What to choose? 1Bdrm, 2Bdrm, 3Bdrm, Suited house?

[NickDavis]

Hello all!

For the past few months I have been trying to analyze the market I am looking to invest in. I have been searching rental websites, newspaper websites, craigslists and kijiji to determine the average rents for the area. I am trying to narrow down my search so that I can become an expert in one area but I want to choose the property that will have the best opportunity for great cash flow. I know, that is what everyone is trying to do

. I am not looking for the get rich quick purchase but I do want to make sure I do all of my due diligence before I start investing.

I am trying to narrow down my search for each property type by breaking down rent and expenses vs. mortgage payment. Once I narrow down to the property type I will do the same calculation but using every expense. For now I am just trying to narrow down my property search so I can start viewing properties to utilize the Gold Mine score card.

The following is what I have come up with and I was hoping that some of you experienced investors could review and tell me if I am on the right track:

1 Bedroom apartments:
The average rent of a 1 bedroom apartment is approximately $800 per month. If I estimate $150 for Strata, $100 for Insurance and $150 for Property taxes that gives me a total of approximately $400 of additional expenses (not including vacancy factor, property maintenance or repairs, etc.) This leaves me with a maximum monthly mortgage payment of $400 or approximately $100,000 mortgage to break even (breaking even isn`t the goal but I am just trying to narrow down my search.) I doubt very much that I can find a property that will make sense that is only one bedroom as it simply has to cash flow for me to look at it. Also, one bedroom apartments and two bedroom apartments are similar in price and I assume the two bedroom apartments will rise in price sooner and better than the one bedrooms.

2 Bedroom apartments:
The average rent of a 2 bedroom apartment is approximately $1100 per month. If I estimate the same $150 for Strata, $100 for Insurance and $150 for Property taxes that gives me a total of approximately $400 of additional expenses (not including vacancy factor, property maintenance or repairs, etc.) This leaves me with a maximum monthly mortgage payment of $700 or approximately $175,000 mortgage to break even. This may be a much easier way to find an apartment to cash flow; however, I noticed that a majority of the listings were either 55+ or “no rentals” so the opportunities will be drastically reduced.

3+ Bedroom apartment/townhouses:
The average rent of a 3 bedroom apartment or most likely townhouse is approximately $1400 per month. If I estimate $600 for strata, insurance, property tax that would leave me with approximately $800 as a maximum mortgage payment or a $200,000 mortgage to break even. This will definitely increase the possibilities but because of the increased risk I would probably scrutinize the property much more and look for greater cash flow capability. It would be much more important for me to ensure I have the right vacancy factory to ensure I don’t have a $1400 expense if I can’t find a renter.

3 bedroom up/2 bedroom down suited house:
Since I have basically written off the one bedroom possibility and I noticed there are many apartment buildings and town home complexes that do not permit rentals I have thought a lot about a suited home; however, I may be out to lunch when it comes to the availability and pricing. I looked at the above numbers to try and calculate the possibilities and adjusted them based on “sharing” a house being slightly less attractive then an apartment or townhouse. Assuming I found a house that had three bedrooms upstairs and a two bedroom suite downstairs the numbers may work. If I could rent the upper level three bedroom suite for $1200 and the lower level two bedroom suite for $900, I would have a total rental income of $2100. Factoring $300 for property taxes, $150 for insurance, $210 for property maintenance and $210 for miscellaneous costs my approximate expenses would be $870 per month leaving me with a maximum mortgage payment of $1230 or mortgage of $300,000.

I know I haven`t provided you with important factors such as downpayment, actual location, etc. but for now I am just trying to narrow down my properties to look at. I do however, have at least 10% of all the above and am looking in the Maple Ridge area of BC.

Am I on the right track here or am I going about this totally backwards?

Thanks for any input!

Nick

 

[Thomas Beyer]

no magic here .. all have their pro's and con's !



