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GillianJ

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Hello all,

Have just learned about this forum and am finding a lot of very interesting information.

I am thinking of buying a second investment property. I would leverage my first (and currently only) investment property to provide me with enough funds to put down 20% on a second property (therefore, no CMHC fees). The property taxes, utilities and insurance on this second property represent about 30% of the gross rents. My mortgage broker says I can get a 3.85% 5-year fixed mortgage; the mortgage payments would be about 57% of the gross rents (35-year amortization) or 69% (25-year amortization). Basically, if I go with the 35-year amortization, I`d be netting* about $350/month. With the 25-year amortization, I`d be just breaking even. (* not including income tax payable on difference between revenue and expenses or monies for a contingency fund).

I live in the same city as the property; therefore, there would be no management fees. The property`s in an excellent location and there are multiple units (so if one unit is vacant there would still be rents coming in from the other units).

Just wondering if I could call on your experience for any feedback on this purchase...

Thanks!
 
Gillian,

Sounds like you are considering buying a property for around $555,000 generating only around $2700 in rent(!) That is a very low rent to price ratio. I would not buy it as it is not expected to generate any cash flow. Plus, you would have additional expenses you did not include in your calculation such as vacancies, management, maintenance and repair costs.

In other words - save your money for a MUCH better deal!

Good luck,
Neil
 
Based on the sketchy details you have given on this property I predict you will likely have negative cash flow on this property from day one and when interest rates rise you will potentially be throwing a lot of money into this property.
The reason for this is because you are leaving many expenses out of your calculations. Legal, repairs, evictions, vacancies, utilities when vacant, advertising, prep between tenants etc, etc..
To be safe you should assume expenses will be 50% of your rental income, when initially evaluating, on a long term bases. Holding a property can result in major expenses such as evictions (lost income) HVAC, roof, window replacement etc.
 
QUOTE (GillianJ @ Apr 6 2009, 11:33 AM) .... The property taxes, utilities and insurance on this second property represent about 30% of the gross rents. My mortgage broker says I can get a 3.85% 5-year fixed mortgage; the mortgage payments would be about 57% of the gross rents (35-year amortization) or 69% (25-year amortization). Basically, if I go with the 35-year amortization, I`d be netting* about $350/month. With the 25-year amortization, I`d be just breaking even. ..
expenses WILL be higher .. and bank will underwrite on higher expenses, using a 50% expense ratio .. thus I would be very surprised you`d get that high a mortgage on an investment property .. unless you have very high other income to offset it !

What is the price and what is the realistically achievable rent ?
 
Thanks everyone for your feedback. Here are more details:

price: $500,000; monthly mortgage of $1872/month (35-year amortization)
gross rents: $3250/month
expenses: property taxes: $400/month; utilities/insurance: $568/month; anticipated regular maintenance/ repair: $100/month; total = $1068/month
Therefore, without the contingency amount, there would be approx. $310 unaccounted for (earlier I had rounded figures and came out with a slightly different figure).

The cap rate is 7.8% which is in keeping with the area.

The property is in very good condition; newer windows, high efficiency furnace, new kitchens, and newer roof. Residences a block away from this property are selling for over $600,000. This is a very nice area and properties rent quickly.

My strategy is to hold for 10 years and then sell... hopefully with a good growth in equity.

Your opinions, with this further information, are valued. Thank you again.
 
Rent to purchase price is too low
I`ve never seen a property with $3250 rent that works out to a 7.8% cap rate when purchased at 500k
Never
Your numbers are suspect if you can calculate a 7.8% cap using that rent and purchase price
 
QUOTE (housingrental @ Apr 6 2009, 07:42 PM) Rent to purchase price is too lowI`ve never seen a property with $3250 rent that works out to a 7.8% cap rate when purchased at 500k
Never
Your numbers are suspect if you can calculate a 7.8% cap using that rent and purchase price
indeed .. ANY investment / long term hold project over $300,000 is suspect .. a rent of over $3000/month is NOT sustainable !!

Where is that ?? New York`s Manhattan ? Downtown Paris ? London, UK ? I would know of no other city being able to command a sustainable rent of over $2500 !!

buy 3 condos or townhouses for $150-180K instead .. with sustainable rents of $1200 each !

or: flip it for a 100K profit if indeed it is worth 600K !!
 
