Putting a value on a full duplex?

[darkness05]

Hey everyone - I have a line on a full duplex going up for sale in Kelowna BC. Since the market has changed so dramatically here in just the past 6-12 months, I am curious how you come up with an accurate value on something with limited recent comps.

My experience thus far has been single family bi-levels and I know that market fairly well - but new to duplexes.

Unit is 750K and is currently rented at $2200 a side. After taxes/insurance/payment it will net $1400 a month or $700 a side. Fairly good returns.

So when buying do you just base it strictly off the cash flow per month or what?

Thanks for any info you may have

 

[Matt Crowley]

Just as a check here... so both duplexes selling for $750,000 and monthly NOI is $1400. So your cap rate is 2.24%. Sorry but is that good returns? Rents would need to grow 165% to reach a 6% cap, assuming operating expenses stay flat.

As a rule of thumb, a risky investment should not make less than a risk free GIC.

2.24% is the total return on asset. If you have 50% leverage multiply that my 2 and your return is 4.48%. Oh, I should probably to mention that you can only borrow a maximum of $292,540 on the property to stay cash flow positive so requires $457,459 down to earn 0%. But you will actually lose money because you still pay taxes on your PPD so you will be paying to lose money.

Much better investments out there, IMHO.

 

[darkness05]

Hey Matt - sorry I re-read my initial post and it wasn't clear. The entire unit is 750K - or 375K a side. Rents are $4400 for the entire unit or $2200/side.

 

[Thomas Beyer]

I have a similar one in Penticton - with 2 titles though. I'd reckon Kelowna is AT LEAST $100,000 higher, so $850,000 if two titles, and maybe $750-800,000 if only one title. Depends on land size, house size, house quality and area. What do neighboring houses (i.e. non-duplexes) go for ?

Could you sub-divide if only one title today ? You'd get a $70-100,000 lift I'd say.

Write an offer, tie it up, THEN decide if you wish to waive conditions or not. Will be tough to finance over 65% LTV with this income unless you have personal income to augment it. Part of financing will be an appraisal.

 

[Rickson9]

$4400/month gross rent

I would pay no more than $440,000 for the property subject to inspection. Assuming normal employment prospects and in large population city.

I would pay this amount because it's what I'm getting in the US. If it's not at least equal to the US then there's no reason for me to buy it.

 

[Thomas Beyer]

.. I would pay no more than $440,000 for the property subject to inspection. ...

Only a fool would listen to this. $750,000 for a duplex is likely very good value for Kelowna. Sell it for $850,000 in a year or 2 and send us a all a picture of your new Tesla !

 

[Matt Crowley]

$4400/month gross rent

I would pay no more than $440,000 for the property subject to inspection. Assuming normal employment prospects and in large population city.

Could you share a city you are looking at right now Rick? Very interested. That is a price to rent of 8.3... hard to imagine why people are not buying there instead of renting.

 

[Thomas Beyer]

Could you share a city you are looking at right now Rick? Very interested. That is a price to rent of 8.3... hard to imagine why people are not buying there instead of renting.

Likely because it is only one title and most folks wish to buy only one home, and not two. It works well for investors though, or for folks willing to live in one side and rent the other (which is the minority of people)

 

[Rickson9]

Could you share a city you are looking at right now Rick? Very interested. That is a price to rent of 8.3... hard to imagine why people are not buying there instead of renting.

You can find this in a number of US cities. Cleveland, OH comes to mind.

https://en.m.wikipedia.org/wiki/Cleveland

A 13-unit apartment sold recently for $500k USD ($685k CAD).

http://www.cleturnkey.com/for-sale/14801-clifton-blvd-lakewood-oh-44107/

If you want a duplex, they sell for $180k USD and gross rents are around $2k USD/month.

With regards to why they're renting and not buying, most Canadians underestimate the massive financial and psychological hit the Americans took after the Great Recession.

Only a fool would listen to this. $750,000 for a duplex is likely very good value for Kelowna. Sell it for $850,000 in a year or 2 and send us a all a picture of your new Tesla !

