Will You Purchase This Mixed Use Rental Property?

[reinvestors88]

Hello everyone,



We are currently negotiating directly with the owner (private sale) to buy a mixed use (1 1/2 storey residential house zoned for re-development) 4beds-3baths rental property in one of the top cities to invest in Ontario. It is in great location with huge potential knowing and observing the area. At present, the property is being used as a single family residence and rented out to one family for one year.



Below are the financials:

Asking price - $290K

Purchase price (under re-negotiation) - $260K

VTB (under re-negotiation) - 15% at 6% interest rate for 1 year (balloon)

Appraised value - $255K

After repair value - $300K+

Estimated repair costs as per home inspection - $25K (price reduction still under negotiation)



1st Year Financial data :

Current Rental income = $18,000 plus utilities (if we keep the current tenants)

Less: Cash disbursements (Property taxes, Insurance, Vacancy allowance (5%) Repairs & maintenance allowance (5%) Property management (10%), Mortgage payment (P+I), Interest on VTB) = $20,790

Negative Cash flow - $(2,790)



What we plan to do:

1 - ask the seller for vacant possession

2 - do cosmetic renovations

3 - refinance it (if viable)

4 - increase the rent to $1,875/mo plus utilities, or

5 - convert the house into commercial (main floor) and residential units (2nd floor & basement)(per zoning this is allowed)

6 - refinance it

7 - estimated rental income is $2,500 minimum



Aside from the above plans, would you plan to do differently? What would you do or not do? Would you still pursue the deal? Any expert opinion in this case? Much appreciated.



REInvestors88

 

[housingrental]

Hi



Will changing use to commercial and triplex impact your property tax and have you factored this in to your pro-forma's?

 

[Thomas Beyer]

Is commercial allowed ? Would the commercial lease be better than a residential one ? Is vacant possession achievable for seller due to existing lease ? In most provinces you need 3 month notice, and in many you cannot force a tenant to leave.

 

[reinvestors88]

[quote user=housingrental]Hi



Will changing use to commercial and triplex impact your property tax and have you factored this in to your pro-forma's?





Thanks, Adam, for the good points...definitely the taxes will be higher for a commercial and triplex...the pro-forma is only based on current lease...we have to check the city on this...Thanks again.

 

[reinvestors88]

[quote user=ThomasBeyer]Is commercial allowed ? Would the commercial lease be better than a residential one ? Is vacant possession achievable for seller due to existing lease ? In most provinces you need 3 month notice, and in many you cannot force a tenant to leave.




Per zoning certificate, commercial is allowed. I believe commercial lease is much better that residential one. Hence, we are planning to convert it into commercial for higher revenues. By the way, there are big box stores in the neighborhood.



Vacant possession remains under negotiation, thus, we are asking for longer completion date to give the seller sufficient time to notify the tenants. Hope tenants will agree. If not, are there legal remedies to force them out?



Many thanks, Thomas.

 

[housingrental]

A few other notes if not already aware:



Depend on particular area / quality of tenant consistency of revenue source might be far worse with your change of use plans:



Potential for longer vacancies on commercial unit



(In many area's) harder to find good quality renters for small spaces for commercial - higher chance of default



(In many area's) harder to find good quality renters for small spaces for residential - higher chance of default



Potential for higher costs for garbage clean up from commercial unit re more people in and out of property



Depending on activities carried out by commercial unit, potential for impacting and causing tenancy issues with residential units



Additional costs to property manager / or time to self administer re more renting re 3 units vs 1 / more complex leasing for commercial unit



This might be a great way to add value to the property - but be careful to cost everything before proceeding

 

[Mike Milovick]

"Vacant possession remains under negotiation, thus, we are asking for longer completion date to give the seller sufficient time to notify the tenants. Hope tenants will agree. If not, are there legal remedies to force them out? "



There are no legal remedies to force tenants out in Ontario. You may be able to work out an agreement to buy the tenants out.

 

[Thomas Beyer]

[quote user=reinvestors88]If not, are there legal remedies to force them out? Not usually, except those stipulated in landlord-tenant act, such as personal use or major renovation.



How about an incentive ? $2000 will likely do the trick.

 

[reinvestors88]

[quote user=housingrental]This might be a great way to add value to the property - but be careful to cost everything before proceeding


Great insights and reminders!!! Well noted in our plans.



Considering the above and many years of experience as investor and property manager, what would you do with the property? Convert it into triplex or 1 commercial unit?



Also, our primary concern now is to increase revenue. Thus, while working on more details of changing the use, we plan to draw up a new lease agreement with two additional tenants under the same lease for shorter period (current lease is up to Sept/12). Is this legally feasible?



Your advice are very much appreciated. Thanks again.



REinvestors88

 

[reinvestors88]

[quote user=ThomasBeyer][quote user=reinvestors88]If not, are there legal remedies to force them out? Not usually, except those stipulated in landlord-tenant act, such as personal use or major renovation.



