Thinking of buying..Does the math work?

[Trizzy]

Been quite some time since I last posted. My knowledge of market conditions and general investing has increased ten-fold. I have learned alot in the last few months about mortgages/rental properties that I didn`t know about a few months ago. This will be my first acquisition. That being said, it definitely won`t hurt to pass all this by all of you.
Looking at a tri-plex in the heart of Kitchener. It is neighboured by other converted SFH`s and purpose-built`s.

Here are all the details:

Monthly income: $2015.00
Yearly gross income: $24180.00
Yearly expenses: Taxes ($2526.00) + Hydro & Gas ($2910.00) = $5436.00
Gross income - expenses = $18,644.00
Mortgage: $239,000~ @ 3.79% / 5% down with 30 year amortization = $1,052/month($12,624/year)

Gross income - Mortgage(Yearly): $18,644 - $12,624 = $6,020($501/month) NET

These calculation do not include vacancies or property insurance.

So what do you guys think about this property? Feasible in the long-term to stay profitable?

Any opinion is appreciated. Thanks guys.

 

[dsmandato]

QUOTE (Trizzy @ Apr 10 2010, 07:34 PM) Been quite some time since I last posted. My knowledge of market conditions and general investing has increased ten-fold. I have learned alot in the last few months about mortgages/rental properties that I didn`t know about a few months ago. This will be my first acquisition. That being said, it definitely won`t hurt to pass all this by all of you.
Looking at a tri-plex in the heart of Kitchener. It is neighboured by other converted SFH`s and purpose-built`s.

Here are all the details:

Monthly income: $2015.00
Yearly gross income: $24180.00
Yearly expenses: Taxes ($2526.00) + Hydro & Gas ($2910.00) = $5436.00
Gross income - expenses = $18,644.00
Mortgage: $239,000~ @ 3.79% / 5% down with 30 year amortization = $1,052/month($12,624/year)

Gross income - Mortgage(Yearly): $18,644 - $12,624 = $6,020($501/month) NET

These calculation do not include vacancies or property insurance.

So what do you guys think about this property? Feasible in the long-term to stay profitable?

Any opinion is appreciated. Thanks guys.


Hard to tell without knowing what condition the property is in. Assuming it is in good condition and no immediate repair or large capital expenses, you are still missing a few items in your calculations aside from property insurance and vacancies. Whether you manage it yourself or not, include 10% of gross income/month. Even if you do not have any immediate repairs or large capital expenses, include for $1000/suite/year for maintenance. And don`t forget your accounting/book keeping and miscellaneous fees.

Aside from that on the surface I think you have a break even property. That said, you should run your numbers with a higher down payment (ie, 20% down) unless you plan on getting this mortgage before the new Mortgage rules come into effect.

 

[Nir]

QUOTE (Trizzy @ Apr 10 2010, 06:34 PM) Been quite some time since I last posted. My knowledge of market conditions and general investing has increased ten-fold. I have learned alot in the last few months about mortgages/rental properties that I didn`t know about a few months ago. This will be my first acquisition. That being said, it definitely won`t hurt to pass all this by all of you.
Looking at a tri-plex in the heart of Kitchener. It is neighboured by other converted SFH`s and purpose-built`s.

Here are all the details:

Monthly income: $2015.00
Yearly gross income: $24180.00
Yearly expenses: Taxes ($2526.00) + Hydro & Gas ($2910.00) = $5436.00
Gross income - expenses = $18,644.00
Mortgage: $239,000~ @ 3.79% / 5% down with 30 year amortization = $1,052/month($12,624/year)

Gross income - Mortgage(Yearly): $18,644 - $12,624 = $6,020($501/month) NET

These calculation do not include vacancies or property insurance.

So what do you guys think about this property? Feasible in the long-term to stay profitable?

Any opinion is appreciated. Thanks guys.

if cash flow is important to you then don`t buy! net income is close to zero with this one. cheers.

 

[invst4profit]

As pointed out you have omitted many expenses associated with rental properties that will likely eat up your cash flow on this property.
Have you included all closing costs in the final price. Are there any immediate repairs or deferred repairs on the horizon. What is the age of the mechanicals, roof etc.

Also keep in mind a property has two sources of income, the property itself and the cash you have in a deal. Increasing the down payment does not increase cash flow as any additional income must be attributed to the cash so as to justify diverting that cash from other income producing investments.
To get a truer picture of cash flow you should base your debt repayment (mortgage) calculation on 100% financing. This method will allow you to calculate a income on your cash, based on a minimum % equal to your mortgage rate and allow you to better understand the true value break down of your investment.

