Great cashflow, but low score on the prop goldmine score card

[PBosse]

I`m new to this and would love some advice.

I`m looking at a 12-plex in a not-so-great part of Kingston, that shows great numbers. I wouldn`t expect much appreciation, and there isn`t much of an exit strategy. Vacancy rates are very low, but I`m told this property is a little more hands on than what I could get in other parts of town - hence the low price. I`m based out of Ottawa, so I`d have to rely on a property management company, at least for the week to week stuff.

Here are the approximate figures:

12-plex: 650,000
Income: 98,000
Mgmt: 6,000
Tax: 20,641
Ins: 1,583
Utilities: 9,575
Maint: 5,000 (my own estimate)

A few notes:
- All tenants pay their own hydro (except one who is moving out soon)
- While Kingston isn`t one of the top cities, it does fit my Belize as that`s where we want to live eventually.
- I have some experience with tenants, but not with multi-families.

Any thoughts? Don`t hold back.
Cheers
Pierre

 

[housingrental]

I`m not familiar with this property but I`d bet that maintenance expense ends up closer to $12,000 than $5,000
You might need to pay for that for a management intensive building - when including rental fees 6% might not do it
There will be extra costs for cleaning common area`s, snow, grass, salt, capital improvements, damage to building, evictions / non payment of rent / ltb, lots of fun to be had with hands on buildings...

Make sure you have 100% confidence in the management company your choosing before purchasing... there are many that won`t take on places like this and few that will do a great job for cheap...

 

[DaveRhydderch]

Good thoughts by Adam on things to consider.

I`ll take a different direction. You should have an idea if this property meets your system. You seem to be aware of the pro`s (cashflow) and cons (lots of work, low appreciation). For me I can`t have my investments consuming lots of my time, but maybe thats ok with you for the cashflow. If you have plans to eventually do this full time, perphaps this works.

I would recommend you consider what it is you want to get out of real estate investing - i.e what life you want to live - and see if this fits. You also do need an exit stratgey, as this will help you (i.e. hold for 5 years, pay down 50k in mortgage, assume 2% apprecaiton, sell for 700k, etc).

 

[Thomas Beyer]

QUOTE (PBosse @ Aug 17 2010, 08:32 PM)
..

Any thoughts? Don't hold back.

..


Talk to AT LEAST 3 property managers in Kingston about this area. Did you walk it in daylight and at night ? What is this neighborhood like ? You can improve the asset all you want .. but if the area is crappy then you will have headaches and rent collection issues until you sell (ask me how I know that)



Don't confuse pro-forma rent with net rent collected .. a difference of up to 30% !!



PM is 10-15% on such a small asset .. so much higher unless you live in a unit yourself and do it yourself !



R&M is likely higher depending on state of repairs.



50/door can be had in MANY locations in ON .. NO RUSH HERE on that price !!



I assume you're coming to the Aug.28/29 course in Edmonton .. a MUST for you !!



Related reads:



Items to consider when buying an apartment building: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-14548-Buy_vs_Build.html



Multi-Family Primer in May 2009 Issue of Canadian RE Magazine:

http://myreinspace.com/rein_members_only1/Members-Only_Discussion/81-10996-Multi-Family_Primer_-_May_2009_Issue.html

 

[PBosse]

Adam, Dave, Thomas,
Thank you very much for your thoughts on this. I`ve been reading your posts and your opinion means a lot. We`ve decide to pass for for a few different reasons. First, when using the figures you suggested, we got a little less excited. Secondly, we realized we were being a bit emotional, breaking one of the cardinal rules. Finally, we can`t make it to the Multi-family bootcamp and agree that it`s something we should do first. We`re just joining REIN now, so we`ll spend a bit more time on our education, apply a bit of patience, then jump in.
Thanks again,
Pierre

 

[Berubeland]

I can tell you that you can get good tenants but as Dave said you`ll need a pm that`s on board. It often takes one year or more to stabilize a distressed building. It also costs a fair bit. In a bad area you`ll want the best value place around so you can snag the best tenants.

 

[Rickson9]

QUOTE (PBosse @ Aug 17 2010, 10:32 PM) I`m new to this and would love some advice.

I`m looking at a 12-plex in a not-so-great part of Kingston, that shows great numbers. I wouldn`t expect much appreciation, and there isn`t much of an exit strategy. Vacancy rates are very low, but I`m told this property is a little more hands on than what I could get in other parts of town - hence the low price. I`m based out of Ottawa, so I`d have to rely on a property management company, at least for the week to week stuff.

Here are the approximate figures:

12-plex: 650,000
Income: 98,000
Mgmt: 6,000
Tax: 20,641
Ins: 1,583
Utilities: 9,575
Maint: 5,000 (my own estimate)

A few notes:
- All tenants pay their own hydro (except one who is moving out soon)
- While Kingston isn`t one of the top cities, it does fit my Belize as that`s where we want to live eventually.
- I have some experience with tenants, but not with multi-families.

Any thoughts? Don`t hold back.
Cheers
Pierre

This sounds like an apartment I looked at a few years ago; 352 Conacher Drive, Kingston.

 

[Dan_Eisenhauer]

A rule of thumb is that expenses are going to run about 30 - 35% of the income. For a building that is getting up there in age, or in a questionable area, they will probably be in the 40% range. Not being familiar with Ontario`s rental controls could mean that expenses are outpacing income, and the expense ratio may be even higher than that.

Be cautious and very conservative in your analysis.

 

[NorthernAlex]

Don`t forget expenses for Snow Removal!

Is there parking included? This can cost big $$$$, too!

 

[Thomas Beyer]

QUOTE (Dan_Eisenhauer @ Aug 22 2010, 10:19 AM) A rule of thumb is that expenses are going to run about 30 - 35% of the income. For a building that is getting up there in age, or in a questionable area, they will probably be in the 40% range. ..
only on well maintained, well located assets with seniors that don`t move.

A normal turnover per year is 30% .. so a new paint and carpet job every 3 years .. plus a month or so of vacancy even in a tight market due to turnover ... that adds up !!

FAR higher on newly acquired, usually uglier buildings with deferred maintenance and vacancy/collection issues !!

Also higher in high tax jurisdictions like SK or MB !!

or earthquake zones like Abbotsford due to higher insurance premiums !

Also higher in buildings with below market rents as expenses tend to be fixed .. thus % of rent is then higher !!