Sell or Not?

[conchoss]

Please help me with making an educated decision. Should I sell my property or keep it?

Before joining REIN, I bought my very first property: 444 & 442 Catharine St N in Hamilton (about two years ago).

$320k was my purchase price and currently owe $270k at Manulife's 5 year fixed 2.67 % interest rate
$120k in renovations of which I currently still owe $50k in credit card debt
$520k appraised value
$70k potential profit since 25% of the selling expenses are covered by my employer who's moving me to Ottawa this summer

$1300 monthly mortgage
$1400 monthly expenses include hydro, gas, water, insurance, taxes, internet.
$4000 monthly income once I rent out my unit as well
$1300 positive monthly cash flow

Zoning Verification stated the following: It appears that this is one building; as such, a total of four residential units, is considered a multiple dwelling which is not permitted. Building Division records indicate the last recognized use is a building containing a single family dwelling at (442) which is permitted and a retail (variety) store at (444) which may be considered legally established non-conforming provided this use has continuously existed since prior to 29 Aug 1961 until present.

 

[conchoss]

Note that zoning thinks I own a single semi-detached property that isn't attached to anything. Hence, they don't think the other half of my building exists despite my showing them the MPAC and tax records.

 

[Thomas Beyer]

Why sell ?

Who would manage it if you are not in town ? Assuming you can get that organized by a reliable PM, do you have better use for the cash (after 40%+ taxes on the gain) or a need for the cash ?

Why did you get a 5 year fixed mortgage ? Why not a two year mortgage as you could now refi at 2% (2 year variable rate) based on new appraisal and pull out much of the invested cash plus money owed on expensive CC would disappear ?

Assuming you do not need the cash and assuming a reliable PM can take the headaches off your plate for a reasonable fee (of say 8% of rent/month) I'd stick with it for at least 2-3 more years, then refi, and hold forever.

Btw: some expenses like R&M or management will have to be deducted from your cash flow.

 

[Seeley]

I would agree if you can find a reliable property management company, big if, I would keep it for the time being. You may find it to be more trouble than it is worth owning in Hamilton if you get a bad tenant but you can always sell in the future.

By the way you have left a number of items off the expense list which will lower your cash flow quite a bit. As well if you are including utilities in the rent expect them to be higher that you presently pay. When tenants are not responsible they generally live like kings when it comes to consuming utilities. Also if the internet does not have a cap on usage expect tenants to be streaming movies non stop.

I would strongly advise not including internet and defiantly not utilities if they are on separate meters.

 

[conchoss]

I agree full heartingly.

We've tried to optimize the capital improvements towards increasing rents (kitchens, bathrooms, secure garage door, lipstick and makeup) and decreasing expenses/liabilities (purchased water heater, insulation, added electrical panels to each unit, duct cleaning, etc). The rents increased from 2800 to 4100 and expenses decreased by about $300. $1300/month improvement. I've been constrained by the smoking stench the previous owners left me compounded by the tenants who claim they'll never leave. They are smokers, on disability, had hydro included in the lease when I purchased the property and they live on the main floor two bedroom. They'd rather keep the front door open during the winter because it's warm rather than telling me so that I can readjusted the airflow.

I am warming up to the idea of hiring a reliable property management company. What should $320/month (8%) get me and how do I know they're reliable?

The internet costs me $60/month and is 25 mbps with no caps though the router could use a couple tweaks. The smoking tenants agreed to pay $30/month for it and as the units vacated I increased the rents by $50.

 

[conchoss]

I've added your book to my reading list. Ten years from now, I want to become a consultant on Real Estate Investing so I've been applying the lessons learned from REIN workshops and trenches. I've been taking the role of property manager... for a little while. I honestly wanted to understand the process and minutia involved such as proper advertising and vetting of tenants.

Can I hide the gains in another property I buy?

I chose fixed because I thought interest rates were as low as they were going to get. I had the choice from my employer to either have $3500 to pay down the interest on a five year fixed or get what remains after paying 40% taxes on the $3500. It's an open mortgage so I intend to get a blended interest rate with the new appraised value and take out some of the value to pay down the CC and should still have enough for another down payment.

I'm currently trying to bring down the R&M and PM to a total of $500. There's a lot of complicated moving parts to this machine.

 

[snoopy]

I would also be concerned about the zoning issue. If the City presses the issue, you will likely have serious headaches and costs. Didn't your lawyer check the legality of the property before you bought it?

 

[Seeley]

"I've been constrained by the smoking stench the previous owners left me compounded by the tenants who claim they'll never leave. They are smokers, on disability, had hydro included in the lease when I purchased the property and they live on the main floor two bedroom. They'd rather keep the front door open during the winter because it's warm rather than telling me so that I can readjusted the airflow."

This additional info changes everything.

Long term tenants in Ontario are a death knell for a landlords profit margins and I would never rent to anyone on any form of government assistance. They are the worst of the worst, overpowered with a scenes of entitlement and completely disrespectful of any one else's rights or concerns. If push ever comes to shove with these tenants they will end up owning you at any LTB hearing. The board will bend over backwards giving them everything they want including rent rebates and if they ever stop paying the government does not allow you to collect money owed. Welfare recipients are deemed "untouchable" and have no obligation to pay any money owed to landlords or any other business.

Based on this information I would dump this property asap and invest in something else in the Ottawa area. Starting over you can target a property without utilities included and find a better class of tenant. You will end up regretting holding on to this property.