Gillian,

where is the property located and is there potential to increase the rents?
 
Gillian,

7.8% is NOT the CAP rate, it is the annual rent to purcahse price ratio: 3250 * 12 / 500,000 = 7.8%. BIG difference!

Let`s use the right terms. The CAP based on the numbers you provided is: (3250-1068)*12/500,000 = 5.2%

Regards,
Neil
 
Sorry for the mix up in terminology... I am new at this.

At first glance the property seemed to have a lot going for it; however, it is evident that the rents are too low to sustain the expenses.

I will investigate the townhome idea and re-read the REIN ACRE-system book.

Thanks again for your input.
 
Thank you ThomasI agree with your additional content...

QUOTE (thomasbeyer2000 @ Apr 6 2009, 11:08 PM) indeed .. ANY investment / long term hold project over $300,000 is suspect .. a rent of over $3000/month is NOT sustainable !!

Where is that ?? New York`s Manhattan ? Downtown Paris ? London, UK ? I would know of no other city being able to command a sustainable rent of over $2500 !!

buy 3 condos or townhouses for $150-180K instead .. with sustainable rents of $1200 each !

or: flip it for a 100K profit if indeed it is worth 600K !!
 
you can get more rent than that for over $100,000 dollars LESS in Fort McMurray. Just FYI...happy investing.
 
QUOTE (Nukav @ Apr 7 2009, 03:56 PM) you can get more rent than that for over $100,000 dollars LESS in Fort McMurray. Just FYI...happy investing.
can you, with oil @ $50 ?
 
QUOTE Where is that ?? New York`s Manhattan ? Downtown Paris ? London, UK ? I would know of no other city being able to command a sustainable rent of over $2500 !!

How about Ottawa? The property is (although maybe I should say "was" since I`m not buying it) a triplex in the Alta Vista area - close to two hospitals, public transit and within 45 minutes of two universities. It`s two 3-br units and one bachelor.
 
Hi Gillian,

I recently returned from the Vancouver ACRE Program. One big thing I learned is that it`s all about CASH-FLOW. Of course, you want the property to go up in value, so when you sell it in 5, 10, 20 years it will have made you a nice profit; however, it still is all about creating an income for yourself. If I were you I`d do a couple things...
  • Find rental properties that cash-flow nicely at decent, even low rents.
  • When calculating the numbers on a rental property, use conservative interest rates because when you renew your mortgage in 5 years you don`t want to pay any extra for your property.Focus on the big picture. Use CMHC or Genworth to your advantage...put only 5% or 10% down so you can keep buying more properties. Don`t waste your down-payment money on one property (a lesson learned by me).Read or re-read Don Campbell`s revised Real Estate Investing in Canada and take notes as you read.
Right now, I`m buying a property my 4th rental property for $67,500. I am putting 5% down ($3375) - sure I pay a hefty CMHC premium but it gets added to the mortgage and realistically when am I EVER going to pay that mortgage off. My mortgage payments (variable 3.1% interest, 35 years) are around $260/month, strata $100/month, taxes $30/month). The rent is $570 which is low for the area. I cash flow at $180/month. This is pretty nice for only putting $3375 down. No one is getting that kind of return in the stock market - that`s for sure.

Good luck with your decisions!
Lee



QUOTE (GillianJ @ Apr 6 2009, 10:33 AM) Hello all,

Have just learned about this forum and am finding a lot of very interesting information.

I am thinking of buying a second investment property. I would leverage my first (and currently only) investment property to provide me with enough funds to put down 20% on a second property (therefore, no CMHC fees). The property taxes, utilities and insurance on this second property represent about 30% of the gross rents. My mortgage broker says I can get a 3.85% 5-year fixed mortgage; the mortgage payments would be about 57% of the gross rents (35-year amortization) or 69% (25-year amortization). Basically, if I go with the 35-year amortization, I`d be netting* about $350/month. With the 25-year amortization, I`d be just breaking even. (* not including income tax payable on difference between revenue and expenses or monies for a contingency fund).

I live in the same city as the property; therefore, there would be no management fees. The property`s in an excellent location and there are multiple units (so if one unit is vacant there would still be rents coming in from the other units).

Just wondering if I could call on your experience for any feedback on this purchase...

Thanks!
 
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