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Small cash flow but possible big equity appreciation?

margaretcowan

margaretcowan

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REIN Member
Joined
Feb 22, 2008
Messages
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I`ve crunched the numbers on a nice, well renovated fourplex in a good part of a major Alberta city. Price is $800,000. But I`d have to put down 35% or about $280,000 (ouch!) to make a measly cash flow of $400 a month on the whole building or about 1.7% cash on cash. I`m using 4.25%, 35 year amortization.

Of course, there`s mortgage paydown but it wouldn`t be in my hot little hand right now.

I told the realtor I needed better cash flow.

He said that was as good as I`d ever find in a better area of the city (I`ve done the drug ridden area trip, thanks), that many investors would take a low cash flow since values could go up say 20% over the next few years and I take home $160,000 in the end. This has happened to me. But now I want cash flow.

What do you think? Am I unrealistic? Am I trying to have my gelato and eat it too?

Thanks
Margaret
www.italycookingschools.com
 
I do not know of any investor that would accept a return as low as 1.7%.
Speculators on the other hand may find this deal appealing. But they are willing to gamble and accept the possibility of failure.
 
Is that fourplex the only property ( amongst the many types in the market) that will appreciate by 20% as your realtor projected? It makes no sense to get that amount of cash flow on that amount of down payment.
Conrad.



QUOTE (margaretcowan @ Apr 23 2010, 09:57 PM) I`ve crunched the numbers on a nice, well renovated fourplex in a good part of a major Alberta city. Price is $800,000. But I`d have to put down 35% or about $280,000 (ouch!) to make a measly cash flow of $400 a month on the whole building or about 1.7% cash on cash. I`m using 4.25%, 35 year amortization.

Of course, there`s mortgage paydown but it wouldn`t be in my hot little hand right now.

I told the realtor I needed better cash flow.

He said that was as good as I`d ever find in a better area of the city (I`ve done the drug ridden area trip, thanks), that many investors would take a low cash flow since values could go up say 20% over the next few years and I take home $160,000 in the end. This has happened to me. But now I want cash flow.

What do you think? Am I unrealistic? Am I trying to have my gelato and eat it too?

Thanks
Margaret
www.italycookingschools.com
 
QUOTE (margaretcowan @ Apr 23 2010, 11:57 PM) But now I want cash flow.

What do you think? Am I unrealistic? Am I trying to have my gelato and eat it too?

Thanks
Margaret
www.italycookingschools.com


Hi Margaret, I`m the last person that should be making this comment (given my history) but it sounds to me like you might be trying to buy a good property that doesn`t fit your system. I bolded your quote above because it seems like this property, albeit a decent find, is lacking in the very thing you want- cashflow.
Is it better to stick to your new system of focusing on cashflow...even if it means waiting or looking elsewhere?

For me, the question isn`t "are you being unrealistic," rather I would suggest the question be "what will it take for your goal to become realistic?" Perhaps moving your target area, perhaps changing your target property class, perhaps tweaking your focus on cashflow.
In any event, to put this property into a cashflow perspective, I`ve got better cashflow on the RTO property I bought last august for $140,000....(and that was only $12,000 out of pocket).
 
QUOTE (margaretcowan @ Apr 23 2010, 08:57 PM) I`ve crunched the numbers on a nice, well renovated fourplex in a good part of a major Alberta city.

.. But now I want cash flow.

What do you think? Am I unrealistic? Am I trying to have my gelato and eat it too?
cash flow is hard to come by unless you put 40%+ down in major cities .. or you go 20% down to small towns with higher risk .. or to bad areas with higher vacancies .. or by buying larger complexes (40+) [we do the latter now as we also went the class C bad area route and did not like it ..]

200/door sounds a tad high .. It must be A+ location and condition at that price ! Consider to pass and buy a 12 plex for maybe 120/door in a good part of town ..

