC interest are all built into the equation when I say it cashflows at $300/mth.



Regards...Randy D.

 

[invst4profit]

[quote name=`Randy Dalton` date=`Jun 9 2009, 08:38 AM` post=`59506`]Thank you for laying things out for me. We decided to go with option 3 as my Realtor is telling me that after renos are complete the old tenants have first dibs on the property however it is at current market rates. Do others have any experience on this issue?

Your agent is WRONG. Never ever believe anything a agent says. In Ontario they have the right to return at the previous rent. Check the RTA!!!!!!

Section 53. (3)

In addition in order to evict a tenant the work must be sufficient to require a building permit and you must ask the tenant before they move to exercise there "right of first refusal".

Care to share the actual numbers you are working with?

 

[Jeffrey2144]

QUOTE Any thoughts on what cashflow should be expected? This is a question I have been struggling with for sometime now. Please note Vacancy Allowance at 5.4%, Property Management at 8%, and Repair and Maintenance at 8% as well as heat, water, insurance, mortgage, and LOC interest are all built into the equation when I say it cashflows at $300/mth.

To answer your question you need to compare other property types (i.e. single family homes) in your area and figure out what cash flow you can get from those "lower maintenance, lower hassle" type investments.

I happen to know you focus in Hamilton so let`s do the math...

Single family condo homes in select neighbourhoods of Hamilton will generate anywhere from $100-$400 per month (on average) with greatly reduced risk of major expenses as the condo corp. will cover things like the roof, windows, fencing, driveway, external sewage, etc. You will also attract a better tenant profile who will (on average) take better care of your property and stay there longer.

These single-family condo investments typically cost $150,000 plus $200-$250/month condo fees. With a 20% down payment + $5,000 closing costs ($35K total) your cash-on-cash return is approx. 8.5% (Cash-on-cash = annual cash flow / amount invested).

Based on these educated assumptions I would use $250 or 8.5% as the "base level" cash flow. From there you need to determine what type of risk premium you are willing to accept above and beyond the "low maintenance" $250 per month or 8.5% annually. For a triplex you might want $600-$700 per month cash flow (or 13-15% cash-on-cash return -- based on $250K purchase price, 20% down payment, $5K closing costs). For a student rental perhaps $700-$900 per month or 15-20% cash-on-cash.

At the end of the day the goal is buy & HOLD real estate. You just want to make sure you are buying something you can afford (mentally & financially) to hold over the long term. For me, these numbers are attainable and offer a reasonable risk vs. reward profile to make them worth my time.

 

[invst4profit]

Based on these educated assumptions I would use $250 or 8.5% as the "base level" cash flow. From there you need to determine what type of risk premium you are willing to accept above and beyond the "low maintenance" $250 per month or 8.5% annually. For a triplex you might want $600-$700 per month cash flow (or 13-15% cash-on-cash return -- based on $250K purchase price, 20% down payment, $5K closing costs). For a student rental perhaps $700-$900 per month or 15-20% cash-on-cash.

In order to net $700 a month on a property priced at $255,000 ($5000 closing) your monthly rent would need to be in the range of $3100. Based on a 30 year at 4%.
Is that do able on a property in that price range in your area.

 

[RandyDalton]

QUOTE (jvarcoe @ Jun 10 2009, 10:32 AM)
To answer your question you need to compare other property types (i.e. single family homes) in your area and figure out what cash flow you can get from those "lower maintenance, lower hassle" type investments.



I happen to know you focus in Hamilton so let's do the math...



Single family condo homes in select neighbourhoods of Hamilton will generate anywhere from $100-$400 per month (on average) with greatly reduced risk of major expenses as the condo corp. will cover things like the roof, windows, fencing, driveway, external sewage, etc. You will also attract a better tenant profile who will (on average) take better care of your property and stay there longer.



These single-family condo investments typically cost $150,000 plus $200-$250/month condo fees. With a 20% down payment + $5,000 closing costs ($35K total) your cash-on-cash return is approx. 8.5% (Cash-on-cash = annual cash flow / amount invested).



Based on these educated assumptions I would use $250 or 8.5% as the "base level" cash flow. From there you need to determine what type of risk premium you are willing to accept above and beyond the "low maintenance" $250 per month or 8.5% annually. For a triplex you might want $600-$700 per month cash flow (or 13-15% cash-on-cash return -- based on $250K purchase price, 20% down payment, $5K closing costs). For a student rental perhaps $700-$900 per month or 15-20% cash-on-cash.



At the end of the day the goal is buy & HOLD real estate. You just want to make sure you are buying something you can afford (mentally & financially) to hold over the long term. For me, these numbers are attainable and offer a reasonable risk vs. reward profile to make them worth my time.




Thanks Jeff...a light just went on for me given your explanation.



I am going to create another post asking for a review of the numbers and brutal honesty.



Regards...Randy D.

 

[Jeffrey2144]

QUOTE In order to net $700 a month on a property priced at $255,000 ($5000 closing) your monthly rent would need to be in the range of $3100. Based on a 30 year at 4%.
Is that do able on a property in that price range in your area.

Hi Greg,

I would say this is not easy to find everyday of the week but it is certainly doable. I ran some numbers through REMA and I figure you`d need $2,900 per month in rent (assuming your paying the utilities) using a 35-year amortization to net $700 in cash flow.

Here is a link to the REMA analysis: REMA Triplex Example

I have a triplex that net`s over $1,000 every month which I purchased last year for exactly $250,000. My rents are just over $3,000 per month, I pay utilities but I also have a separate garage and some ad space that I utilize to increase cash flow. My mortgage is also a 40-year at prime -0.6 so that all helps to create great cash flow.

