Cashflow analysis on this property

[llee]

Hi,Wanted to get your feedback on this property.Listed 255,000 (semi-attached)
CMHC Premium 6% = 15,300
Total mortgage = 255,000 + 15,300 = 270,300

Income (1 year lease signed)
Unit 1: 1200/mo; Unit 2: 950/mo
minus 5% vacancy and bad debt
GOI = 24,510

Expense
Property Mgmt: 2000/year (8% of rent)
Condo fee: 0
Property tax: ~$2300/year
Insurance: ~500/year
Utility: 300/mo or 3600/year
Maintenance (assume 10%) 1290/year
TOE = 9,660

NOI = 14,820

ADS (on $270,300 mortgage, zero down)
4.2%, 35year, 1,229.46/mo or $14,753/year

Annual cashflow = 66.48/year

The property is in Ottawa. It has 2 units (upper and lower, separate entrance). I was told it`s a legal residential property, but "non-conforming" (basement with separate entrance). Also, the lower unit in the basement has a separate kitchen. Is it really OK?

Any feedback on the numbers and legality is appreciated.

Thanks.

 

[invst4profit]

What is your long term plan and exit strategy on this property?
Have you included closing costs in your calculations?
Based on your numbers there is virtually no money to be made on this investment.
Your estimate for expenses is low and any unexpected large repair will put you in a negative cash flow that you will not recover with only 66/year profit.
Unfortunately in Ontario it is very difficult to keep rents up with increases in costs like taxes, utilities, material etc. and as such if appreciation returns to normal levels this property even as a speculative purchase likely may not show a overall profit when factoring in negative cash flow and resale costs.
If you are paying the utilities on this property and not the tenants I would definitely not buy this one.
My estimate is this property will have a negative cash flow (long term) of about $160/month due to a higher estimate on expenses than you anticipate.
Your target should be a positive cash flow of about $100/door/month if not immediately at least in the foreseeable future as a good investment property.

 

[jasonlgreen]

I wouldn`t count on that interest rate staying at 4.2% forever either. With only 6 bucks a month cash flow even a small jump in rates will put you in the hole.

If the property is in Vanier or a place like that you would probably want to factor more in there for vacancy and bad debt. I personally try to use more than double CMHC`s vacancy rate for an area I am buying in.

Better safe than sorry!

Hope that helps.

 

[GarthChapman]

You would be starting out at break-even - no cashflow at all. Why make such an investment? Where is the gain? How does it take you closer to your goals?

What are the opportunities for you to turn this into a winner?
1) Can you increase the rents?
2) Can you change the use of the property to make it worth more or derive more income from?
3) Can you add rental units to it (even a garage)?
4) Can you re-develop the property?

What are the downside risks?
1) Does Ontario limit your rent increases?
2) What if the Ontario economy goes into recession and you have to reduce your rent to keep it occupied?
3) Could the property value decrease? And, are you buying well below current market value to mitigate this risk?
4) Could interest rates rise, making it into an alligator to feed?
5) Can you afford the cost of these risks?

 

[llee]

The Garth for your insights. I have passed the opportunity because it`s a legal but non-conforming unit to start with. I am not comfortable with it.

Cheers,
Lucas

 

[Nir]

Hello Lucas,

I wouldn`t buy a property for a Big Mac & fries a month ($5.5).

Think how many Big Macs/properties you need in order to pay your own bills and replace your current job with retirement somewhere.

You`re definitely on the right track, just look for MUCH higher annual rent to purchase price ratio.
(this one is only 10%, in Ontario you can do better)

Good luck!
Neil
PS. A property being legal non-conforming is actually not an issue for most investors. the important thing is that it is legal, which means its use is legal. cheers.

 

[RArora]

Hi Neil

"You`re definitely on the right track, just look for MUCH higher annual rent to purchase price ratio.
(this one is only 10%, in Ontario you can do better)"

I`v been looking hard and in Ottawa it seems its rare to find such a property-as rents are pretty low and prices relatively high-eg. for a freehold townhome in ottawa even if you`re lucky enough to find one for $240-250k the rent from it won`t be more than $1400-1500...

Can you recommend any specific areas where it might be better to look at the 10% rule and have hope of finding the same?

I would like to purchase one more property this yr with positive cash flow, hopefully one that has long term tenants in place already and doesn`t need any work to be done really. (I`m not asking for the moon, now am I?)

I`m looking.... any help/advice is appreciated.

Thanks

Thanks
Rasna

 

[GarthChapman]

QUOTE (llee @ Sep 3 2008, 06:30 PM) The Garth for your insights. I have passed the opportunity because it`s a legal but non-conforming unit to start with. I am not comfortable with it.

Cheers,
Lucas

Legal suites that are non-conforming can often be very good properties, as long as there aren`t non-conforming issues that are safety related and very expensive to resolve.

The best reason to walk from this deal is that it was not a good enough investment for you. But worth checking out as it has helped you to learn about the process and will help you to make good investing decisions down the road.

 

[kboughen]

QUOTE (llee @ Aug 20 2008, 01:10 AM) Any feedback on the numbers Looking at the numbers provided, the cash flow analysis is based on financing 106% of the purchase price (including the CMHC fees). I suspect this is because your strategy is to invest little of your own money and not to JV. This strategy has it`s down falls, not the least of which is lower cash flow, but has and can be successful.


I agree that you have to be prepared for unexpected expenses and vacancies. You have to be able to sleep at night knowing you can carry the property and make repairs when the unexpected happens. You have to be prepared when interest rates raise and you have to have a long term mentality when values flatten or decrease. You must have the required resources at your disposal. You have to be comfortable with your strategy.

Positive cash flow is king, appreciation is a must and mortgage pay down is a wonderful thing, however...


If every real estate investment in residential single family homes had to produce a $200/month positive cash flow after factoring in vacancy, maintenance and management with a 106% financing, I suspect there would very few purchases in top 10 towns and I am sure there would far fewer successful investors reaching their goals.



Get comfortable with your strategy and continue taking action!

 

[Nir]

Hi Rasna,

No, you`re not asking for the moon, not even a mooncake. Yes, such properties are difficult to find BUT...possible/exist!
(however difficult is relative, what`s very difficult for some is easy for others)

I don`t know Ottawa well but have you tried other cities on Don`s list?

However, if you prefer buying locally I do not know the answer/Ottawa.

Cheers,
Neil