How about an incentive ? $2000 will likely do the trick.




As also suggested by Mike, giving incentive will do the trick.



We are thinking of 'personal use or major renovation' as a reason to force them out.



Many thanks, Thomas and Mike, for sharing your thoughts and experience.



REinvestors88

 

[moparcanuck]

If you're getting into commercial rent, ESPECIALLY if it's mixed use on the same property, make sure you have an accountant who is VERY good at GST/HST. You can very quickly get caught up in problems with change of use, allocating expenses, etc.

 

[invst4profit]

Personally I would not consider purchasing this property based solely on your projected rental income.

$2500/month on a approximately $300,000 total investment is too low.

Keeping in mind you may be being rather optimistic. You can not pay now for future income.



Regarding your plans to evict. If the tenant agrees to leave voluntarily you are fine otherwise you are out of luck.

In Ontario you have no legal right to force a tenant to sign a new or different lease at the end of there existing lease. They automatically become month to month and have no obligation to sign a new lease agreement.

As far as personal occupancy is concerned you may evict on these grounds however the LTB does not take lightly this action if not done for legitimate reasons. If used as a excuse to evict with the intent of renovating you can get burned. To be safe you would need to actually live there for a year to prevent the previous tenant from taking you to the board (tenants have up to one full year from time of eviction to file complaints).

Regarding evicting for renovating this will only apply if building permits are required and the work is extensive enough to warrant vacancy.

Keep in mind the tenant is entitled to move back into the unit following completion of work at their previous rental rate in the case of eviction for renovation purposes(or a lower rent consistent with the size of the final unit).

The fact is your plans to reduce the size of the tenants present unit likely will not be permitted by the LTB.

The laws in Ontario do not permit landlords the right to do with there properties as they please if it negatively impacts on tenants.



You should hope the present landlord is successful in evicting or bribing the tenants to leave but as stated I would not bother as the ROI is not sufficient in my opinion. You need to keep in mind that investors determine the purchase value of a property based on the present income not future income. The present rental income of $18,000 per year places your value of $260,000 way, way, out of line.

 

[Thomas Beyer]

[quote user=reinvestors88]

We are thinking of 'personal use or major renovation' as a reason to force them out.
Do that only if you actually plan to do so, as in Ontario the LTB has a long arm. You actually have to move in, or you have to do extensive reno's and tenant has right to move in again later.



Better option is a voluntary separation, sweetened by some cash or other consideration, say pay for his move plus beer money !

 

[housingrental]

I have not been given enough information to to take action on either option - sorry



As others have already wrote you can not force anyone to sign a new lease - you can only make happen what you can get everyone to agree to.



[quote user=reinvestors88][quote user=housingrental]This might be a great way to add value to the property - but be careful to cost everything before proceeding


Great insights and reminders!!! Well noted in our plans.



Considering the above and many years of experience as investor and property manager, what would you do with the property? Convert it into triplex or 1 commercial unit?



Also, our primary concern now is to increase revenue. Thus, while working on more details of changing the use, we plan to draw up a new lease agreement with two additional tenants under the same lease for shorter period (current lease is up to Sept/12). Is this legally feasible?



Your advice are very much appreciated. Thanks again.



REinvestors88

 

[Pheenix]

Regarding the conversion;









There hasn't been any discussion of the cost of conversion to a mixed use property. Aside from those related directly to the conversion, with a reno of this scope you would probably be required to bring everything up to code, even in the less effected parts of the struture. Some of the issues you may face are;




- access and egress issues




- fire separations




- sound transmission




- changes and upgrades to systems such as heat, electrical and pumbing




- parking requirements




- vacany / conversion period and carrying costs (usually longer and higher than expected)









Each of these must be carefully thought out and researched - especially if you have not done this sort of work before.









The mixed use will have an impact on your mortgage arrangements, most likely including the LTV, so ensure you have a good discussion of this aspect with mortgage specialist.









The principal question to ask is whether the increase in rent provides an acceptable pay back period once you determine the changes required and their cost (including design and permitting).









This could be an interesting and rewarding project but not for the inexperienced or faint of heart.









Good luck




Brad

 

[reinvestors88]

An update: Our group pursued this deal and now fully rented as 100% residential at 1%+/month of the purchase price + utilities, and generating decent cash flow. We are still focusing at cost - benefit of converting the whole place into a commercial unit in the near future.



Thanks everyone for your expert advice.

 

[Rickson9]

[quote user=invst4profit]Personally I would not consider purchasing this property based solely on your projected rental income.

$2500/month on a approximately $300,000 total investment is too low.





^ This. I agree. ROI is terrible. My opinion only.

 

[reinvestors88]

[quote user=Rickson9]$2500/month on a approximately $300,000 total investment is too low


Bought it at reduced price to come up with 1% rule that is over projected rent. Many thanks.