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city taxes and how to anticipate them

eastender

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Hi everyone!

Well, I`m in the thick of negotiating my first multi-unit and it`s knives out for the dreamkillers around here.

They`re telling me that city taxes and a new assessment will chew up any cashflow and I`ll wind up paying out of pocket every month instead. This property is assessed pretty low right now. Things lookin` pretty good on paper at the moment...but 5 years down the road? I dunno.

So the big question is, "is there any way see how the city will tax in the future?" Heck, I`d be just as happy to read replies about your experiences with city taxes to boot!

This property is in Hamilton, Ontario and the taxes here are pretty brutal. (I can provide more info if necessary)

Any and all input much appreciated!!!
 

invst4profit

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Post some numbers and let us see what you are looking at.
I would guess if you feel the taxes may be a deal breaker the numbers may be too thin to begin with. If we know the numbers many on here will be able to suggest a workable purchase price to offer.
 

eastender

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Sure thing!

Here`s a quick rundown on the numbers...

Offering price: $631250
Annual revenue: $82434
Annual operating expenses: $44012 (including city taxes $18275 and insurance $1500)
Financing: $23963

Right now, at the end of the year it cashflows just over $8700.

Sooo...what can I expect from the good ol` Hammertown city hall?
 

invst4profit

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Taxes. I don`t know.

As far as your numbers are concerned I would be very careful calculating your financing expenses.
Things will change in time and you will likely be paying much more for a mortgage in 5 years time.
At this time you are assuming about 2% mortgage and return on cash on the total $631,250. That is very low.
If you consider 4% your expense/return is in the $36,000 range which only leaves you a annual profit of $2400/year.
$8,000 return on a $600,000 investment is far to small to be of interest to me and $2400 is out of the question.

What information are you basing your annual expenses on for repairs, upkeep, legal, advertising, evictions etc. Are they from the present owner or your own calculations.

How many doors do you have. You should be seeing at least $100/door monthly in positive cash flow.
 

eastender

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Hmmm...ok.

Let me add more info to the equation...

12 units - 11 1bdrm 1 bach.

Offering price: $631250
Annual revenue: $82434 (includes rent, coin-op laundry,parking and vacancy)
Annual operating expenses: $44012 (including city taxes $18275 and insurance $1500 as well as gas heat, hydro electric/water, superintendant, pm and repairs)
Financing: $23963 (includes the mortgage AND the PLC)

The mortgage I`m lookin` at is 4.89%(5year fixed) and PLC is 3.7%(5year fixed). Although, this could change as another bank is hounding me right now.

I gotta say it`s a 60 year old building but it is build solid! The walls are almost a foot thick and the roof is new and the boiler and hot water tank are as well. Of course, I`m still getting an inspection.

I`m getting all the documentation by the end of the week and then I`ll see how close they are to the numbers I was given.

Also, this place hasn`t had a rent increase in 4 freakin` years and I`m fixin` to change that, so I don`t see a problem attaining that $100 per door. Do you?


All comments welcome....
 

GaryMcGowan

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QUOTE (eastender @ May 20 2009, 10:26 PM) Also, this place hasn`t had a rent increase in 4 freakin` years and I`m fixin` to change that, so I don`t see a problem attaining that $100 per door. Do you?
All comments welcome....

Remember you can only raise rents on existing tenants once a year in Ontario and only after they have been there a year.
2009 guideline 1.8%
for this property aprox. $1400
Is that enough to get you over the $100 CFP that you are looking for?
 

GarthChapman

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QUOTE (eastender @ May 20 2009, 07:26 PM) Hmmm...ok.

Let me add more info to the equation...

12 units - 11 1bdrm 1 bach.

Offering price: $631250
Annual revenue: $82434 (includes rent, coin-op laundry,parking and vacancy)
Annual operating expenses: $44012 (including city taxes $18275 and insurance $1500 as well as gas heat, hydro electric/water, superintendant, pm and repairs)
Financing: $23963 (includes the mortgage AND the PLC)

The mortgage I`m lookin` at is 4.89%(5year fixed) and PLC is 3.7%(5year fixed). Although, this could change as another bank is hounding me right now.

I gotta say it`s a 60 year old building but it is build solid! The walls are almost a foot thick and the roof is new and the boiler and hot water tank are as well. Of course, I`m still getting an inspection.

I`m getting all the documentation by the end of the week and then I`ll see how close they are to the numbers I was given.

Also, this place hasn`t had a rent increase in 4 freakin` years and I`m fixin` to change that, so I don`t see a problem attaining that $100 per door. Do you?


All comments welcome....

The interest rate on the mortgage is at least one full percent above the market. So shop around with a mortgage agent who knows investment real estate.

On another note- `stress test` the property using 6% interest rate and a 25 year amortization. If it is still cashflow positive you probably have a winner.
 

invst4profit

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Rule #1. A investment properties value is based on today`s income not tomorrow`s.