Yes, you can have your gelato cash-flow and equity upside too if you buy right or put 35%+ down .. but maybe not with this deal at 200/door .. there are plenty of good deals at 100-150/door in major cities available (with free gelato) !
 
If you want the security of being in a major city center you will have to take a little less cash flow.

However 800k is top of the market and for the price this seller wants you need a property in excellent overall condition.

1. The building had better be in top notch shape. I`d like to see some evidence that some upgrading has been done and that things like the furnaces, hot water tanks, roof, windows & bathrooms have had attention recently.
2. The building had better be in an A+ location. You want to be confident that there will be lots of traffic when you have turnover and that the property is going to attract good tenants due to its location
3. The layout and size need to be such that you will always be able to offer better units than your competition.

800k for a fourplex isn`t neccessarily too much if you are getting what you are paying for - as in assured cash flow with very little risk going forward while being positioned well for a recovering market and rising rents due to interest rates. If you aren`t taking any risk then the return is going to be low!

I`d suggest looking at a variable rate. Lots of $$ to be saved as prime works it`s way up before you`d end up at a net of 4.25... Prime would have to more than double from where it is now and that`s not going to happen overnight... so might as well save some $ on its way up. Perhaps a 3 year term?
 
Based on previous responses I see most viewing this as a Cadillac purchase. I believe if a investor has reached there peek a Cadillac may be a nice reward for there success but if you are still climbing the latter you may be premature and maybe somewhat overconfident at this time to take that step.

Thomas somewhat eluded to it when he suggested you could throw bucket fulls of cash at it to give the impression of having positive cash flow. Real cash flow and artificially forced cash flow is the difference between those working to be successful and those already successful to the point that the impression of money is of more importance than money itself.
 
QUOTE (invst4profit @ Apr 25 2010, 07:23 AM) Based on previous responses I see most viewing this as a Cadillac purchase. I believe if a investor has reached there peek a Cadillac may be a nice reward for there success but if you are still climbing the latter you may be premature ...what you`re saying is that there is wealth creation (higher risk, far more work/time/sweat equity invested, less cash down, more flipping, smaller towns and worse areas of town) and wealth preservation !

This 800k property fits the latter category !
 
What kind of properties are there for $100,000 to $150,000 a door? What asset classes? What locations? What return cash on cash---net income after mortgage payments divided by my downpayment -- could I expect on such properties?

I need to open my mind!


QUOTE (ThomasBeyer @ Apr 24 2010, 03:17 PM) cash flow is hard to come by unless you put 40%+ down in major cities .. or you go 20% down to small towns with higher risk .. or to bad areas with higher vacancies .. or by buying larger complexes (40+) [we do the latter now as we also went the class C bad area route and did not like it ..]

200/door sounds a tad high .. It must be A+ location and condition at that price ! Consider to pass and buy a 12 plex for maybe 120/door in a good part of town ..

Yes, you can have your gelato cash-flow and equity upside too if you buy right or put 35%+ down .. but maybe not with this deal at 200/door .. there are plenty of good deals at 100-150/door in major cities available (with free gelato) !
 
QUOTE (margaretcowan @ Apr 28 2010, 07:55 AM)
What kind of properties are there for $100,000 to $150,000 a door? What asset classes? What locations? What return cash on cash---net income after mortgage payments divided by my downpayment -- could I expect on such properties?



I need to open my mind!


many .. most properties in Edmonton, for example, are between 75 to 140/door



75/door = ugly + bad area



140 = pretty + A area



most clustered around 90-105/door i.e. "middle of the road"



Similar prices in Red Deer, Regina and Saskatoon .. 10% higher in Calgary .. 10% (or more) lower in Lethbridge or smaller cities in the west



Items to consider when buying an apartment building: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-14548-Buy_vs_Build.html



Multi-Family Primer in May 2009 Issue of Canadian RE Magazine:

http://myreinspace.com/rein_members_only1/Members-Only_Discussion/81-10996-Multi-Family_Primer_-_May_2009_Issue.html
 
What age, number of units and price range of multi-family buildings in the middle range of 90-150 a door?



