Raising Rent in our offer for 4plex....(Socialist Ontario)

[claudio]

Hello Everyone,



My partners and I (brothers) have decided to go full throttle in creating a portfolio of investment properties. My brothers already own two duplex themselves, myself nothing other then my principal mortgage. We have already placed two offers in on properties in the Brantford area but have been unsuccessfull. The first, a triplex, the sellers bottom line price did not make financial sense with our calculation through cash flow etc...The second was a sixplex in which we where going to vest a fair amount of reno money into because we negotiated a great price. But in the end was deemed commercial and thus made not viable for our plans.

We are currently looking at and have been through a 4plex in which the sellers rental rates are well below what they should be in our research of the area in Brantford. There bottom line we found out is about $20,000 from our bottom. But I do see upside to this property with young professionals as renters and it has a fair amount of $$$ put back into through furnace, roof, etc... Is it possible to place in our offer at there bottom line a condition stating it hinges on the seller raising rents for each unit to $50.00 which is about 8-10%. We would require a signed agreement form and dated by each tenant with stipulations covering us for once we take possesion should this go through. Is this viable or even allowed? If the tenant is willing to move forward with the agreement and know they are still getting a good deal, and consent then why not?



I have looked everywhere on the web and can't find anything close to my question. My next step after this is to contact our Real Estate Lawyer.

 

[Thomas Beyer]

(Socialist) Ontario caps annual rent increases, 0.8% in 2014 and 1.6% in 2015. The only way to get higher increases is if a new tenant moves in as you can then set rents at any level you deem fit.



As such your plan of rent increases by you and/or current owner will not work.



You could offer them an incentive to move out, say $5000. Or you could move into one suite yourself, renovate, then re-rent later.

 

[REQRentals]

Hi Claudio,



If the building is rent controlled (built before 1991) then you cannot raise the rent even by agreement with the tenants as long as they are there except under very specific conditions (additional services ect...).



If the tenants challenge the agreement later you will have to refund rents (like if one of them does not pay and you try and evict them and run into legal aid etc...). There is supposed to be a one year limitation for the tenant to complain but there have been some decisions that do away with that in certain cases.



The seller will not be responsible to repay the illegal increase as you are the one who collected them.



The short answer is that to raise the rent by more the the guideline is illegal and if you get caught you will have to refund. If you do work to the building you can recover the costs from the rent or provide additional services etc...but otherwise that is the point of rent control.



The guideline for 2015 I believe is 1.6%



On a longer term plan you can raise the rents at market once the current tenants leave. Another strategy is to take possession of one unit yourself, renovate and re-rent and so on.

 

[claudio]

Thomas and Alison, thank you kindly for your responses. From your posts it will be difficult to pass such an agreement form. But I will still check in with my lawyer to be 100%. Only because if the seller is the one administering the agreement form and the current renters consent to the increase then in a court of law with a signed agreement, that states the reason and stipulations of the form they are signing, how would it not be passed?



So on the basis of the aforementioned not being allowed, from your experiences, would the following 4plex be worth it?

Financials;

bottom line selling price by seller - $310,000

Gross Income - $27,600

Total Expenses - $4304.00

Rent - 2-2bedroom @ $600.00 pay own utilities

1 bedroom @ 600.00 pay own utilities

1 bedroom @ 500.00 pay own utilities

Net Income - $22,696.00



After the mortgage we do also have to pay my father off whom is providing us the downpayment for the property. This property has very nice curb appeal, area is growing and already a number of properties are aesthetically nice looking along with those on each side of this property. The furnace is new, Roof and Rooms have been updated. I see this being a good property marketed to young proffessionals working in the downtown core of Brantford. And do feel and noted that rents should be in the $650 range.I have ran the numbers numerous times at $310,000 and we would be suffering (slight positive cash flow with nothing going wrong) for a little while or as renters leave and we bring our rent up. But is it worth it to buy now?

Let me know your thoughts and thank you in advance.

 

[Thomas Beyer]

Expenses are likely far far higher. Taxes are around $3000. Insurance around $1000. Then R&M should be at least $3000 as a budget ($750unit), likely shown as zero. Management fee is 10% i.e. $2300 but likely also shown as zero if self-managed. Utilities are water, sewer, heating of water (I presume, not clear from your post) plus garbage and recycling, likely around $3000-4000 a year. How is the building heated ? If by landlord, then another $1200. So budget $12,000/year in expenses at least likely $13,000.



So this is about a 4.5% CAP rate, i.e. expensive and justifiable only with immediate rental upside, which one could get in AB or SK as one can adjust rents to market immediately, but not in ON. Using a 6% CAP rate on realistic expenses price ought to be below $250,000.



If you see only $50 rental upside then I would say it is far too expensive, unless rents in the $800+ range are realistic.

 

[claudio]

Hi Thomas, thank you for your reply. The expenses are as follows;



>Tax $2881

>Hot Water Rental Heater $550.00

>Insurance $875.00



Thus total expenses equate to $4304.00 based on what they have provided. They do have a couple that basically takes care of onsite management, but my partners and I would take all of this on ourselves. Thus the management fee is a mute point. As for the R&M, I am not sure if it equates to this total as alot of the major ticket items have been completed and work that would be required to be done, can be completed by my two partners and I as we are very very mechanically inclined (electrician and mechanic). It is heated via Gas Forced Air Furnace. The tenants do pay there own Utility Bills which includes water, sewer, etc... as you mentioned. I know that they paid 3 years ago $225,000 and put in what we assume about $20,000 in upgrades such as roof, furnace and updating the apartments, which could still be on the high side. The property has been up for 280 days now. They seem to be stuck on $310,000 as bottom line as they have noted they aren't going to break even with anything less then???? We have left our final offer at $290,000 and see if they change there mind but continue to look. Thomas your a great source of information and appreciate your reply and insight.



P.S. If your ever interested in a JV in the growing city of Brantford my partners and I would be keen to talk to you.



Cheers,



Claudio

 

[kfort]

Never price yourself into managing a place. You might do it, but don't price yourself into NEEDING to do it. Ever. There is nothing in this life more valuable than time.

 

[Thomas Beyer]

[quote user=kfort]There is nothing in this life more valuable than time.
Well stated. One can always find more $s through JVs, banks or money partners. You can buy time to a degree by hiring others or outsourcing tasks to others, such as R&M and property management, and as such it needs to be priced into the property valuation (even if you chose not do outsource it for a while).



The 4-plex has 4 water meters ? How is hot water measured and billed across 4 units ? Or are there 4 hot water tanks, one per unit ? How is the building heated ? Garbage pickup is free in Brantford, or part of the property taxes, or just undisclosed by landlord ?



Ask seller here for all 11 (!!) sources / costs of utilities, with (*) being the ones usually paid by tenants, but the other 8 usually by the landlord in an apartment building:



a) cold water

b) sewer

c) hot water

d) building heat

e) garbage

f) recycling

g) common area electricity

h) common area heating

i) in-suite electricity *

j) TV *

k) internet *