1 BRs have the best price-to-rent ratio .. but you get more turnover and it is tougher to sell. So a 1BR for a long term hold (10+ years) otherwise I'd start with a decent 2 bedroom as you get more buyers eventually and less renter turnover .. or an up-down bungalow but the price-to-rent ratio is usually far worse .. but is even better for re-sale.



related posts:



How to get started http://myreinspace.com/public_forums/General_Discussion/61-4391-How_to_get_started_.html



Are you too levered ? http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10823-When_are_you_too_levered_.html

 

[invst4profit]

Not knowing your target market I would look for a triplex or larger to spread your risk over more units.
100% or 50% vacancy is far more crippling than say 25%.

 

[NickDavis]

QUOTE (thomasbeyer2000 @ Jul 20 2009, 07:40 PM)
no magic here .. all have their pro's and con's !



1 BRs have the best price-to-rent ratio .. but you get more turnover and it is tougher to sell. So a 1BR for a long term hold (10+ years) otherwise I'd start with a decent 2 bedroom as you get more buyers eventually and less renter turnover .. or an up-down bungalow but the price-to-rent ratio is usually far worse .. but is even better for re-sale.



related posts:



How to get started http://myreinspace.com/public_forums/General_Discussion/61-4391-How_to_get_started_.html



Are you too levered ? http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10823-When_are_you_too_levered_.html




Thanks Thomas, I haven't started many topics but reading everyone else`s I always look forward to your posts.



This may sound a little stupid but when you quote price-to-rent ratio your saying for example $150,000 purchase price to $1,500 monthly rent, correct?



If this is right, I am a little confused only because my research has shown the price of a one bedroom apartment is high compared to the monthly rent and the price of a two or three bedroom apartment isn't much higher but the rent is substantially better. Is this normal or is the area I am looking at a little different?



Thanks again!



Nick

 

[NickDavis]

QUOTE (invst4profit @ Jul 20 2009, 08:22 PM) Not knowing your target market I would look for a triplex or larger to spread your risk over more units.
100% or 50% vacancy is far more crippling than say 25%.

Thanks Greg, I appreciate your advice. I am definitely interested in a duplex, triplex or more. In fact, I recently saw a duplex that was suited so it was actually a fourplex; however, other than this one I never see them on the market. Do you know of any secrets finding them? They never seem to be on the MLS.

Thanks again!

Nick

 

[invst4profit]

There is no real secret.
It boils down to time, hard work and a top notch RE agent.

 

[CalvinPeters]

all things being relative, if you move your entire "property metric" over differant towns/cities/provinces you will get quite a differance in rental income, but all relative to each other approximatly in the way that you have discovered. Having said that, why Maple Ridge? Do you think that if cash flow was the target you would serch out the opportunities in the areas with the highest cashflow?

Just curious...

 

[ChrisDavies]

QUOTE (NICKEED @ Jul 20 2009, 09:45 PM) If this is right, I am a little confused only because my research has shown the price of a one bedroom apartment is high compared to the monthly rent and the price of a two or three bedroom apartment isn`t much higher but the rent is substantially better. Is this normal or is the area I am looking at a little different?

Right on the money. I focus on three bedroom townhouses for the same reasons, among others.

 

[JoefromTO]

[quote name=`NICKEED` date=`Jul 20 2009, 11:45 PM` post=`62308`]
Thanks Thomas, I haven`t started many topics but reading everyone else`s I always look forward to your posts.

This may sound a little stupid but when you quote price-to-rent ratio your saying for example $150,000 purchase price to $1,500 monthly rent, correct?

If this is right, I am a little confused only because my research has shown the price of a one bedroom apartment is high compared to the monthly rent and the price of a two or three bedroom apartment isn`t much higher but the rent is substantially better. Is this normal or is the area I am looking at a little different?

Thanks again!

Nick

If your refering to the primary 10% filter, then your math is a little off. The 10% refers to an annual income, in this case $15,000 but it has to be devided by 12 to get the projected monthly income...therefore, $15,000/12= $1,250 per month.

