NEWBIE about to make an Offer

[KathrynFallis]

I have been a REIN member for 1.5 years and have done nothing but attend meetings and have not taken any action until the ACRE weekend inspired me (I have 1 rental property at present prior to joining REIN). I have found a house that I would like to make an offer on (I have a realtor who is a REIN member and an investor herself) but FEAR freaks me out – especially during these times.



The property is in an area of Surrey called Cedar Hills, an older established neighbourhood which I believe is a sleeping giant as it is close, but far enough away, to the new downtown Surrey centre which is going through renewal.



The property only comes in at 7% not the 8-10% on the Cash Flow Zone but we will property manage this ourselves. After expenses (mortgage, property tax, house insurance, utilities) I will be left with $300-$400 cash flow that we will save for any upcoming future expenses.



The house is extremely clean, 5 bedrooms, with some updates and there is at most $2,000 to put into it to have it ready for rental. I have done my research with expected rents in the area both on the net and I have gone to view competitive properties for rent. The house also has city and mountain views and the suite is above ground.



I feel it is a great deal. MY FEAR is: Although I know vacancy rates are low in Surrey and this property rocks on the Goldmine Scorecard - but what happens if the economy really spirals down, people start losing their jobs left right and centre and no one can afford to rent my home? For those of you who have been doing this through the ups and downs….do you have any words of wisdom so I can move forward in what appears to be a good solid investment.

 

[invst4profit]

What percentage are you using for expenses. Repairs, legal, advertising eviction, vacancy, etc.
Is this to be a "utilities included` or metered for tenants.
Have you accounted for increased interest rates in the future.

Do you have actual numbers?

 

[KathrynFallis]

My actual numbers are:

Purchase Price: $400,000 Rental Income $2,100 on low end - realistically should get $2,400

Down Payment $80,000 (LOC Interest only) 20 pct - $233.00 per month
Mortgage $320,000, 4.00 locked in for 5 years - $1,410.00 per month
Vacancy: $46.00 per month
Property Taxes: $233.00 per month
House Insurance: $60.00 per month

TOTAL EXPENSES: $1,926
TOTAL INCOME: $2,400

We will property manage on our own.

This I know is at a low interest rate of 4.00 for 5 years. If rates doubled by the end of this term, I would hope for higher rents.

 

[invst4profit]

In my opinion the rental income is far too low for a $400,000 dollar investment. I would be expecting $4000/month rental income (not realistic on a single family home) as a minimum but even at that I would not buy. A single family is risky at best, having all your eggs in one basket, but at that price I would be looking for a multiplex.
Unfortunately a vacancy of a few months is going to sink you.

With a income of $2100/ month your calculations are leaving out far too many expenses involved in running a rental business to allow you a positive cash flow.
I would expect you will, over the long term, possibly have at negative cash flow of $600/ month.

This is potentially a very bad deal that I personally would not consider.

 

[KathrynFallis]

Yes, but the market in the Lower Mainland is quite different. Very difficult to find opportunities much better than this and I am not interested in buying out of province....I believe when the market increases I will do best in Surrey even though my cash flow may not be as great as other provinces.

 

[REINteam]

Hi Kathryn,

Some will be extremely conservative, others not nearly enough. However, the one thing to think about with this property is "who is your tenant base". $2100-$2400/month for a single unit may or may not be sustainable - this is something you`ll need to do your homework on. The best case scenario for this type of property, and most likely, is 2 families in it, or extended family...otherwise most individuals won`t/can`t spend that much on rent. This might work better as a college rental where you can rent by the room, but much more difficult as a standard rental. Approach this with caution, as mentioned above, a few months of vacancy can hurt big time with these numbers.

You`ll need to figure out what kind of demand a place like this has in your area of interest and why will tenants pay over $2K to rent it - big yard, shop, etc. If this is a standard house with no further upside you will be negative for sure...and leveraged. We never recommend buying for future appreciation and carrying such a large mortgage, interest payments, repairs, etc can quickly eat any appreciation, along with taxes. Move forward very conservatively, map out the worst case scenario and see if that is something you can handle.

You may have better luck with cash flow and marketability with something smaller - condo, townhome , or for that kind of money a duplex. Make sure the numbers work and think long term.

Regards,

Ray Reuter
Real Estate Investment Network

 

[TIMWEMBLEY]

Congrats on getting out their and looking for deals to proceed on but this one is definately an negative cashflow property. I have it losing $341.00 a month based on your numbers. I realize BC is tougher to find cashflow than Ab but you probably will need to look for a suited unit. They require much more management but since your trying to get in 0 down (using a HELOC that you need to service) single family`s wont cashflow.
Best of Luck

 

[KathrynFallis]

This is a 5 bedroom home. 3 bedrooms upstairs, 1550 sq.ft. it has vaulted ceilings, views of the City and mountains, an above ground 2 bedroom suite that has large beautiful windows and views. This property is very close to the new centre of Surrey which is going through renewal. 4 minute drive from a large University as well and a few minutes drive to the Bridge connecting to New Westminster / Vancouver.

I have been calling other landlords in the area and feel that if I market this property and cater to students in the basement I could most likely pull in $2,800 per month but I wanted to base my numbers on the bottom end $2,100 - $2,400 just in case.

Perhaps I am too emotional about the property?

 

[housingrental]

Hi Kathryn,

A few thoughts:
invst4profit has the right idea - this is way way too low rent to purchase price
your expenses are too low
your time is valuable - include pm expenses even if self managing or your distorting the real value of the assest
if you can`t find a better deal than this anywhere in a location your willing to buy in then don`t buy
if you can consistently get $2800 per month re your recent post than that`s much better but not good... a marginal deal...
Something I`d look into at $2800/month only if:
a) You can consistently rent it out for this much 12 months a year, year after year, and collect the rent 100% of the time
b) You can add value to this through some modification - can you throw 10k in and get rent up to $3400 maybe ? etc..

