"1. This property is probably illegally suited. In my area, you will typically only see properties with this high of an income to purchase price ratio when you delve into illegal/nonconforming suites. So - if this is true (and forgive me if it isn`t, I`m just guessing based upon my own experience) you must realize the risk there as well. What will the return be if 1 or 2 of those suites gets pulled?" This is a good point and I agree with you if its not legal. This wasn`t mentioned in is his post though so I was assuming it`s legal.
"2. I also assume that this building is older and probably in need of repairs or deferred maintenance. Has this been factored into your initial budget? I`ve bought properties like that, and it`s easy to sink $40K+ into them when you need to upgrade electrical, plumbing, windows, flooring, etc. This must be accounted for, and also realize that this `additional` money will be more expensive (if ir`s being borrowed) because you will have to pay typically a higher interest rate or a lower Amortization period to repay the loan to do this work. So, if it does require work, figure out what will be needed, and add that to your expense list." For sure. I also agree with you on this. But no $$ in were mentioned so prudent to assume not needed.
"3. As far as allowing a PM to do all the work, that`s fine IF you want mediocre results. At the least, I`d be advertising for my PM and sending all the applicants to the PM to view, etc. Now, also consider that if a PM does the required work for you, you will probably be paying much more than getting renovations or maintenance done yourself. It`s been my experience that PM companies will typically charge out maintenance employees at approx $65/hr while paying them less than half of that. So if you hired a great handyman at $35/hr (which I have a full time one personally) you would save thousands if you required a lot of work." I`ll somewhat disagree on this.. there are many terrible pm companies and many just OK pm`s.. but there are many great ones too... Most people don`t advertise for their property when hiring a pm and if your manager is competent there should be no reason to waste your time on that. Also note than many pm companies, like mine, do not mark up worker fees. If a worker costs $25 worker bills out for $25, etc.. Also I`m often able to get workers to stop in to places in a few hours if needed and preempt other peoples work because some of the companies I`ve been dealing with for years and given hundreds of jobs too... It can be hard to find good, reasonable priced trades that you can phone for an electrical issue at 4:00pm and have them come at 7:30pm that night for most non pm companies.
QUOTE (MitchCollins @ Jun 11 2009, 09:03 PM) Hi Adam;
Well, let`s look at this a little closer.
Randy - please do not take this the wrong way - I`m not used to the area you`re investing in, and I am just hoping to add some value to your decision to purchase this property, not to discourage you from taking action!Randy`s property has a purchase price of $230,000.His rental income is $2,320 per month, giving a ROI figure of 121.04%, correct? (I know this is w/o calculating expenses - just a guideline)
While that seems extremely good, three things come to my mind upon seeing these numbers.
1. This property is probably illegally suited. In my area, you will typically only see properties with this high of an income to purchase price ratio when you delve into illegal/nonconforming suites. So - if this is true (and forgive me if it isn`t, I`m just guessing based upon my own experience) you must realize the risk there as well. What will the return be if 1 or 2 of those suites gets pulled?
2. I also assume that this building is older and probably in need of repairs or deferred maintenance. Has this been factored into your initial budget? I`ve bought properties like that, and it`s easy to sink $40K+ into them when you need to upgrade electrical, plumbing, windows, flooring, etc. This must be accounted for, and also realize that this `additional` money will be more expensive (if ir`s being borrowed) because you will have to pay typically a higher interest rate or a lower Amortization period to repay the loan to do this work. So, if it does require work, figure out what will be needed, and add that to your expense list.
3. As far as allowing a PM to do all the work, that`s fine IF you want mediocre results. At the least, I`d be advertising for my PM and sending all the applicants to the PM to view, etc. Now, also consider that if a PM does the required work for you, you will probably be paying much more than getting renovations or maintenance done yourself. It`s been my experience that PM companies will typically charge out maintenance employees at approx $65/hr while paying them less than half of that. So if you hired a great handyman at $35/hr (which I have a full time one personally) you would save thousands if you required a lot of work.
Now, this is the cashflow analysis I have for this property - I hope this helps you see how others look at properties as well, Randy. (ALL NUMBERS ROUNDED TO SAVE TIME)
Income of $2,194 (After taking off Randy`s figure of 5.4% for vacancy)
Expenses
Mortgage - $932
Taxes - $250
Insurance - $85
LOC - $100
PM - $185
R+M - $185
Heat - $200
Water - $35
Total Expenses of $1,972 per month.
This leaves a positive cash flow of $222 per month.
Everyone agree with that so far?
Now take into consideration that this does not include any figures for the upgrading or deferred maintenance that will probably be required if it`s an older building, so this figure could potentially be less, and also does not take into account the building of a reserve fund for the first couple years - it appears that if he`s purchasing it with a LOC, I`m assuming Randy is purchasing w/o a JV partner.
Randy, would you share with us what interest rate and amortization your mortgage will be?
And if you plan to hold long term, will there be a buyer for an older building (once again assuming that it is older - I might be wrong here!)?
Now let`s take a look at the property I posted to show the difference.
Purchase Price of $350,000
Income - $2,700 per month ($2,565 after a 5% vacancy allowance)
Expenses
Mortgage - $1,320 (Based on 20% down, 35 year amortization rate and a 4.5% rate)
Taxes - $260
Insurance - $100
Repairs - $50 (Brand new buildings, or else I`d never allow for this low of a number initially)
PM - $216 (Also, personally I do all my own MGMT, but I am allowing for a 8% here just for parity)
Total Expenses of $1,950
Total CashFlow of $619/mth
Now, the main difference here is that my example is using a 20% down, and that there is no repayment of a LOC. This is because I`d enter into a JV partner where I would ask for the JV partner to put in at least 20% down here in this situation. I just wanted to point that out myself before 15 people pointed this out. (Cash flow would be approx $547 per month with 10% down, not including CMHC fees, etc).
But in this situation, you`ve got a guaranteed legal suite, seperate utilities, brand new development that will not require MAJOR renovations or maintenance for probably 10 years. This will help you to `normalize` your cash flow over your investment horizon, and will keep your property cash flowing, and when it comes time to sell, you will still have a relatively new property to sell, making it more attractive (arguably).
Randy, after looking at your property again, I`d give it a thumbs up IF it is not illegally suites and IF it does not require MAJOR renovations and/or deferred maintenance.
Hope that helps you see how others look at cash flow analysis - even roughly like that, and the reasoning behind certain things.
Feel free to PM me with any questions or anything else.
Mitch
