Please assess my numbers for 100%LOC financed purchase

[holymoly]

I have a conditional offer accepted on a tiny (~500sqft) SFH in Hamilton, 1/2km from downtown and GO Station. If anyone could give me feedback on my numbers, I`d really appreciate it. My usual spreadsheet isn`t set up for interest-only and I don`t know how to change it. Thank you!!!

Purchase price $80000
Financing 100% on HELOC, variable rate currently at 3.25%

MONTHLY OPERATING INCOME:
Rent = $750 plus utilities
Vacancy (7%) = $52.50
--------> Total operating income = $697.50

MONTHLY OPERATING EXPENSES:
Property tax = $114.00
Repairs/maintenance (5%) = $37.50
Property management (5%) = $37.50
Water heater rental (estimate) = $19
--------> Total operating expenses = $208.50

Interest-only payments on HELOC = $216.67/month

-----------
INCOME $697.50 - EXPENSES $425.17 = NET CASH FLOW $272.33

Notes: I want to pay down principal too but have calculated using minimum payments. The house is empty and I don`t have rental history, if any. $750/mo is my estimate based on area. It`s tricky to estimate since most houses aren`t miniature!

 

[manojsingh]

Hi,
Maintenance will be more because of the condition of the house. Vacancy and management will also be more. You will get less cash flow. Take extra precaution. Explore other financing option also to get maximum rate of return.
QUOTE (holymoly @ Oct 20 2009, 07:20 AM) I have a conditional offer accepted on a tiny (~500sqft) SFH in Hamilton, 1/2km from downtown and GO Station. If anyone could give me feedback on my numbers, I`d really appreciate it. My usual spreadsheet isn`t set up for interest-only and I don`t know how to change it. Thank you!!!

Purchase price $80000
Financing 100% on HELOC, variable rate currently at 3.25%

MONTHLY OPERATING INCOME:
Rent = $750 plus utilities
Vacancy (7%) = $52.50
--------> Total operating income = $697.50

MONTHLY OPERATING EXPENSES:
Property tax = $114.00
Repairs/maintenance (5%) = $37.50
Property management (5%) = $37.50
Water heater rental (estimate) = $19
--------> Total operating expenses = $208.50

Interest-only payments on HELOC = $216.67/month

-----------
INCOME $697.50 - EXPENSES $425.17 = NET CASH FLOW $272.33

Notes: I want to pay down principal too but have calculated using minimum payments. The house is empty and I don`t have rental history, if any. $750/mo is my estimate based on area. It`s tricky to estimate since most houses aren`t miniature!

 

[holymoly]

QUOTE (manojsingh @ Oct 20 2009, 09:41 AM) Hi,
Maintenance will be more because of the condition of the house. Vacancy and management will also be more. You will get less cash flow. Take extra precaution. Explore other financing option also to get maximum rate of return.

Thanks for your reply. Yes, you could be right about vacancy. I`ll be doing the management myself. That`s interesting about maintenance. I thought it might be less because the house is so small. (Maybe you saw this house?

) Could you please expand on the idea of getting a better rate of return with other financing options? Thanks!

 

[EdRenkema]

QUOTE (holymoly @ Oct 20 2009, 07:20 AM) I have a conditional offer accepted on a tiny (~500sqft) SFH in Hamilton, 1/2km from downtown and GO Station. If anyone could give me feedback on my numbers, I`d really appreciate it. My usual spreadsheet isn`t set up for interest-only and I don`t know how to change it. Thank you!!!
Purchase price $80000
Financing 100% on HELOC, variable rate currently at 3.25%

MONTHLY OPERATING INCOME:
Rent = $750 plus utilities
Vacancy (7%) = $52.50
--------> Total operating income = $697.50

MONTHLY OPERATING EXPENSES:
Property tax = $114.00
Repairs/maintenance (5%) = $37.50
Property management (5%) = $37.50
Water heater rental (estimate) = $19
--------> Total operating expenses = $208.50

Interest-only payments on HELOC = $216.67/month

-----------
INCOME $697.50 - EXPENSES $425.17 = NET CASH FLOW $272.33

Notes: I want to pay down principal too but have calculated using minimum payments. The house is empty and I don`t have rental history, if any. $750/mo is my estimate based on area. It`s tricky to estimate since most houses aren`t miniature!