What age, number of units and price range of multi-family buildings in the A areas for 140 a door?



I've bought 4 or 5 plexes and one 6plex...but not recently. I suspect you're thinking of larger buildings.



Sometimes I ask too many questions, but I'm pretty sure other REIN forum members want to know too.



Thanks!








QUOTE (ThomasBeyer @ Apr 28 2010, 08:26 AM)
many .. most properties in Edmonton, for example, are between 75 to 140/door



75/door = ugly + bad area



140 = pretty + A area



most clustered around 90-105/door i.e. "middle of the road"



Similar prices in Red Deer, Regina and Saskatoon .. 10% higher in Calgary .. 10% (or more) lower in Lethbridge or smaller cities in the west



Items to consider when buying an apartment building: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-14548-Buy_vs_Build.html



Multi-Family Primer in May 2009 Issue of Canadian RE Magazine:

http://myreinspace.com/rein_members_only1/Members-Only_Discussion/81-10996-Multi-Family_Primer_-_May_2009_Issue.html
 
I can only speak for myself, and I wouldn`t invest for such a low return. Appreciation has also never been my primary motivator.
 
QUOTE (margaretcowan @ Apr 28 2010, 12:19 PM) What age, number of units and price range of multi-family buildings in the middle range of 90-150 a door?

What age, number of units and price range of multi-family buildings in the A areas for 140 a door?
built in late 60`s to mid 80`s .. ANY # of units ..

a small asset has more land per door, and more "boiler" or "common area" or "entry way" per door .. thus is usually a bit more expensive per door than a larger complex with the same rent per door !
 
Thanks so much, Thomas. Your advice and the other links you`ve posted in this thread have been very helpful!! You`re a REIN treasure.

As you know, my expertise is travel in Italy, so if you ever need any advice there, I`ll do whatever I can for you.

Margaret

QUOTE (ThomasBeyer @ Apr 28 2010, 05:05 PM) built in late 60`s to mid 80`s .. ANY # of units ..

a small asset has more land per door, and more "boiler" or "common area" or "entry way" per door .. thus is usually a bit more expensive per door than a larger complex with the same rent per door !
 
QUOTE (margaretcowan @ Apr 23 2010, 10:57 PM) I`ve crunched the numbers on a nice, well renovated fourplex in a good part of a major Alberta city. Price is $800,000. But I`d have to put down 35% or about $280,000 (ouch!) to make a measly cash flow of $400 a month on the whole building or about 1.7% cash on cash. I`m using 4.25%, 35 year amortization.

Of course, there`s mortgage paydown but it wouldn`t be in my hot little hand right now.

I told the realtor I needed better cash flow.

He said that was as good as I`d ever find in a better area of the city (I`ve done the drug ridden area trip, thanks), that many investors would take a low cash flow since values could go up say 20% over the next few years and I take home $160,000 in the end. This has happened to me. But now I want cash flow.

What do you think? Am I unrealistic? Am I trying to have my gelato and eat it too?

Thanks
Margaret
www.italycookingschools.com

What are the rents like? Are they low and could they be increased? Who pays the utilities? If its the landlord, can a conversion be easily done to have the tenants pay utilities (ie..baseboard heating if hydro is separate, for example). Are there condo conversion possibilities with this property?
 
I seriously doubt your realtor`s conjecture of 20% property appreciation. When you start getting into properties like this 4 plex people care about the ROI so increases on the value will be based on increases in income.

IMHO no one will buy your 4 plex for 20%more than you paid if it isn`t cashflowing and it doesn`t matter what the location is like.

To get an additional $160,000 (20%) for the property you would need to increase the rental income about 1300.00 per month.
Thats about 400 to 500 per suite per month.
 
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