Want a Tesla? Spend $685k CAD and get a 13 unit multi family, and get the Tesla tomorrow. Or spend $750k CAD for a Kelowna duplex and have fun doing your own property management.

 

[darkness05]

Hey guys - thanks for the info here. I decided to put an offer in and it was accepted at 750K. It is in a solid, upcoming neighbourhood. Subject to financing and inspection of course. At $1400 a month cash flow I really didn't see the downside to this - plus the fact that I feel that the Kelowna market will just keep going up. Hoping everything goes through as planned!

 

[dpeacock]

As a comparable in Calgary for a side by side duplex, listed on MLS today, you'd pay about 750-780 for a side by side duplex in a good neighbourhood, renovated. You would get about 1850 per side. And you'd have to look hard for that. An un-renovated side by side might go for 650-700 and you'd get about 1250-1300 per side. So fairly expensive, even with the downturn.

Just curious. When you say it cash flows 1400 mo, do you add in repairs, maintenance, property Managment, and taxes? How much money down?

If you split title, then there's a lift if you sold renovated profited separately for about 390-415 per side.

 

[Matt Crowley]

You can find this in a number of US cities. Cleveland, OH comes to mind.

https://en.m.wikipedia.org/wiki/Cleveland

A 13-unit apartment sold recently for $500k USD ($685k CAD).

Just did a quick peripheral of Cleveland. Strong multi occupancy and amazing affordability (for the customers) at caps 7%+ http://www.colliers.com/-/media/fil...kets/ohio/ohio/2016/oh 2016h1 multifamily.pdf. Amazing to see rents at around $1/SF in apartment buildings. Big advantage for customers.

Commercial and industrial seem to be lagging a bit (retail: http://www.colliers.com/-/media/fil...o/cleveland/research/2017/cle2017q1retail.pdf).

Like I said, a peripheral look. I didn't dig into REIS data.

Rick, is your play on macroeconomic variables? Vs. opportunity or value add is what I am asking? Is the strategy buy core / core plus in markets with strong macroeconomics?

 

[dpeacock]

If you split title you could sell each side for about 10-20k more.

 

[Thomas Beyer]

Low cap rates usually go hand in hand with a strong economy and more value upside potential, whereas higher cap rate assets are usually found in smaller cities, less economically vibrant areas but are better for cash-flow but often with more muted value upside. There is no right or wrong here, just different wealth creation and real estate strategies.

Entering the US now, at close to 70 cents US per Can $, one needs to also look at the risk of future exchange rates as a Canadian investor. You may be asked to pay taxes in US $s on a gain on sale YET get less Can $s in 5 or ten years when the rate might be 80-85 cents again.

The US also has far higher mortgage rates, roughly 50% more expensive. A commercial multi family asset here with CMHC might carries a 2.7% mortgage rate, or 3.5% without whereas in the US it is well over 4% approaching 5%. residential mortgages are very tough to get for Canadian investors, are lower LTV and also far more than high 3 or 4% ie 50% more than your typical 2.7% mortgage here. Most Canadians buying properties in the US use their LOC in Canada so it appears as a cash sale in the US, as Canadian LOCs are prime to prime plus 1, i.e. cheaper and easier than US mortgages.

We did very well with one very large US asset, which we recently sold into the frothy Dallas, Texas market, and in hindsight should have bought more from 2010-2014 in the US. As to entering it today as a Canadian it is not a slam dunk anymore. This duplex in Kelowna for $750,000 with $4400/month in rent is as good as it gets in single unit assets, and is probably a good investment.

 

[dpeacock]

Good insight Thomas. If that duplex was in Calgary, with good access, it would be an excellent purchase with those numbers.

 

[darkness05]

As a comparable in Calgary for a side by side duplex, listed on MLS today, you'd pay about 750-780 for a side by side duplex in a good neighbourhood, renovated. You would get about 1850 per side. And you'd have to look hard for that. An un-renovated side by side might go for 650-700 and you'd get about 1250-1300 per side. So fairly expensive, even with the downturn.