 

[NickDavis]

QUOTE (Nukav @ Jul 21 2009, 09:37 AM) all things being relative, if you move your entire "property metric" over differant towns/cities/provinces you will get quite a differance in rental income, but all relative to each other approximatly in the way that you have discovered. Having said that, why Maple Ridge? Do you think that if cash flow was the target you would serch out the opportunities in the areas with the highest cashflow?

Just curious...

I chose Maple Ridge because we have just moved here ourselves and I thought our first property should be close. Also, Maple Ridge/Pitt Meadows was the #2 top town to invest in BC on REIN`s list. With the completion of the Golden Ears Bridge, the nearing completion of the Pitt River Bridge and new Port Mann Bridge under construction, Maple Ridge/Pitt Meadows real estate is destined to increase. Currently housing prices are drastically lower than Surrey, Langley, Port Coquitlam and Coquitlam and there is substantial public demand for box store shopping outlets. I feel as long as the City Council allows the city to grow it is a gold mine. I made the point of stating cash flow was important; however, a greater reward at the end of the road is another target!

Thanks for the input!

Nick

 

[NickDavis]

QUOTE (JoefromTO @ Jul 21 2009, 01:06 PM) If your refering to the primary 10% filter, then your math is a little off. The 10% refers to an annual income, in this case $15,000 but it has to be devided by 12 to get the projected monthly income...therefore, $15,000/12= $1,250 per month.

Thanks for the info. I was referring to Thomas` statement that one bedroom apartments have a better rent-to-price ratio than two bedrooms and up and down bungalow`s.

However, your comments have interested me. Is the 10% primary filter used as a quick filter for properties? For example, if I am looking at a $200,000 property I would first divide the purchase price by 10% giving me $20,000 annual income, then divide the annual income by 12 (for months) giving me $1667 per month. Therefore, if I think I can rent the property for $1667 per month or higher than I should dig deeper into the property and use the gold mine score card?

I don`t remember this from Quickstart, but I like it... then again, it was a lot of information built into two days!!

Thanks,

Nick

 

[JimWhitelaw]

QUOTE Thanks for the info. I was referring to Thomas` statement that one bedroom apartments have a better rent-to-price ratio than two bedrooms and up and down bungalow`s.Not wanting to put words in Thomas` mouth, but I believe that`s only true when you can buy an entire building of them or at least buy up a number of them in one deal. We`ve never seen any 1BR`s available as a single unit that cashflow nearly as well as larger suites.

One additional point, a fellow REIN member once recommended for us to look for properties that offer multiple exit strategies - properties that appeal to a broad range of buyers (singles, couples, families, investors, developers). I think you`ll find that the number of potential buyer types increases as you move from small 1BR suites to suited SFH`s. I think that makes good sense while you`re building an initial portfolio that you expect to turn over into something else over time.

 

[NickDavis]

QUOTE (NICKEED @ Jul 21 2009, 10:18 PM) Thanks for the info. I was referring to Thomas` statement that one bedroom apartments have a better rent-to-price ratio than two bedrooms and up and down bungalow`s.

However, your comments have interested me. Is the 10% primary filter used as a quick filter for properties? For example, if I am looking at a $200,000 property I would first divide the purchase price by 10% giving me $20,000 annual income, then divide the annual income by 12 (for months) giving me $1667 per month. Therefore, if I think I can rent the property for $1667 per month or higher than I should dig deeper into the property and use the gold mine score card?

I don`t remember this from Quickstart, but I like it... then again, it was a lot of information built into two days!!