Remember when investing cash it must also earn it`s keep.

 

[Trizzy]

Hi guys.

So from what you all have said thus far, it appears I would have a property with little income actually being produced.

Now just so I understand your reasoning..

The property before Insurance is producing $500/month net. That is income after all constant variables have been calculated.

Now what you all are essentially saying is after inconstant variables are equated, I am left with no income. However, the property IS producing roughly $5,000(after insurance) every year..Assuming no major repairs or long vacancies in the immediate future, thats money in my pocket..

This property(from my knowledge) does not look to be in disrepair, nor am I diverting imminent repairs. It looks in relative good condition.

Maybe you guys can straigten this up for me..I must be missing something.

 

[Trizzy]

Now I just stumbled upon a similar deal.Triplex, downtown core of Kitchener.
Monthly income: $2,360.00
Yearly gross income: $28,330.00
Yearly expenses: Taxes ($2,800.00) + Hydro, Gas & Insurance ($4800.00) = $7,600.00
Gross income - expenses = $20,730.00
Mortgage: $269,900 @ 3.79% / 5% down with 30 year amortization = $1,184/month($14,208/year)

Gross income - Mortgage(Yearly): $20,730 - $14,208 = $6,522($540/month) NET

PLUS: $1,800-2,000/year($158/month) for coin-op laundry.

Total: $8,422($698/month)

What of this property? Making Almost $700/month after all constant variables are calculated..I think this one wins!

 

[fumbrunner]

QUOTE (Trizzy @ Apr 11 2010, 09:41 AM) Now I just stumbled upon a similar deal.Triplex, downtown core of Kitchener.
Monthly income: $2,360.00
Yearly gross income: $28,330.00
Yearly expenses: Taxes ($2,800.00) + Hydro, Gas & Insurance ($4800.00) = $7,600.00
Gross income - expenses = $20,730.00
Mortgage: $269,900 @ 3.79% / 5% down with 30 year amortization = $1,184/month($14,208/year)

Gross income - Mortgage(Yearly): $20,730 - $14,208 = $6,522($540/month) NET

PLUS: $1,800-2,000/year($158/month) for coin-op laundry.

Total: $8,422($698/month)

What of this property? Making Almost $700/month after all constant variables are calculated..I think this one wins!

Any of these condusive to separating the utilities so that they are the tenants responsibility?  I just purchased a duplex that did not cashflow well but by putting in electric heat on the second floor and having separate utilities, it made much more sense.

 

[Trizzy]

QUOTE (fumbrunner @ Apr 11 2010, 09:02 AM) Any of these condusive to separating the utilities so that they are the tenants responsibility? I just purchased a duplex that did not cashflow well but by putting in electric heat on the second floor and having separate utilities, it made much more sense.

The rents acquired justify the all inclusive status. It is cashflowing the way it is. I could add seperate meters, however then the rents are no longer justified, and I would likely lose the tenants already in place. Not to mention the bill for installation..Not a good way to start your first acqusition..

 

[MonteDobson]

QUOTE (Trizzy @ Apr 10 2010, 07:34 PM) These calculation do not include vacancies or property insurance.
So what do you guys think about this property? Feasible in the long-term to stay profitable?

Any opinion is appreciated. Thanks guys.
When calculating net positive cashflow, you must include ALL expenses.

We also factor in 10% (of gross rents) for Repairs/Maintenance/Vacancy and 10% for Property Mgt (even if you are self-managing). While these are not considered CASH expenses today, you will need this money at some point down the road as tenants move in/out, paint, flooring, roof, furnace etc. Either that or set aside a large reserve fund at the start (ie. 6 months worth of rents).

 

[invst4profit]

Calculating income is not only about constant variables. In fact the make or break on rental income properties usually comes down to the unexpected.
You have not included many of the items experienced investors automatically include such as legal, accounting, routine maintenance, major repairs, advertising, spruce up between tenants, utilities when vacant, vacancies, evictions, property management (self or someone else) etc, etc.