Congratulations on taking action.
Have you thought about your exit strategy???
In my opinion a 500 sq. ft. house is tough to resell.

You will also be renting to single person, not bad if it is in a trendy area to a single professional if the neighbourhood does not appeal to that type of person I wouldn`t touch it, be careful! You are creating a very one dimensional strategy for a very limited group of potential tenants only because it is inexpensive and easy to finance.

 

[BrianPersaud]

QUOTE (EdRenkema @ Oct 20 2009, 09:59 AM) Congratulations on taking action.Have you thought about your exit strategy???
In my opinion a 500 sq. ft. house is tough to resell.

You will also be renting to single person, not bad if it is in a trendy area to a single professional if the neighbourhood does not appeal to that type of person I wouldn`t touch it, be careful! You are creating a very one dimensional strategy for a very limited group of potential tenants only because it is inexpensive and easy to finance.

$80k sounds like its in those rough areas in Hamilton. Hamilton REIN members would be able to share all her experiences managing property there. Rough tenant profile and high expenses/vacancies

 

[holymoly]

QUOTE (EdRenkema @ Oct 20 2009, 09:59 AM) Congratulations on taking action.Have you thought about your exit strategy???
In my opinion a 500 sq. ft. house is tough to resell.

You will also be renting to single person, not bad if it is in a trendy area to a single professional if the neighbourhood does not appeal to that type of person I wouldn`t touch it, be careful! You are creating a very one dimensional strategy for a very limited group of potential tenants only because it is inexpensive and easy to finance.
Great points, thanks.

 

[holymoly]

QUOTE (BrianPersaud @ Oct 20 2009, 10:50 AM) $80k sounds like its in those rough areas in Hamilton. Hamilton REIN members would be able to share all her experiences managing property there. Rough tenant profile and high expenses/vacancies
Thanks for your thoughts. The original listing was almost $100k, then down to $90K. It`s in Corktown, which is a transitioning area but I wouldn`t call it rough. I have another SFH in this neighbourhood and have only had great tenants, but that`s a `normal` house, easier to rent I`m sure.

 

[housingrental]

You will not find quality management anywhere nfor $37.50 / month
Maybe, maybe in that area for $80+/month and then more on re-rental

Can you consistently find quality renters for this type of property?
What percent of rent can you reasonably hope to collect?

I`m guess this is an older property. Will utilities as a proportion of rent be very high? Even for a small home, if its older and detached, $200/month utilities is possible.

 

[holymoly]

QUOTE (housingrental @ Oct 20 2009, 07:30 PM) You will not find quality management anywhere nfor $37.50 / month
Maybe, maybe in that area for $80+/month and then more on re-rental.
Thanks for your thoughts. I`m not using a property management company, just trying to factor in a bit for myself. I haven`t had any problems at all with my other SFH in this area -- the two sets of tenants so far have been great, and finding them wasn`t hard -- so maybe I`m not being realistic after that good luck. It sounds like I should expect to put more management hours into this smaller property.

QUOTE Can you consistently find quality renters for this type of property?
What percent of rent can you reasonably hope to collect?
That`s a good question. I wish I knew how to answer it. There are just a few houses this size in the area and the houses on this block are regular size.

QUOTE I`m guess this is an older property. Will utilities as a proportion of rent be very high? Even for a small home, if its older and detached, $200/month utilities is possible.
You`re right, it is very old. It`s semi-detached.

Thanks for the good questions to ask myself. I`m learning all the time.

 

[Emil1753]

really? $750 rent for a 500sq ft home in Hamilton?
Sounds high.

As well, I know I`ve had issues in the past getting financing for detached houses smaller than 700 sq ft.
I know you`re using your HELOC but think about resale.

 

[NiagaraInvestor]

Congrats on your first property!!




Judging by the price I`m going to guess that it needs quite a bit of work?  

I also agree with the previous poster that 750 + utilities might be a bit rich for that part of Hamilton.

That being said I think it`s proper that you mange your first rental property by yourself so you can learn the ropes. 

Bought my first property with business partner for $85`900 in St. Catharines in 2003.  Six years on I own it myself, fixed it myself and learned a lot process. 

You will encounter problems with this new property you probably didn`t know even existed..

