New REI in Calgary - basement suites?

[Hammock]

Hi,

I`m a new Real Estate Investor in Calgary, and interested in developing a legal basement suite in a bungalow near Heritage LRT station. From an analysis online, I figure I can get about 700-800 a month for a nicely done 1 bedroom.
Any advice from some of the veterans out there? Anything I should be aware of? Any good/recommended renovators in the Calgary area?

 

[RedlineBrett]

In this lending environment we are of the opinion that you are better off using that capital to buy another property as opposed to adding a suite in.

We ran the numbers based on our construction costs and figured that if you think RE will increase at an average rate of between 3 and 4% per year for the next five years or 2-3%/yr for ten (depending on your ownership timeframe) then you should buy another property.

If it`s less than that, then put in the suite.

Why not buy something that has a suite already installed and then just freshen it up? LOTS of good ones of those available!

QUOTE (Hammock @ Mar 23 2009, 06:52 AM) Hi,

I`m a new Real Estate Investor in Calgary, and interested in developing a legal basement suite in a bungalow near Heritage LRT station. From an analysis online, I figure I can get about 700-800 a month for a nicely done 1 bedroom.
Any advice from some of the veterans out there? Anything I should be aware of? Any good/recommended renovators in the Calgary area?

 

[Hammock]

QUOTE (RedlineBrett @ Mar 23 2009, 01:35 PM) In this lending environment we are of the opinion that you are better off using that capital to buy another property as opposed to adding a suite in.

We ran the numbers based on our construction costs and figured that if you think RE will increase at an average rate of between 3 and 4% per year for the next five years or 2-3%/yr for ten (depending on your ownership timeframe) then you should buy another property.

If it`s less than that, then put in the suite.

Why not buy something that has a suite already installed and then just freshen it up? LOTS of good ones of those available!

Are you able to share your numbers and assumptions that you are basing your conclusions on?

I`ve got a guy coming in to do an estimate tomorrow, I`ll let you know whether it is within the realm of possibility.

 

[RedlineBrett]

QUOTE (Hammock @ Mar 23 2009, 09:16 PM) Are you able to share your numbers and assumptions that you are basing your conclusions on?

I`ve got a guy coming in to do an estimate tomorrow, I`ll let you know whether it is within the realm of possibility.

Ok I re-did my analysis for some calgary specific numbers and up-to-date rental amounts and interest rates.

The analysis is here:

http://redlinerealestate.ca/files/to%20sui...rty%20-%203.pdf

this is not a black and white problem and an estimate requires a number of variables and a few steps of iteration. Anyways here are the assumptions underlining the analysis:

- Purchase of a property is an unsuited property with a garage that can be rented for a total of $1775/mo
- Purchase price of this property is $350,000.
- Down payment is 10%, or $35,000.
- Cost to put a suite in is equal to $35,000
- mortgage rate is 4.45% fixed for the five year estimate AND the 10 year estimate.
- Amortization is 35 years.
- CMHC premium is 5.15% (4.75% for 10% down an an additional 0.4% for the 35yr am)
- rents appreciate at the same rate as property
- transaction costs for the future sale of the property are 5% total.
- Assuming that you are not selling the income property and are holding onto it forever.
- basement suite is low (700 for a brand new one bedroom) but this is due to the main floor now renting for less than 1775/mo

When I run all this through my math I see that you are better off buying a property then adding a suite at these appreciation rate numbers on a 5 yr and 10 yr time frame

5yr = just over 3%
10 year = just over 2%.

Some other things to consider:

- If you used the $35k to purchase a solid CASH FLOWING property (not breakeven on year 1!) it blows the `add suite` out of the water
- If you add in the transaction costs for selling the newly renovated basement suite it also hurts it.
- If you can do the suite for less than 35k you would need to know the return that the difference in cash would earn you. Call it a stock or a bond or something with a fixed rate so you could compare it to the new property.

If you have specific variables you want to add in to change things for your own particular situation send me an email or give me a call, but I might make you listen to my sales pitch

Trust this helps somehow.

 

[seanverret]

Great analysis Brett, can you run the same numbers if the development of the suite was 75% funded by the city, i.e. like the program happening in Edmonton right now.... I`m sure those numbers would help some of those who have been recently posting about the Edmonton Secondary Suite program...

 

[RedlineBrett]

You`d just take 75% of the cost off of the reno and then toss the savings into another investment option and add that cash to the cashflow generated by the suite. It would definitely help the suite side.

However if you can`t equate the cost of adding a suite very closely to the down payment capital required for a new property it becomes a lot tougher to compare them.

You`d also have to add something in for cost of dealing with the city, what other implications there are by using their program things like that.

QUOTE (seanverret @ Mar 24 2009, 11:09 AM) Great analysis Brett, can you run the same numbers if the development of the suite was 75% funded by the city, i.e. like the program happening in Edmonton right now.... I`m sure those numbers would help some of those who have been recently posting about the Edmonton Secondary Suite program...

 

[Hammock]

QUOTE (RedlineBrett @ Mar 24 2009, 11:48 AM) If you have specific variables you want to add in to change things for your own particular situation send me an email or give me a call, but I might make you listen to my sales pitch

This is great, thanks! I do have different assumptions (I`m not as optimistic that housing prices and rents will continue to increase at that rate), but can work on your sheet from here to do the investment return comparisons. Can you shoot me your contact info?

 

[RedlineBrett]

Sure thing, my spreadsheets are all linked to various tables on my hard drive and as such don`t take well to distribution, but I`d be happy to go over your concerns and specific costs/variables and help however I can.

shoot me an email bturnerATredlinerealestate.ca (replace the AT with @)

QUOTE (Hammock @ Mar 24 2009, 10:26 PM) This is great, thanks! I do have different assumptions (I`m not as optimistic that housing prices and rents will continue to increase at that rate), but can work on your sheet from here to do the investment return comparisons. Can you shoot me your contact info?

 

[RogerPanchuk]

QUOTE (Hammock @ Mar 23 2009, 07:52 AM) Hi,

I`m a new Real Estate Investor in Calgary, and interested in developing a legal basement suite in a bungalow near Heritage LRT station. From an analysis online, I figure I can get about 700-800 a month for a nicely done 1 bedroom.
Any advice from some of the veterans out there? Anything I should be aware of? Any good/recommended renovators in the Calgary area?


We have developed several basement suites in Calgary and I can build one for you. I can show you some of our finished projects and I have a few references to offer. I can be reached @403-710-7771 I look forward to talking with you about your project.

 

[RogerPanchuk]

QUOTE (RedlineBrett @ Mar 23 2009, 01:35 PM) In this lending environment we are of the opinion that you are better off using that capital to buy another property as opposed to adding a suite in.

We ran the numbers based on our construction costs and figured that if you think RE will increase at an average rate of between 3 and 4% per year for the next five years or 2-3%/yr for ten (depending on your ownership timeframe) then you should buy another property.

If it`s less than that, then put in the suite.

Why not buy something that has a suite already installed and then just freshen it up? LOTS of good ones of those available!
Brett makes some very good points if your in an offence mode. But from a defence side of things more cashflow would add alot of security. I think a main floor and a basement suite are esier to rent than one house for $1775. As the market gets tighter those more expensive homes will be even harder to Rent. We own several suited properties so maybe I have a bias opinion . When we did our we would buy, fix the home up and create a suite and then re-fi to get our money back. This worked very well for us in the past.

My 2 cents