Your numbers do not include a single penny for routine upkeep let alone tenant damage/ware and tear. This is not realistic.
Keep in mind contractors are very expensive so unless you are handy the costs can be high as well as time consuming.
Consider new furnace $6-$8000, roof $5-$10000, hot water tanks, stoves, fridges, drywall repairs, a eviction and vacancy of 3-6 months, broken pipes the list of unexpected hurdles is endless and in time will happen so budgeting for them is mandatory.
Consider your own personal home. Mine has cost approximately $40,000 in maintenance and upkeep in 20 years and I am not a tenant. Consider the fact that tenants often have very little respect for a LLs property and the costs go up.

Expenses, all inclusive, not just constants range between approximately 30% and 50% of monthly income before debt repayment.
Historically expenses run closer to 50% when holding long term or holding multiple properties. Many investors owning new buildings dispute that % but regardless you must expect the unexpected when evaluating the income on any property. Error on the high side if nothing else. Expect 40% of your monthly income to go toward expenses when evaluating properties and your chances of success will be greatly increased. Maybe higher if you are paying utilities as tenant are very irresponsible when they do not pay the bill. I personally would never consider owning a property with utilities included for that reason.

Not accepting the reality that tenants cause expensive ware and tear and the fact that everything needs replacing in time has been the down fall of many a novice investor.

 

[fumbrunner]

QUOTE (Trizzy @ Apr 11 2010, 10:09 AM) The rents acquired justify the all inclusive status. It is cashflowing the way it is. I could add seperate meters, however then the rents are no longer justified, and I would likely lose the tenants already in place. Not to mention the bill for installation..Not a good way to start your first acqusition..

$5000 being put towards heat and hydro could go into your pockets instead.  The extra cashflow would help you better justify the purchase, not to mention increasing the value of the property.

 

[fumbrunner]

QUOTE (MonteDobson @ Apr 11 2010, 10:58 AM) When calculating net positive cashflow, you must include ALL expenses.

We also factor in 10% (of gross rents) for Repairs/Maintenance/Vacancy and 10% for Property Mgt (even if you are self-managing). While these are not considered CASH expenses today, you will need this money at some point down the road as tenants move in/out, paint, flooring, roof, furnace etc. Either that or set aside a large reserve fund at the start (ie. 6 months worth of rents).

+1. Should be part of any cashflow calculations.

 

[fumbrunner]

QUOTE (dsmandato @ Apr 10 2010, 10:02 PM) Hard to tell without knowing what condition the property is in. Assuming it is in good condition and no immediate repair or large capital expenses, you are still missing a few items in your calculations aside from property insurance and vacancies. Whether you manage it yourself or not, include 10% of gross income/month. Even if you do not have any immediate repairs or large capital expenses, include for $1000/suite/year for maintenance. And don`t forget your accounting/book keeping and miscellaneous fees.

Aside from that on the surface I think you have a break even property. That said, you should run your numbers with a higher down payment (ie, 20% down) unless you plan on getting this mortgage before the new Mortgage rules come into effect.
Even before the new rules, the min down payment for a 3plex was 10% (5% for sfd and duplexes).  This will of course go up to 20% on the 19th.

 

[invst4profit]

How certain are you of your mortgage rate. You might consider calculating base on a 5% rate to be on the safe side and with 10% down attribute more income off the top to your cash in the deal. Again basing your debt repayment figures on 100% financing will give you a more realistic figure on the true cost of your debt/investment.

 

[Ian]

QUOTE (Trizzy @ Apr 10 2010, 06:34 PM) Been quite some time since I last posted. My knowledge of market conditions and general investing has increased ten-fold. I have learned alot in the last few months about mortgages/rental properties that I didn`t know about a few months ago. This will be my first acquisition. That being said, it definitely won`t hurt to pass all this by all of you.
Looking at a tri-plex in the heart of Kitchener. It is neighboured by other converted SFH`s and purpose-built`s.

Here are all the details:

Monthly income: $2015.00
Yearly gross income: $24180.00
Yearly expenses: Taxes ($2526.00) + Hydro & Gas ($2910.00) = $5436.00
Gross income - expenses = $18,644.00
Mortgage: $239,000~ @ 3.79% / 5% down with 30 year amortization = $1,052/month($12,624/year)


will the utility bills be in your name? I only ask b/c you mentioned it in your expenses. Can you work it so that those bills are in the tenant`s name(s)?

Gross income - Mortgage(Yearly): $18,644 - $12,624 = $6,020($501/month) NET

These calculation do not include vacancies or property insurance.