Thanks,

Nick

Ok, so now I am starting to get more confused. I decided to start considering looking at SFH`s as well and am using the 10% rule or 10% primary filter. While searching I came across a house on a big lot with 3 bedrooms 2 bathrooms upstairs and a 2 bedroom suite downstairs. Before I used the 10% filters I did the quick math and figured the upstairs could command around $1600 and the downstairs should be able to bring in $900 for a total of $2500 monthly income not including any other income the large lot may be able to attract. Using the purchase price of $390,000, 10% down at 4.5% over 35 years the monthly mortgage payment is $1650. However, using the quick method of both 10% rules/filters I shouldn`t even bother looking closer at the property unless the monthly rental income would be $3250 ($390,000/10%= $39,000/12 = $3250.) Shouldn`t I look closer at the property that could have a net income of $850 LESS EXPENSES? Or does it only make sense that the $850 will easily be absorbed by PM, Ins, Taxes, Vacancy %, R&M, etc. etc. I guess I just answered my own questions.

Any comments?

 

[JimWhitelaw]

In the more recent incarnations of the Quickstart/ACRES system, the 10% rule has been modified to a Cash Flow Zone of 8%-10%. So it`s not quite the rigid filter it was previously.

Cash Flow Zone is rung 4 of the "REIN Property Ladder". The idea is that you complete each step before moving up to the next rung, or moving on to another property.


9. Manage for Cash Flow
8. Fulfill Conditions - Buy It!
7. Negotiate Offer
6. Property Analyzer
5. Due Diligence
4. Cash Flow Zone
3. Source Prospective Properties
2. Geographic Specialization
1. Property Goldmine Scorecard

 

[invst4profit]

In your initial analysis of a property you should estimate that total expenses, taxes, vacancies, utilities when vacant, legal, advertising, accounting, evictions, ongoing maintenance, major repairs, etc. will normally eat up 50% of your income over the long term.
Roughly divide the monthly income in half and what you end up with is the amount available for dept repayment and positive cash flow (if there is any).
Although this is rough it is fairly consistent when holding a property long term.

 

[NickDavis]

QUOTE (invst4profit @ Jul 22 2009, 07:22 AM) In your initial analysis of a property you should estimate that total expenses, taxes, vacancies, utilities when vacant, legal, advertising, accounting, evictions, ongoing maintenance, major repairs, etc. will normally eat up 50% of your income over the long term.
Roughly divide the monthly income in half and what you end up with is the amount available for dept repayment and positive cash flow (if there is any).
Although this is rough it is fairly consistent when holding a property long term.

Thanks Greg, I think this piece of advice will make my searching a lot smoother; although, it may make it a lot harder for me to find a property! I appreciate your help!

Nick

 

[rabrol]

QUOTE (NICKEED @ Jul 23 2009, 12:38 AM) Thanks Greg, I think this piece of advice will make my searching a lot smoother; although, it may make it a lot harder for me to find a property! I appreciate your help!

Nick

Yeah, I would be surprised if there are many properties that allow for 50% and still cashflow. That said, I`m still just researching the whole idea of getting into REI, so I don`t know how many current investors are pulling those kind of numbers, or what size of downpayment they would need to do it!

 

[invst4profit]

Cash flow has nothing to do with down payment in my calculations.

Paying down a mortgage only creates artificial cash flow. All investor cash has a value and could be invested elsewhere to earn income and therefor must have a value placed on it. As an example if it were the cash from a JV partner instead of your own cash you would be required to pay that investor something for that cash. Same if it is your own cash.
My system evaluates cash flow based on 100% financing.
The 50% rule is based on decades of research in the States on hundreds of thousands of all types of units and is a average. It is consider a average over long term and varies somewhat between different types of properties.
Any property you evaluate that is in that range warrants further detailed evaluation.
Are properties meeting this criteria out there? Definitely. Plenty of them but it requires hard work and experience to find them. Contacts can be invaluable.
You do not generally find them on MLS, although I have, and if you do it is because you have a real estate agent that knows exactly what you want and as a team you have worked very hard.
In many cases it also depends on ones negotiating skills and creative financing.
You often find a property that on the surface does not fit the rule but has hidden potential. It may be poorly managed, the rents may have fallen below market or there is a potential to add units.