Rookie Investor Looking for Advice on a potential first Investment Deal

[vargam3]

Hello Fellow REIN members, I was hoping to get some of the more experienced investors insights into a potential deal that has come across my way. The deal is from a seller that is eager to get out a rental property that he owns. He picked up the property a few years ago as a distressed sale from someone who was in pre-foreclosure so he got a great deal and is now looking to get married and move to a new city and doesn`t want the headache of a rental property anymore. Some quick facts about me I have never bought a house, have a solid salary of 75k and have no outstanding debts at all and my credit rating is around 750, I have access to roughly 50k cash. I want to be able to purchase my own home but would look to get this deal as an investment property first, since it`s has lots of equity built in but I don`t live in that city.


here are some of the details of the deal:


It is an up/down duplex in the center of Penticton that he purchased as his first time home owner 3 years ago. It is in good condition, renovated roughly 5 years ago, but I would get an appraisal to make sure it is in good structural quality.


Assesed Value by city (Penticton, B.C.) $289,000


Mortgage: $127,307 it has 2 years remaining at 2.45% variable rate with TD Bank


Price he will sell for: $165,000


Financials of the Property: rents out basement 825 and top at 925. His mortgage payments are $648 and and his monthly taxes are $233.33.





So I am wondering what the best way to approach this deal would be? Would it be better to assume his mortgage for the 2 years and just pay him his cash up front?


Would it be better do an agreement for sale and just give him his deposit up front in order to lock in the property and then hire a good property manager to take care of it for me.


Or would it be better to just buy it out right, pay the prepayment penalty, which I believe is only 3 months interest because it is variable.


Also I was wondering if there are any legal creative strategies to take advantage of the fact that this was his principal residence. Such as a higher sale price and then gift the money back to me, I`m sure CRA is pretty smart to this idea, but not sure if any investors out there know of a good compliant strategy to maximize the capital gains exemption in this particular case.


Any advice would be appreciated. Pros and cons? Potential Pitfalls? Due diligence steps I should take that a rookie like me probably wouldn`t have thought about.


Thanks in Advance

 

[Thomas Beyer]

Why would he not list with a realtor and get close to $280,000 if this is the true value ?



Penticton is a dead town with nothing major economically happening there, so little if any upside. As such, assess not only the true market value but also the rents you can achieve in a weak town, in a rent controlled province.



First step is to get this property under contract; then to look under the hood, but quickly. So, step 1: write an offer, with conditions such as "subject to property inspection satisfactory to purchaser".



Step 2: get offer accepted. As such, it becomes an option to buy but an obligation to sell.



Step 3: you have to assess the true market value & achievable rents. That involves some significant local research and "boots on the ground". Assuming it is indeed worth north of $200,000 and rents are as you state you will likely close.



Step 4: To get a new mortgage you need an appraisal. Assuming appraisal confirms value north of $200,000 you will get 80% of 165,000 i.e. $132,000.



Step 5: apply for mortgage or: Agreement for Sale, i.e. $38,000 cash to mortgage is certainly an option, too and would eliminate / replace the immediate mortgage application but none of the other steps.



Step 6: inspect property thoroughly, and if all check outs:



Step 7: you close as planned.





I suggest you get a short term mortgage, say 6 , maybe 12 months. Then you either sell the asset right away for a quick 50-100,000 profit, or you rent it and re-finance in 6-12 month at 75-80% LTV and pull out some significant cash. Say it appraises for $250,000. You buy it for $165,000 with $33,000 down. You re-fi at 80% of $250,000 i.e. you pull out 68,000, i.e. double what you invested. Then you can buy more properties and this one still cash flow and you're well on the way to write your own real estate investing book !

 

[vargam3]

Thank you very much for your reply Thomas,



You always provide great insight. I definately have alot of due diligence ahead of me to see whats behind the curtain. But it certainly has enough potential to dive deeper.



A title search and thorough home inspection would be top priority. Another big concern for me would of course be property management.



I look forward to reading your book its the next in my line up after I finish the Canadian Real Estate Action Plan.