property analysis

[Ian]

I am looking for some advice/feedback on the following property:

This is a pre-construction three floor detached house with a detached two car garage and a coachhouse suite above the garage. I have no intentions of living in the house so there are potentially three rental units here: coach house, basementsuite and main/top floor. Each unit will have their own laundry and kitchen facilities.

I know that the two adjacent units are also being purchased for complete rental purposes.



Here are some numbers:



purchase price $600000 including GST

monthly mortgage payment at 4.2% fixed = $2715.89

monthly mortgage payment at prime + .25 = 2140.82



monthly expenses:



property taxes = $250 ($3000/year)

insurance = $100

vacancy rate @ 5% = $150

maintenance/repairs = 50 (not sure how much to allocate b/c it is brand new)

total expense (not including mortgage payment) = $550

estimated total monthly rent = $3000 (based upon local newspaper ads and realtor advice--will do my own test ads later)

so, if we go with the fixed rate then monthly expenses = $3265.89

which = negative cash flow of $265.89/month

if we go with the variable rate then monthly expenses = $2690.82

which = postive cash flow of $309.18

I see a decent upside in terms of potential equity gain b/c it is new. My concern is that in BC we can only raise rents approx. 4%/year (which is only $34 on $850).

The rents are conservative but would rather do that than over predict.

So, is this a good deal??

The cash flow is ok but the bigger question may be equity gain. What about mortgage rates in 5 years when the principal amount will still be quite high?

Please, any thoughts/advice would be greatly appreciated!!

Ian

 

[invst4profit]

The price is too high/rents are too low to be worth the trouble of investing in my opinion. At $200,000 per door this is not a good candidate for rental.
Positive cash flow is likely non existent regardless of interest due to missing or underestimated expenses.
I would prefer to see rental income at $5000 or better to start.

I don`t really see a upside in this investment.

 

[greg12]

The investors I know in Surrey who are enjoying good cash flow either have small mortgages, own 4-plexes & above or rent room to room. They consistently increase their rents each time a tenant moves out or their lease is up. Strangely enough, I`ve seen some of the biggest rent increases during these times of recession.

I also have a friend who started from a negative cash flow situation 3 years ago, but is now netting $+800 monthly on his 4 plex. If you are prepared to start negative, make sure to set the funds aside as part of your initial investment and have a definite plan for when & how the property will turn positive e.g. Smith Manoeuvring, rent increases, mtg cost decrease, sale etc.

 

[Ian]

QUOTE (greg12 @ Oct 5 2009, 02:20 PM) The investors I know in Surrey who are enjoying good cash flow either have small mortgages, own 4-plexes & above or rent room to room. They consistently increase their rents each time a tenant moves out or their lease is up. Strangely enough, I`ve seen some of the biggest rent increases during these times of recession.

I also have a friend who started from a negative cash flow situation 3 years ago, but is now netting $+800 monthly on his 4 plex. If you are prepared to start negative, make sure to set the funds aside as part of your initial investment and have a definite plan for when & how the property will turn positive e.g. Smith Manoeuvring, rent increases, mtg cost decrease, sale etc.

Thanks Greg. You speak of rent increases --is it not true that one can only raise rent by 4%/year? If so, then how can someone realize "big rent increases?"

Ian

 

[GarthChapman]

QUOTE (Ian @ Oct 5 2009, 03:56 PM) Thanks Greg. You speak of rent increases --is it not true that one can only raise rent by 4%/year? If so, then how can someone realize "big rent increases?"

Ian

You can charge a new tenant whatever they are willing to pay - the maximum increase regulation only applies to existing tenants.

 

[Lermy]

Ian,

We are picking up homes in that same area for $535000.

You have your rents about $500 short.

If you are paying $600k for a home in the area with a carriage house on top of garage, I believe you are paying way too much.

Also, check out this link, it is the allowable rent increase in BC. The rental increase is 3.2%.

Cheers,

Ryan

 

[westboundventures]

Ian,

I think you are missing some important items in your calculations. Some items to consider:
- is $50/month enough for repairs and maintenance? Talk to some investors who have managed multiple rental properties, they will all be able to tell you that this is way too low for a 3-suiter, even a brand new one.
- no budget for property management. Even if you are self-managing, is your time not worth anything? What happens when you buy more property or your circumstances change and you are no longer able to manage the property. I would suggest budget at least 10% for property management.
- interest rates are at historical lows. Even the bank of canada is now admitting they mave have to start raising rates sooner than originally stated. Any positive cashflow you get from a rock-bottom interest rate on a variable rate mortgage will quickly evaporate. I suggest following Thomas Beyer`s suggestion of "stress-testing" your financing at 6% and 25 year amortization. If you start bleeding cash at these financing rates you are risking overleveraging yourself when rates rise.

I personally follow REIN`s "10% rule" suggestion. This allows me to sleep well at night and pad my bank account every month with CASH. I do not worry about an increase in interest rates/vacancy/repairs because I have a great cashflow. If you are having trouble finding properties with STRONG cashflow, try talking to some other REIN members that are successfully following this system and find out where and what they are buying!

Best of luck with your investing!!