I should also mention that I would not expect one to find a "legally conforming" triplex at the $250K price range. It all comes back to that risk vs. reward thing I mentioned.

 

[Jeffrey2144]

QUOTE Thanks Jeff...a light just went on for me given your explanation.

Glad to hear that Randy. I`ve been reading the forums for a while so it`s nice to be able to write something and give back some advice where I can.

 

[RandyDalton]

QUOTE (jvarcoe @ Jun 10 2009, 11:44 PM)
Hi Greg,



I would say this is not easy to find everyday of the week but it is certainly doable. I ran some numbers through REMA and I figure you'd need $2,900 per month in rent (assuming your paying the utilities) using a 35-year amortization to net $700 in cash flow.



Here is a link to the REMA analysis: REMA Triplex Example




Hi Jeff,



I checked out your example. Wondering why you pulled R&M and PM out of your projected cash flow analysis or was that a typo?



Also everything I have looked at has Triplex Main Floor unit renting between $800 and $1,000. Where should I be looking in Hamilton to get rents of $1,250?



Regards...Randy D.

 

[invst4profit]

I have a triplex that net`s over $1,000 every month which I purchased last year for exactly $250,000. My rents are just over $3,000 per month, I pay utilities but I also have a separate garage and some ad space that I utilize to increase cash flow. My mortgage is also a 40-year at prime -0.6 so that all helps to create great cash flow.


Good numbers for now but based on your info my calculations only show $500/ month positive cash flow,which is still good, based on expenses at 50% (you show no repair costs???). Considering you pay utilities expenses will definitely be in the 50% range long term.

In addition, since your cash in the deal is earning about $200 of your estimated $1000/month cash flow that must be discounted from the actual profit from the triplex itself.

Numbers still looking pretty good based on my standards.



e

 

[Jeffrey2144]

QUOTE Wondering why you pulled R&M and PM out of your projected cash flow analysis or was that a typo?
Yes it was a typo. I just focused on current expenses and never made the necessary entries into the projected expense portion of REMA.

QUOTE Also everything I have looked at has Triplex Main Floor unit renting between $800 and $1,000. Where should I be looking in Hamilton to get rents of $1,250?

It would depend on how your triplex is structured. For instance, 1 unit in my triplex is a freshly painted 3-bedroom unit on 2-floors with big living room and kitchen. It also offers exclusive access to a good sized front yard PLUS I pay utilities. So for this unit I can easily get $1,250 per month in rent. The property is also on Hamilton Mountain so that makes a big difference too.

 

[Jeffrey2144]

QUOTE Good numbers for now but based on your info my calculations only show $500/ month positive cash flow,which is still good, based on expenses at 50% (you show no repair costs???). Considering you pay utilities expenses will definitely be in the 50% range long term.

On the REMA analysis repair costs are listed under Maintenance (ongoing).

It sounds like your using some quick analysis "rules of thumb" to draw your conclusions. I love those kind of tips and tricks so I am curious on how you arrive at your numbers? What expenses do you include in your "50% rule" and how do you arrive at $500 positive cash flow?

QUOTE In addition, since your cash in the deal is earning about $200 of your estimated $1000/month cash flow that must be discounted from the actual profit from the triplex itself.

Your right -- carrying costs on $25K is approx. $200 per month.

 

[RandyDalton]

QUOTE (jvarcoe @ Jun 12 2009, 10:13 AM) Yes it was a typo. I just focused on current expenses and never made the necessary entries into the projected expense portion of REMA.



It would depend on how your triplex is structured. For instance, 1 unit in my triplex is a freshly painted 3-bedroom unit on 2-floors with big living room and kitchen. It also offers exclusive access to a good sized front yard PLUS I pay utilities. So for this unit I can easily get $1,250 per month in rent. The property is also on Hamilton Mountain so that makes a big difference too.


Hi Jeff,


Are there a lot up on top and are they legal? I must say I haven`t been looking in that area for multiplexes. By two floors do you mean basement and 1st floor?

Regards...Randy D.

 

[invst4profit]

QUOTE (varcoe @ Jun 12 2009, 10:46 AM) On the REMA analysis repair costs are listed under Maintenance (ongoing).
It sounds like your using some quick analysis "rules of thumb" to draw your conclusions. I love those kind of tips and tricks so I am curious on how you arrive at your numbers? What expenses do you include in your "50% rule" and how do you arrive at $500 positive cash flow?

http://www.biggerpockets.com/forums/

If you go to this site and search "50% rule" you will find numerous discussions on this quick analysis system.

Expenses are every possible cost you can imagine except debt repayment.
Legal, accounting, advertising, vacancies, taxes, insurance, utilities paid by owner, regular maintenance, management, capitol expenses etc, etc.

To arrive at the $500. Divide the monthly income by 2 (50% rule) subtract your debt repayment based not on actual but on 100% financing (including principal) and what you have left is the most likely, long term, positive cash flow you can expect to receive from a property. Some base the interest rate not on today`s rate but on a more likely average rate over time (5%-7%)
Keeping in mind this is long term projection into the future not last month or last year.

Basing your debt repayment on 100% allows you a modest return on your down payment thus operating income from the actual property and income from your cash investment.
The monthly principal payment is not counted as positive cash flow as you will only realise it at time of sale and there is no guarantee of what you will receive at sale. Therefor not profit toward monthly or annual positive cash flow.

My approach is if, on a monthly bases, you cannot buy groceries or pay bills with it it is not positive cash flow.

Keep in mind this being hypothetical math anyone can take any numbers and come up with any answer that meets there expectations (business plan).

 

[housingrental]

Greg / invst4profit - Please send me an email - adam at hoffaco dot com