Although you may feel you can increase the rents the present owner can only expect the value of his property to be based on the present rents. Landlords that do not increase there rents in Ontario every year by the allowable amount are devaluing there investment.

If I were assessing this properties value based on the present income the maximum price I would be willing to offer would be $450,000.
I calculate the number based on 100% financing at 6% interest with a positive cash flow of $1200/ month.

If the seller wanted more than that he would have to offer extremely attractive vendor financing (0%) on a large portion of the total amount to encourage me to go any higher.
 

kreezo

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Greg, how did you come about the $450,000 maximum offer price?


QUOTE (invst4profit @ May 21 2009, 09:33 AM) Rule #1. A investment properties value is based on today`s income not tomorrow`s.

Although you may feel you can increase the rents the present owner can only expect the value of his property to be based on the present rents. Landlords that do not increase there rents in Ontario every year by the allowable amount are devaluing there investment.

If I were assessing this properties value based on the present income the maximum price I would be willing to offer would be $450,000.
I calculate the number based on 100% financing at 6% interest with a positive cash flow of $1200/ month.

If the seller wanted more than that he would have to offer extremely attractive vendor financing (0%) on a large portion of the total amount to encourage me to go any higher.
 

invst4profit

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Fairly simple by working backwords.

Annual income ($82434.00) - Annual expences ($44012.00) = Profit + debt repayment ($38422.00)

$38422.00 - Cash flow $100/month per door($14400.000) = available debt repayment ($24022.00)

Knowing you have $24022.00 to pay monthly to the debt repayment use a mortgage calculator to figure out how much you can afford at 100% financing. This not only pays the mortage but also gives you a 6% return on your downpayment.

I used 6% as it would be a commercial mortgage but this may be low based on the individule applicant and on rates in a few years into the future.

I have no idea where the expences of $44012.00 came from as expences are partially estimates but assuming 50% of monthly income typically goes to expences this number is useable in this rough estimate.
 

eastender

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Ok...

Now the $100 net per door per month number, Greg, are you arriving at that as strictly cashflow or are you also using the principal paid as well in that equation? I think you mentioned somewhere that you do your own property managing...I can`t at the moment so I would have to factor that expense in that you wouldn`t. I want to have a good rule of thumb, I just need to know it`s reasonable for my situation.

This property sold for $480K in 2002....I don`t think $450K is in the making. Honestly, I`ve never seen deals close to that. But if your brave you can try this one (it dropped $120K since yesterday) Listing ID: H3014112.

And Gary, yep...I`m factoring that in now and but 5 people have arrived since Jan.09.

Again, thanks for the input people...it is greatly appreciated!

And the number crunching continues...
 

invst4profit

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The $100 is strictly monthly positive cash flow. I only count what I can use at the end of the month to but groceries. I do not count the principal pay down as you do not see that until you sell and depending on the market at the time you sell you may or may not recover that portion (speculation).

Weather you self manage, paying yourself, or hire a company your monthly expenses should be estimated in the 45% - 50% of monthly income. Many say they are seeing lower expenses but that can always be traced back to them not including many expense items.
The 50% rule is proven through decades of research involving 10s of thousands of varying types of units. Although many will argue different types of units may vary this is a solid, reliable number to use for rough calculations although due diligence should never be overlooked.

$480,000 in 2002. They paid too much.
It doesn`t matter if deals are in the workable range in the area it simply means you do not buy in that area. If the numbers don`t work then they don`t work.
Remember the price a seller sets on a property is irrelevant the only number that is important to a buyer is the one that matches the income.
 

bizaro86

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Strictly using your expense numbers, and I would check them, then double check them, then add a fudge factor if I were you, this looks like it might be worth doing to me, depending on your outlook. Are the rents in the building significantly under market? I know Ontario only allows small increases every, but what about on turnover, could you increase the rents substantially? I understand under-market apartments probably don`t get moved out of very freqeuntly, but you`ll have some evictions, transfers to other areas, deaths, etc that will provide a bit of movement.

I calculated 6870 monthly rent-3668 monthly expenses - 3026 monthly mortgage payment on the full amount (to give your downpayment some value) at 3.89/35 years = 175 per month.

Now, that`s probably not great for a building this size, so it depends if you think the expenses are rock solid and there is rental rate upside. I would also consider the probability of higher interest rates down the road, which would likely push you into negative cash-flow on refinance unless you are able to improve rents significantly.

Michael
 

eastender

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...and I walked away from the deal.

I might be new at this but that doesn`t mean I`m gonna settle for just any building. Looking at the numbers on this, I would be on a treadmill for years IF everything went perfectly....and that never happens.

Thanks everyone for the input...and Mr. Moderator...we should have a "Rate my deal" section or something. The unbiased opinions are invaluable!!!!

 

bizaro86

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QUOTE (eastender @ May 27 2009, 01:22 PM) I might be new at this but that doesn`t mean I`m gonna settle for just any building.

That`s a great quote! I might have to borrow it from you


Michael
 
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