 

 

[holymoly]

QUOTE (NiagaraInvestor @ Oct 22 2009, 06:13 PM) Congrats on your first property!!
Thank you! It`s actually my second property, but going from one to two feels like a big step... it feels like acknowledging that I really am committed to this RE investment/landlording thing.

QUOTE Judging by the price I`m going to guess that it needs quite a bit of work?

I`ll find out for sure at the inspection this weekend! I think the main reason for the price is the size... but we`ll see!

QUOTE I also agree with the previous poster that 750 + utilities might be a bit rich for that part of Hamilton.
This has been my main worry. However, today I dug up an MLS listing from a year ago for a different semi in the same area, along with notes I took on a conversation I had with that semi`s owner/landlord back then... He was renting each unit of the semi for $750 plus utilities. Checking the listing I could see that his 2-bedroom units are actually smaller than `my` 2-bedroom house (I know, hard to believe!) so maybe $750 isn`t that unreasonable.

QUOTE That being said I think it`s proper that you mange your first rental property by yourself so you can learn the ropes.
I like this advice. My other rental (just over a year now) has gone smoothly, so I haven`t been raked over the coals yet as I learn the ropes!

Not that I hope to be, but I know I still have lot to learn. (The fixing-up before renting it was pretty intense though, involving everything from cat problems to taking bones to the police station for identification!... But I really enjoyed all of that.)

QUOTE Bought my first property with business partner for $85`900 in St. Catharines in 2003. Six years on I own it myself, fixed it myself and learned a lot process.
That`s great. The more time I spend on this forum the more impressed I am with the smart moves people here make.

QUOTE You will encounter problems with this new property you probably didn`t know even existed.
I`m sure you`re right.

Thanks for your response.

 

[holymoly]

QUOTE (Platinum @ Oct 21 2009, 12:19 AM) really? $750 rent for a 500sq ft home in Hamilton?
Sounds high.
Thanks for your thoughts, Platinum. I just posted above about a similar sized house (two homes, both sides of a semi) each renting for that price. But, for sure, I might have to go lower.

QUOTE As well, I know I`ve had issues in the past getting financing for detached houses smaller than 700 sq ft.
I know you`re using your HELOC but think about resale.
I didn`t of this. Thanks very much for pointing it out.

 

[NiagaraInvestor]

I`m sure your home inspector will do this but from my experience, especially with older properties in southern Ontario there`s a few costly issues to look for.
1 structural issues.  I`ve seen some issues get by not so fastidious home inspectors that really should have ben noticed.   Happened to me, cost thousands in material to fix and i did it myself..




2.  Electrical: this one is almost endless but I`d look for knob and tube.  Insurance companies don`t like it and might say "30 days to get it out" after you`ve agreed to purchase even though they said it was not a problem.  Again happened to me.

Aluminum wiring and other issues are less costly but should be kept in mind..

Look around for junction boxes in unusual places like, every few feet in basement ceilings where they might have been you used to hang lights for growing weed.  Wiring that`s been tampered with often tells you it was a grow op..Remember unless they got busted this does not have to go on title and the seller probably wouldn`t volunteer this info..

3.  Mold and asbestos.   Mold usually means a problem with your building envelope and often leads to a lot of tear out to fix the cause of the moisture entering the building.  It`s often difficult to tell how bad the problem is until you start removing material. Of course this can be very expensive..


Asbestos.. Ff course in an older home I`m sure somewhere whether in the attic, floor tiles, pipe insulation (hot water heating) you will probably have it somewhere.





I`ve learned the hard way so if I had to do it all over again I would have used these issues to knock down the price!

Call in contractors for estimates then proceed from there....

 

[holymoly]

QUOTE (NiagaraInvestor @ Oct 23 2009, 11:29 AM) I`m sure your home inspector will do this but from my experience, especially with older properties in southern Ontario there`s a few costly issues to look for.
1 structural issues. I`ve seen some issues get by not so fastidious home inspectors that really should have ben noticed. Happened to me, cost thousands in material to fix and i did it myself..




2. Electrical: this one is almost endless but I`d look for knob and tube. Insurance companies don`t like it and might say "30 days to get it out" after you`ve agreed to purchase even though they said it was not a problem. Again happened to me.

Aluminum wiring and other issues are less costly but should be kept in mind..

