Is This Kitchener Offering A Good Deal For 1st Time Investor?

[ClintL]

The Simple Investor group by Todd Slater in Mississauga is offering 2 bedroom townhouse condos in Kitchener - I'm wondering if this is a good deal for a 1st time investor.



Purchase price $120,000



Rent $850 monthly ($10200 annual)



Maintenance Fees $220 monthly ($2640 annual)

Property Taxes $111 monthly ($1332 annual)

Insurance $8.33 monthly ($100 annual)

Property Mgt/Rent Guarantee $70 monthly ($840 annual)



Mortgage Payment @2.99% 25 yr $454.74 monthly ($5457 annual)

Mortgage Payment @2.99% 30 yr $404.23 monthly ($4851 annual)



Cashflow if 25 yr amortization -$14.07 monthly (-$169 annual)

Cashflow if 30 yr amortization $36.44 monthly ($437 annual)



The property was appraised at $127,000 and if we use a 2% increase, we get $129,400 at the end of year one.



Mortgage was for $96,000 and 20% down of $24,000



Mortgage paydown if 25 yr amortization would be $2622.23 at end of year one

Mortgage paydown if 30 yr amortization would be $2007.61 at end of year one



I know that KWC is one of the hot spots to invest in and this The Simple Investor uses a rental pool where in the event of a vacancy, they guarantee the full monthly rent to the investor as part of their property management agreement.



From their property management agreement, it states that;



"the property manager shall utilize the Simple Fund for any vacancy loss, repairs and/or outstanding receivables for those owners participating in the Simple Fund. The parties acknowledge that the funds shall be used as follow:



(i) to cover any rental losses for rental units which become vacant as required ..."



They target seniors as tenants which they claim are the most stable and reliable tenants to have.



The cashflow is not great but The Simple Investor is countering with the rent guarantee.



I calculated the first year ROI with the appraised value of $127,000 increased to $129,400 plus mortgage paydown and cashflow at about 47% and then 20% thereafter annually.



It seems to be a slow and steady equity builder that is pretty hands off for the investor. I already got approved for two such units by RBC since the local branch seems to be quite familiar with The Simple Investor's projects.



I'm pretty sure that in the months ahead when I learn more about investing by taking ACRE and networking with REIN members, I will eventually be able to do more lucrative deals. But for a first investment, is this a decent foundation to start from?



What are everyone's thoughts on this type of deal?



Clint

 

[Thomas Beyer]

Not a bad deal on the surface.




How long is the rental guarantee ? One year ? 5 ? Till money runs out ?




What is missing is the repair and maintenance on your or pooled condos. Budget about 50-80 per month for that, ie carpet replacements, new fridge, drywall repair, new doorknobs, painting of bathrooms, etc.




Does each unit have a garage and a washer/dryer combo ?

 

[ClintL]

Slater told me that the Simple Fund is in effect for as long as the owners use them as the property managers. As for repairs, all units have a coverage limit of $800 per unit per year. Any repairs above $1000 require owners' approval before they start.



They don't have garages - only designated outdoor parking spaces. I can't recall if a washer/dryer was there but stove and fridge were present - no dishwasher.

 

[Rickson9]

$850 a month supports a $51k purchase price for me, but that's just me. $120k would be way to much.

 

[Thomas Beyer]

$800 repair fund is used up with the first vacancy.


Are these units upgraded ? Rest assured that vacancies do exist all the time, so the question is : "What is the motivation to manage if vacancies are too high ?"


How big is the reserve fund ? What major or minor upgrades did your property receive before sale ?


How big is the " Simple Fund" ?


With the right $s and upgrades this may make this a great investment, but if you are on the hook in year for a $12,000 interior reno bill plus new roof of $14,000 plus $5,000 for share of new parking lot pavement it may not be such a hot idea. The devil is in the details, in this as in any real estate investment. That's why it is called REAL estate. It is a real thing where real people live and real things happen, with real money involved to pay for real stuff like a roof, a new carpet, a new fridge, a paved parking lot etc.


I am not saying this is a bad investment - it may be excellent in fact - but what I am saying is that you have to get more facts and ask more questions before you sign the purchase contract, or waive conditions.

 

[richardkp]

There is also the cash flow on the property. You say that it is negative / break even at both the 25 and 30 year amort. and this is at 2.99%. Unless I am missing something aren't we all about making sure that every property we use as an investment is a positive cashflow??

At 2.99% as well this is a rate that is not around any more and the general consensus is that rates are going up, we just don't know when. When they do then you will be negative - or am I missing something here???

Unless it is $100 positive I would not invest.

 

[ClintL]

I appreciate all the comments especially since I'm a newbie - and I think Slater's group is specifically targeting investors who are green like me and don't want to get their hands involved - that's probably why they call it the Simple Investor.



Their management fee is the $70 per month. I toured the units and this was a condo conversion project they did so much was already renovated. I don't know a lot about specifics but again, it is part of my own ignorance.



I already signed for two units although they have extended the closing so I'm going to check with my lawyer if I could back out of one of them.



I don't think Slater would come out with a rotten investment opportunity since he's got a long 20 year reputation to protect here in Mississauga (he was a realtor). But I do now realize that with more education with REIN, I could do better.



But I'm thinking that even with the crappy cashflow but with the rental guarantee fund, a 20% ROI with the majority in the form of mortgage paydown will certainly beat the 2% or even negative ROI I was getting with mutual funds. Plus the financing was a piece of cake - maybe this might be important to build that financing record - I don't know.



I certainly would want future acquisitions to have at least $100 cashflow per month. I just hope that this first one doesn't turn out to be a lemon.