 

[Thomas Beyer]

QUOTE (KathrynFallis @ Apr 6 2009, 02:24 PM) My actual numbers are:

Purchase Price: $400,000 Rental Income $2,100 on low end - realistically should get $2,400

Down Payment $80,000 (LOC Interest only) 20 pct - $233.00 per month
Mortgage $320,000, 4.00 locked in for 5 years - $1,410.00 per month
Vacancy: $46.00 per month
Property Taxes: $233.00 per month
House Insurance: $60.00 per month

TOTAL EXPENSES: $1,926
TOTAL INCOME: $2,400

We will property manage on our own.

This I know is at a low interest rate of 4.00 for 5 years. If rates doubled by the end of this term, I would hope for higher rents.

expenses: property management: 10%
R&M: $1000/year

thus: no meaningful cash-flow !

rent is too low for a $400,000 house !!

or, in other words: $400,000 is too expensive a home !!

 

[lyndsy]

"This is a 5 bedroom home. 3 bedrooms upstairs, 1550 sq.ft. it has vaulted ceilings, views of the City and mountains, an above ground 2 bedroom suite that has large beautiful windows and views."

Kathryn, just reading that quote above really indicates to me that you are emotional about this property. What about seeking something out IN Surrey where the renewal is taking place? Something that you could buy for around $300,000 and put some sweat equity in. It`s great to have views of the city and vaulted ceilings but for a rental property that really is incidental.....

 

[invst4profit]

QUOTE (Kathryn Wallis @ Apr 6 2009, 06:44 PM) Yes, but the market in the Lower Mainland is quite different. Very difficult to find opportunities much better than this and I am not interested in buying out of province....I believe when the market increases I will do best in Surrey even though my cash flow may not be as great as other provinces.



Keep in mind that you are talking about investing a great deal of money and entering into a business with a considerable amount of stress at times.
If the numbers in a area do not work then they do not work. Consider other types of rentals, look elsewhere but do not let your eagerness to move forward cloud your reasoning it could be costly.
A much better deal is around the corner.

Good Luck

 

[Thomas Beyer]

QUOTE (invst4profit @ Apr 7 2009, 08:08 AM) Keep in mind that you are talking about investing a great deal of money and entering into a business with a considerable amount of stress at times. ...If the numbers in a area do not work then they do not work. Consider other types of rentals, look elsewhere but do not let your eagerness to move forward cloud your reasoning it could be costly.
A much better deal is around the corner.
indeed .. real estate is like the bus .. there is another one in 20 minutes (or during rush hour right now, every 10 minutes !!)

 

[KathrynFallis]

Thank you everyone......It is frustrating though. I have been spending hours looking. I really do want to buy in Surrey as I live here and it is destined to be No. 1 so why not.......the reason I moved away from looking at townhouses is that I have a townhouse that I rent in Surrey and I have had it for 10 years. Last year, the Strata implemented a new by-law which was passed at the AGM, to no longer allow rentals. Once my tenants move out, I have a year to sell and cannot rent it out to any one else. I am not the original owner so am not grandfathered. I have been talking to realtors and apparently a lot of townhomes are moving in this direction.

I will continue to look.

 

[Thomas Beyer]

QUOTE (KathrynFallis @ Apr 7 2009, 08:41 AM) Thank you everyone......It is frustrating though. I have been spending hours looking. I really do want to buy in Surrey as I live here and it is destined to be No. 1 so why not..........
yes, stick with Surrey as it is #1 in REIN and you live there ..

but research: only hours ??

weeks .. months please !!!!

 

[vandriani]

Why just Surrey? Take a look down the valley more and you may find deals at lower prices. Any town in the top 10 are good so don`t limit yourself to just No.1.

 

[GORDandJULIE]

Kathryn,
Congrats on taking action but keep one important thing in mind with single family investment properties, vacancy for 3 months can potentially wipe you out. My quick analysis has you losing about $260/month. It took me along time to stop getting emotional about some places. The numbers have to tell the story not the building no matter where it is. Think about multi family properties in other locations. More incomes to smooth out the rough times.

Gord

 

[Thomas Beyer]

QUOTE (vandriani @ Apr 7 2009, 03:57 PM) Why just Surrey? Take a look down the valley more and you may find deals at lower prices. Any town in the top 10 are good so don`t limit yourself to just No.1.
she lives there ! a HUGE HUGE advantage !

Plus cash is likely limited to less than 100 properties .. maybe less than 2 even ..

STAY IN SURREY .. but do more research !!

 

[vandriani]

QUOTE (thomasbeyer2000 @ Apr 7 2009, 06:45 PM) she lives there ! a HUGE HUGE advantage !

Plus cash is likely limited to less than 100 properties .. maybe less than 2 even ..

STAY IN SURREY .. but do more research !!

Fair enough, but Langley, Abbotsford, Pitt Meadows, Mission are only 15-30 minutes away from Surrey and may provide better cashflow. I`m not speaking out of experience but just from word of mouth. She could also change the property type, which may have been already mentioned.

 

[REINteam]

Hi Kathryn,

As part of your homework...how long has this place been on the market? How motivated are the sellers? And have you made an offer?

Let`s remember that this is simply the asking price, nothing is set in stone and you don`t have to pay asking price. Figure out just how motivated they are and also figure out what purchase price works for you...and offer that. Emotion is dictating your judgment at this point, so sit back, work out the numbers and figure out what would work as a price point - if that is $360 then offer $350 and work from there. Make sure the NUMBERS work for you and if at the end of the day they won`t budge...then walk.

Regards,

Ray Reuter
Real Estate Investment Network