So what do you guys think about this property? Feasible in the long-term to stay profitable?

Any opinion is appreciated. Thanks guys.

 

[housingrental]

Hi Trizzy

My thoughts:

I`ve not seen what I thought should be a salable small multiplex in Kitchener currently for sale.

As other posters have pointed out your profit calculations are unrealistic to consistently play out.

Move on , keep looking and learning, and save more $$$ before proceeding.

If you only have 5% to put down what are you going to do when you need $30K to cover unexpected repairs and uncollected rent?

 

[Ian]

QUOTE (Trizzy @ Apr 11 2010, 07:41 AM) Now I just stumbled upon a similar deal.Triplex, downtown core of Kitchener.
Monthly income: $2,360.00
Yearly gross income: $28,330.00
Yearly expenses: Taxes ($2,800.00) + Hydro, Gas & Insurance ($4800.00) = $7,600.00
Gross income - expenses = $20,730.00
Mortgage: $269,900 @ 3.79% / 5% down with 30 year amortization = $1,184/month($14,208/year)

Gross income - Mortgage(Yearly): $20,730 - $14,208 = $6,522($540/month) NET

PLUS: $1,800-2,000/year($158/month) for coin-op laundry.

what about management fees and insurance?

Total: $8,422($698/month)

What of this property? Making Almost $700/month after all constant variables are calculated..I think this one wins!

 

[Ian]

QUOTE (Trizzy @ Apr 11 2010, 08:09 AM) The rents acquired justify the all inclusive status. It is cashflowing the way it is. I could add seperate meters, however then the rents are no longer justified, and I would likely lose the tenants already in place. Not to mention the bill for installation..Not a good way to start your first acqusition..


I, personally,would not buy a property where I was not able or willing to have the utility bills in the tenants names. You property is in Ontario, so cold winters. What incentive is there for the tenants to manage the heating in the units? What`s stopping them from leaving the heat on high all day and leaving you with a bigger hydro bill? What happens if they split or don`t pay you? You are stuck with the bill b/c it is in your name.
Perhaps you can adjust the rent with the assumption that the tenants pay the utility bills?

Just my two cents.

 

[Trizzy]

QUOTE (MonteDobson @ Apr 11 2010, 09:58 AM) When calculating net positive cashflow, you must include ALL expenses.

We also factor in 10% (of gross rents) for Repairs/Maintenance/Vacancy and 10% for Property Mgt (even if you are self-managing). While these are not considered CASH expenses today, you will need this money at some point down the road as tenants move in/out, paint, flooring, roof, furnace etc. Either that or set aside a large reserve fund at the start (ie. 6 months worth of rents).

I do realize these issues will occur, probably more than I am aware of.

I intend on not using any of the cashflow the property provides for personal priorities. I fully intend on opening a new account and depositing every penny into it.

QUOTE (fumbrunner @ Apr 11 2010, 10:04 AM) $5000 being put towards heat and hydro could go into your pockets instead. The extra cashflow would help you better justify the purchase, not to mention increasing the value of the property.

I would need a quotation on how much it would cost to install 2 other hydro meters before I could ever consider doing this. How do you track tenants use of utilities?

QUOTE (invst4profit @ Apr 11 2010, 10:29 AM) How certain are you of your mortgage rate. You might consider calculating base on a 5% rate to be on the safe side and with 10% down attribute more income off the top to your cash in the deal. Again basing your debt repayment figures on 100% financing will give you a more realistic figure on the true cost of your debt/investment.

My rate is locked for a 5 year fixed term. After that, I will have to reconsider when I am up for renewal. That or have the rents increased over time to match the inevitably higher interest rates.

 

[Trizzy]

QUOTE (Ian @ Apr 11 2010, 10:43 AM) I, personally,would not buy a property where I was not able or willing to have the utility bills in the tenants names. You property is in Ontario, so cold winters. What incentive is there for the tenants to manage the heating in the units? What`s stopping them from leaving the heat on high all day and leaving you with a bigger hydro bill? What happens if they split or don`t pay you? You are stuck with the bill b/c it is in your name.
Perhaps you can adjust the rent with the assumption that the tenants pay the utility bills?

Just my two cents.

I will have to put a locked box on the thermostat and leave it on automatic, so they don`t play with it and run by bills up. Also, if the tenants leave, there is no utilites hydro being used.

And just a neat peice of info. Southern Ontario had an amazingly mild winter, all things considered.