 

[housingrental]

These numbers don't interest me

I'd run away from this "deal"

Your opinion might vary

 

[Seankm21]

I also would run away from these. You are puting up 24k each to make at best 450/yr or at worst lose $165/yr cashflow? Sounds like the mutual funds kind of numbers. Do not count the appreciation into any numbers until it is realized. Appreciation is gravy at the end of the deal.

Just my 2 cents worth.



Sean

 

[housingrental]

Hi Sean

You are a very generous person

At worst he loses far more than that if things go wrong





[quote user=Seankm21]I also would run away from these. You are puting up 24k each to make at best 450/yr or at worst lose $165/yr cashflow? Sounds like the mutual funds kind of numbers. Do not count the appreciation into any numbers until it is realized. Appreciation is gravy at the end of the deal.

Just my 2 cents worth.



Sean

 

[ClintL]

What about the mortgage paydown by the tenant? Wouldn't that be factored in? You guys might know the area - it's on Valleyfield Rd in Kitchener near highway 8. Isn't that a good area?



Clint

 

[invst4profit]

If the value does not rise or worse drops then your mortgage pay down disappears into real estate and legal fees when you sell. But that's just worse case scenario.



The reality is the mortgage pay down is really only equivalent to what you would get from investing the $24000 at a decent return anywhere.



That is the reason the investment is not very attractive. You may only get a return on your down payment but nothing from owning the property.

It's more speculative than investment from my perspective.



Slater is the one making the lions share of the profits.

 

[jay2176]

Hi Clint, personally I would not touch an investment property that doesn't cash flow. I went to one of the seminars you are talking about, and they only offer certain properties for sale. If you have to ask if its a good deal, then you probably answered your own question. No, move on. I have a minimun amount per month that a property needs to cash flow before I will consider it. My wife and I purchased our first student housing condo apartment in KW and it cash flows after all is said and done, 600.00 per month. One of the owners in the same building will be listing her unit for sale, if your interested email my wife at: [email protected], she has the details.

 

[billkeay]

Hi Clint,



First of all, you have done a very thorough analysis. Way to go and way to take action! It really depends on your system and what kind of returns you would like to have. A property like this may suit someone who is starting out and wants some protection from a rental pool or a guarantee on rent. The others above are more senior investors so they may not be interested in a property like this as they have said.



KW is a hard place to get cash flow using the REIN system factoring in vacancy, maintenance, management etc., but it can be done. Please check to see if the rents are market rents because they do seem low for a 2 bedroom condo townhouse. The expenses you have here look about right. The condo fees are good compared to other complexes. One thing that could help you get more cash flow is if you add value to the investment like to manage it yourself for a few years, or do the maintenance yourself. Sometimes real estate investment comes dressed in overalls and looks like work. Real estate rewards action!



KW is a great place for appreciation. From 1997 to 2007 the market rose by 80% second only in the province to Barrie. In 2012, the vacancy rate is low 1.7% according to CMHC and the student vacancy rate is lower than that.



If you get a student rental and it if has 4 or more students in the suite, you would need 30% down payment. If the lender has it flagged as a student building you will need 30% otherwise, if it has 3 students or less you may only need 20% down. FYI.



Best of luck with your decision and investment strategy.



Sincerely,



Bill Keay

 

[housingrental]

Which building is your unit in?

[quote user=jay2176]Hi Clint, personally I would not touch an investment property that doesn't cash flow. I went to one of the seminars you are talking about, and they only offer certain properties for sale. If you have to ask if its a good deal, then you probably answered your own question. No, move on. I have a minimun amount per month that a property needs to cash flow before I will consider it. My wife and I purchased our first student housing condo apartment in KW and it cash flows after all is said and done, 600.00 per month. One of the owners in the same building will be listing her unit for sale, if your interested email my wife at: [email protected], she has the details.

 

[investorfrank]

Good Day, my personal opinion to you is walkaway!

 

[MatPiche]

Hey ClintL,



The rent does sound a bit low for a 2 bedroom townhouse. I have a two bedroom townhouse in Doon renting at $1190 per month. I am familiar with the area but I would have to look at it a bit more, your rent should be higher though.



With these numbers, I would run just as Adam said. I'm finding town homes that cashflow a min of $100 with all expenses in all day for my clients. $36 positive cashflow is too small of an amount for me personally, but might be good for you. It sounds pretty hands off which is what you may want.



Good luck!

 

[davidajones]

What a great exercise and use of the Forum. The variety of input was really fascinating !



My input: DON"T DO IT !



1 There is no cash flow and this is worse when you explore the sensitivity test of a higher interest rate.

.

2 On your first property I would really encourage you to manage your own property.



3 I see no potential for you to add value and make the return positive. (rent basement, improvemnts_



4 This property would not pass any of the basic REIN hurdles or scorecards.



5 And Kitchener/ Waterloo. I have lived and owned there and agree with Bill, very challenging to get positive cash flow. So don't buy there unless you are a speculator !



there would be only one reason I could think of to buy this property and that's for a bit of learning with minimal investment. I don't think this is enough



good luck and I think you were smart to ask for input. Made me think what the response would be to some of the stuff I own.



Dave

 

[investorfrank]

The Simple investor, Hmmm after further review why would anyone bother investing in these deals,

when you look at all the numbers the "simple equation" would be to RUNAWAY from this deal,



No cash flow ? Low Rents? A higher interest rate is a combination for disaster.

 

[ClintL]

Unfortunately, these were closed during my pre-REIN days. Good thing the interest rate was locked in at 2.99% for 4 years so I'll re-evaluate at that time to possibly sell these off.



My two recent acquisitions (post ACRE) are fortunately much better!