Just curious. When you say it cash flows 1400 mo, do you add in repairs, maintenance, property Managment, and taxes? How much money down?

If you split title, then there's a lift if you sold renovated profited separately for about 390-415 per side.

Good to know thanks for the info! The $1400 net does include taxes/insurance etc. I do my own PM so that would be included as well. It doesn't need any repairs as it stands but yes those if and when they arise will knock that number down. That's with 20% down.

 

[Matt Crowley]

@dpeacock IMHO, if net income before PM is $1400 and PM has a value of 10% gross rent then actual NOI is $960. So going-in cap of 1.54%. Really terrible. What about looking for a private investment in the area with an experienced developer if you want exposure to that local market? Nothing wrong with betting on massive speculative capital appreciation but good if it is backed by some income.

If your upper lending limit is 1.2 DCR, then your maximum loan on this property is $167,166. Fundamentals are whacked on this.

 

[Thomas Beyer]

@dpeacock IMHO, if net income before PM is $1400 and PM has a value of 10% gross rent then actual NOI is $960. ...

I believe rent was $2220. Deduct PM fees and property taxes and arrive at maybe $1600 NOI. 4-5% CAP rate which is the norm of BC. Very normal for Kelowna, slightly better than average I'd say actually.

 

[dpeacock]

@dpeacock IMHO, if net income before PM is $1400 and PM has a value of 10% gross rent then actual NOI is $960. So going-in cap of 1.54%. Really terrible. What about looking for a private investment in the area with an experienced developer if you want exposure to that local market? Nothing wrong with betting on massive speculative capital appreciation but good if it is backed by some income.

If your upper lending limit is 1.2 DCR, then your maximum loan on this property is $167,166. Fundamentals are whacked on this.

Twitter: @MattCrowley11


Matt,
My observation was that the OP's numbers looked good compared to what is currently available in Calgary.
For me, I'm looking for ways to enhance those numbers, in Calgary.
For example, we purchased a side by side duplex in Calgary a few years ago, with our own cash for 525,000. Off of MLS and about 65,000 below market.
We renovated one side of this dated duplex for about 110,000.
Bank appraised it, after renos, for 825,000.
We took bank financing of 581,250. LTV of 70%
Our cash left in the property is (525,000 + 110,000)- 581,250 = 53,570
Equity was 825,000 - mtge of 581,250 = 243,750. (Property has declined in value, but not too much. This is Calgary!)
Gross Rents are 37,200, which is currently good for the market. One side is dated.
Cash Flow after:
Taxes,
Insurance,
Prop Mngmnt
Vacancy Allowance
Repairs and Maintenance Allowance
Mortgage Payment
equals (negative) fifty dollars a month, currently.
Mortgage pay-down is 13,200 per year, or 24.6 % on our money left in the property, of 53,570.
So most of the money has been made on the original purchase, renovations, and initial market lift.
In time, we hope to see some appreciation thru economic growth.
So that's one strategy we've used.

 

[Rickson9]

Rick, is your play on macroeconomic variables? Vs. opportunity or value add is what I am asking? Is the strategy buy core / core plus in markets with strong macroeconomics?

Both macro and value add. Macro because the US economy is doing fine. Especially in the large cities I focus on. Value add because I renovate the properties to get slightly higher rents.

Without getting into details, I've decided to buy individual detached homes instead of multi family. May change later.

I understand multi family has better cash flow. I'm satisfied with getting only 1% of purchase price in rent per month with the houses. Multi family offers 1.1% to 1.2% of purchase price in monthly rent.

Currency isn't a factor in buying because all my revenue is in US dollars anyway. Only using excess cash flow to add houses over time. Rinse and repeat.

Nothing in Canada looks particularly attractive compared to what I'm seeing in the US cities that I look at. Not looking to change the world, just want some monthly spending money. And as little work as possible.

I get unsolicited calls/mailings wanting to lend me $ and/or to buy my houses (or change property management companies). Not interested atm.