Look around for junction boxes in unusual places like, every few feet in basement ceilings where they might have been you used to hang lights for growing weed. Wiring that`s been tampered with often tells you it was a grow op..Remember unless they got busted this does not have to go on title and the seller probably wouldn`t volunteer this info..

3. Mold and asbestos. Mold usually means a problem with your building envelope and often leads to a lot of tear out to fix the cause of the moisture entering the building. It`s often difficult to tell how bad the problem is until you start removing material. Of course this can be very expensive..


Asbestos.. Ff course in an older home I`m sure somewhere whether in the attic, floor tiles, pipe insulation (hot water heating) you will probably have it somewhere.





I`ve learned the hard way so if I had to do it all over again I would have used these issues to knock down the price!

Call in contractors for estimates then proceed from there....
Thanks NiagaraInvestor. The first time I used a home inspector (for my own home) he was terrible. Unfortunately I didn`t realize it until long after the house became mine. The guy I`ve booked for the new place is expensive but seems very thorough (I used him once before). Like you say, there`s bound to be something.... now to find out what.

The tip about junction boxes is really interesting. I never would`ve put that together. Thanks, good to know.

 

[NiagaraInvestor]

QUOTE (holymoly @ Oct 23 2009, 08:40 AM) Thanks NiagaraInvestor. The first time I used a home inspector (for my own home) he was terrible. Unfortunately I didn`t realize it until long after the house became mine. The guy I`ve booked for the new place is expensive but seems very thorough (I used him once before). Like you say, there`s bound to be something.... now to find out what.

The tip about junction boxes is really interesting. I never would`ve put that together. Thanks, good to know.
Same story here.  We had on of those "everything is great" home inspectors too.  On my second property an expensive but very good one..





Anyways how did the inspection go?  

 

[holymoly]

QUOTE (NiagaraInvestor @ Oct 26 2009, 03:52 PM) Same story here. We had on of those "everything is great" home inspectors too. On my second property an expensive but very good one..





Anyways how did the inspection go?

Lots of significant problems, including foundation issues and wood rot due to half the house being below soil level. I`m not going to buy it.

An interesting/bad thing.... Apparently the basement was once shared between both units of the semi (I`ve heard this is not extremely unusual in these very old semis -- maybe because the basements were crawl spaces once) and both the sewage and water lines come into this house`s basement through the common wall. That is, they run from the city lines to the attached neighbour`s house, then go from his basement into this basement. Imagine being at the mercy of your neighbour for the pressure and integrity of your water and sewage system!

 

[asifghayoor]

QUOTE (holymoly @ Oct 20 2009, 11:14 AM) I have another SFH in this neighbourhood and have only had great tenants, but that`s a `normal` house, easier to rent I`m sure.



just wondering what rent your getting for your "normal" houses, are they 3 bedroom type houses? we are getting 1250 + all utils for our townhouse up on the mountain but i have no feel for the lower part of the hammer.

thanks

Asif Ghayoor P.Eng

 

[holymoly]

QUOTE (asifghayoor @ Oct 28 2009, 04:22 PM) just wondering what rent your getting for your "normal" houses, are they 3 bedroom type houses? we are getting 1250 + all utils for our townhouse up on the mountain but i have no feel for the lower part of the hammer.

thanks

Asif Ghayoor P.Eng
$1100 plus utilities for a three bedroom semi.

 

[AndyLuchies]

QUOTE (holymoly @ Oct 20 2009, 08:51 AM) Could you please expand on the idea of getting a better rate of return with other financing options? Thanks!

1. If you mortgage it you`ll get a better interest rate. (Your LOC is probably prime + 1% right? Right now you can get mortgages at prime, some even prime minus something!)

2. If you mortgage it, you`ll be forced to pay down principle, which you want to do anyways.

3. If you mortgage it, you will save your LOC money for other purchases, investments, etc. ALWAYS use the banks money instead of your own. If you`re using a secured LOC, then you are leveraging your own wealth, but you want to leverage the banks money because they give it away so cheaply.

4. If you mortgage it, it will give you a realistic assessment as to whether you can cashflow it. Using your own money hides A LOT of problems. Make sure you`re not buying a "dog" property that will eat your lunch. This RE slump is staying for a while, so make your deals good ones.

Mortgage at 80%, the monthly payments will be higher, but much of that will go to principle not interest so you`ll actually be getting cheaper financing, saving your own money for later deals, and stress-testing the property right off the bat!