case analysis help needed

[maica]

I`m thinking of buying my first rental. I appreciate any inputs.

Here are the details:

Winnipeg, older duplex built in 1900s, 1500 sq ft

Price: $140000
Rent: $1000 gross total. Utilities paid by tenant.
Tax: $1500

Should I use a HELOC or take out a mortgage if I decide to buy this property? What are the advantages and disadvantages?

Thanks,
maica_td

 

[invst4profit]

Depends on what interest rate you will be getting on a mortgage and how many properties you wish to buy. HELOC is nice to speed up closing, applying for a mortgage later, and having the ability to only pay interest can be of advantage at times.

The property you are looking at is over priced based on the rent. It will have negative cash flow unfortunately especially based on it`s age.
I would pass as it appears to be a very bad investment unless you have the ability to increase the income to above $1400/month.

 

[maica]

Thanks Greg, I only wish to buy 1 property just to see how it goes. As you have said this is a very bad investment, how about if the price is lower to $130000?
Why would I need a mortgage at all if I can have the loan in the HELOC forever? The HELOC rate is prime+1.

maica_td

 

[invst4profit]

You do not necessarily need a mortgage unless you planned to buy more properties in which case you would only use the HELOC for a down payment. This would leave more money to buy additional properties.

I would not consider anything over $100,000. $90,000 would be prefered. Based on the current rental income that is the absolute maximum it is worth to me.

 

[ajaysritharan]

Hi there;

As a rule your yearly rent should be 10% of the purchase price in order to get positive cash flow (generally). This property does not seem to meet this requirement.

Also when tally the expenses consider

a) Property Management fees (if applicable)
b) Maintance Costs - especially since your property is much older
c) Contigency for vacancy
d) Reserve Fund - for anything unexpected

How does the current rent rate on the tenants compare to market rates. If currents are lower than the market average, you may be able to raise them. However, this will take time.

Also, there may be rent controls in Manitoba that restrict how much you can raise rents per year.

Overall, I would say that the deal will not cash flow and personally, I would stay away from it.



Ajayan Sritharan
Investors Relations Manager of Real Experts Inc
www.RealExpertsInc.com

"Buying under-market and cash-flowing properties in the best neighborhoods of the strongest towns."

Quirky research and insights on real estate and the economy at http://realexpertsinc.blogspot.com/

 

[maica]

Thanks Ajayan, I`ll keep looking then.

 

[mplut]

"As a rule your yearly rent should be 10% of the purchase price in order to get positive cash flow (generally)"

I`ve heard that before, but is that even possible? I`m new to investing too....in Southern Ontario. I have trouble seeing how a 240 K property could ever yield rental rate of anything close to $2000 per month. Am I missing something?

Margaret

 

[invst4profit]

$2400/ month would be necessary at a minimum.

The fact is a single family at $240000 is generally not a good choice as a income investment property.
Single families are difficult to get positive cash flow making multi units your best choice. Try to find a tri or 4 plex that meets the criteria.
The thinking is that if you can not find a property that works you are either not looking hard enough or you are looking in the wrong areas.
Lower income areas have higher cash flow but require more work to manage.
Some locations simply do not work others you must find motivated sellers.
You could try attending LTB hearings to find burned out LLs and approach them to see if they will sell.

 

[mplut]

ahhh the light goes on. Thanks.

 

[JohnSoucie]

QUOTE (invst4profit @ May 27 2009, 02:14 PM) The thinking is that if you can not find a property that works you are either not looking hard enough or you are looking in the wrong areas.

Also when you see many of these $240K homes for rent for wayyyy less than the 10% rule, you might get the wrong impression that the owners actually know what they are doing and it`s a true "investment" property" like REIN teaches. But in fact, often it`s a guy who didn`t do any research whatosoever before he bought, listened to his part time realtor who told him it`s a "great investment"(probably because of the location only) and came to grips with the fact that his "investment" was going to cost him $500/month...and did the deal thinking - it`s forced savings and I`ll have a free and clear house to show for it in 15 years. Not sophisticated investing by any stretch. But many nicer houses for rent in nicer areas fit this model. Great deal for the tenants!! How do I know...my Dad did it! Claimed it was one of the smatest investment moves he ever made.....good, considering he never really invested in anything. Pensions are/were wonderfull

John