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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: Le Poisson on February 04, 2016, 09:36:17 AM

Title: Still playing with numbers - potential duplex???
Post by: Le Poisson on February 04, 2016, 09:36:17 AM
Just the facts... Home converted to duplex, just outside the Greater Toronto Area. Do these numbers make sense to the pros on here? NOTE: Canadian Case! Not sure if that makes a difference.

Buying price: $215,000

Down Payment: $43,000 <----- HELOC
Immediate repair budget: $5,000 <---- Contingency, all appears well.
Home inspection: $500
Land Transfer Tax: $1970
Legal Fees: $600

Cash for closing = $46,070
Required Investment = $61,000

Income Side:
Unit A - $1050/mo
Unit B - $1100/mo
Annual total less 10% = $23,220
Cashflow = 11% Annual, 1.1% monthly

Annual Expenses
Mortgage (5% at 5 year term, 25 yr amort. - conservative, rounded up)- $15,000/yr
Taxes (estimate) - $2200
Insurance (estimate) - $1500
Maintenance/Repairs (estimate) - $1500 
Utilities - $2400
Total Annual Expenses = $22,485.00

Annual Cashflow = $735.00

Projections
Cash flow - Yr 1 = $734.96, Yr 2 = $734.96, Yr 3 = $734.96
Loan repay- Yr 1 = $4362.00, Yr 2 = $4583.00, Yr 3 = $4815.00
Capital Appreciation @ 3% Yr 1 = $6450, Yr 2 = $6,643, Yr 3 = $6842

Total ROI - Yr 1 = $11,550, Yr 2 = $11960, Yr 3 = $12,390
Rate of Return = about 20% for first three years.

Title: Re: Still playing with numbers - potential duplex???
Post by: iamlindoro on February 04, 2016, 10:08:21 AM
Personally, from a US perspective, I'd take a big miss on this one.  You call it 11% annual cashflow, but that's not cashflow-- it's gross income.  Your actual cash on cash return is something like 1.5%.  Weighing that against buying a total US index fund for the long term, it's hard to see why this would make sense.  Generally speaking, since REI tends to carry more risk than investing in an index fund, one would want greater returns.

What is it that attracts you to this property? I know that landlording in Canada is not nearly as attractive as it is in the US, but I just can't see what would make this more compelling than other options available to you.

ETA: It seems that you're banking heavily on appreciation.  Personally I am strongly against buying rentals for appreciation, though opinions differ.
Title: Re: Still playing with numbers - potential duplex???
Post by: Le Poisson on February 04, 2016, 10:59:26 AM
Thanks iamlindro - frankly, its incredibly difficult to find anything that flows neutral let alone positive. So when I see this place generating even $700 a year, I get excited. Investing in US properties seems like its riddled with tax issues for a foreign investor, so I stay close to home and hope to find anything that I can make work.

You're right - that 11% isn't flow, I mislabelled that in my sheet. The real flows are at teh bottom of that summary.

I'm not a fan of owning/managing properties too far outside of my immediate area. This would be within half an hour of me - close enough to respond to issues and not have to pay a property manager, far enough that the tenant won't be knocking on my door. The town where this is is currently pegged as one of the 5 fastest appreciating cities in Canada, so that is good. Plus it has an incredibly low vacancy rate (1.2%) and a decent average rent on 2br units ($1050). I am aware of a number of infrastructure changes coming to the neighbourhood where this is, so I am confident that in a 5 year window, we would see good gains in property value.

I do have concerns though - the town does not have a reputation for classy people - probably well earned. And the real estate market could go south pretty quick if the stock market issues jump across into the housing market. If I were to buy further afield, I would somewhat insulate myself from some of those issues, but at the risk of having a harder time finding tenants. I'm not sure that I'm up to renting units in a rural setting, although I know it can be done.
Title: Re: Still playing with numbers - potential duplex???
Post by: FrugalFan on February 04, 2016, 11:13:14 AM
I own a rental duplex in Canada and I agree with iamlindoro that in this case the numbers don't work from a cash flow perspective, and like him, I don't count on appreciation. If you had cash on hand for your initial purchase, you could make more money in a high interest savings account with no risk, and probably a lot more money in an index fund with maybe a similar amount of risk but no work. However, since you would need to borrow from a HELOC, you would actually be paying money to own this duplex (since the rent would not cover the interest I think).

I think counting on appreciation is very risky. Loan repayment shouldn't be discounted but it's a low return in you are just counting on that and the minimum cash flow, and the cost of selling is high if you want to capture that equity. You should also be including your HELOC payments in your expenses. Where I live, the property taxes would be higher for a property that price, but my tenants pay utilities.
Title: Re: Still playing with numbers - potential duplex???
Post by: Le Poisson on February 04, 2016, 12:47:36 PM
Thanks guys - I'll keep looking. I thought this one was marginal but passable.

MLS seems to be the wrong place to watch for these... any tips for better buyer's venues?
Title: Re: Still playing with numbers - potential duplex???
Post by: FrugalFan on February 05, 2016, 11:50:01 AM
Hi Prospector,

I was thinking about this one again and thought I would put it through the process I use and my estimated numbers based on my experience and I have it cash-flowing at $680 per month if you do your own maintenance, which gives a 16% cash on cash ROI. Very reasonable!

The big difference comes from the mortgage. I got a 30-year mortgage on my duplex at 2.69% and I think they are still offering similar rates in Ontario. That means the mortgage would only be $695.15 per month. I also have your initial cash outlay at $51,000 (I couldn't figure out how you got to $61,000)


Here are the numbers I used.
Property Taxes $2800
Insurance $1000
Hydro (none - tenant pays)
Gas (none - tenant pays)
Water (none - tenant pays)
Water Heater $600 per year ($25 a month each per unit; omit if owned)
Lawn care and snow removal (none - you are doing this)
Annual Turnover (none - you are doing this)
Annual cleaning/inspection (none - you are doing this)
Property Management (none - you are doing this)
Building Maintenance 10% $215 per month
Vacancy Allowance 10% $215 per month

Total revenue $2150 per month
Total expenses $771 per month
Net Operating Income (NOI) $1378 per month
Mortgage Payments (Debt Service) $695 per month
Net Profit (Cash flow) $683 per month (which should more than cover your HELOC interest)

On a $51,000 intitial outlay, that is a 16% ROI, not counting loan paydown. I think you could adjust these numbers as you see fit (e.g., if you need to lower the rent if utilities are not included). In my experience it is much better to have the tenants pay for utilities - no huge surprise costs and they will be more more economical with their use if they are paying.

Title: Re: Still playing with numbers - potential duplex???
Post by: Le Poisson on February 05, 2016, 12:13:52 PM
Thanks Biological Wanderer

I used a 5% mortgage as a safeguard against rising rates in term 2+, so yeah, that makes sense. We just renewed the mortgage on our primary residence last month for 5 yrs at 2.75% - I am aware of the low rates out there today.

I find the numbers folks are using for insurance, maintenance, etc. seem to vary wildly from one investor to the next. The going rule of thumb appears to be 10% of annual income for maintenance. But I've gone with $1500 based on a recommendation from another MMM dude who is renting near here. It too is quite conservative IMO.

I may have had a typo with the 61000. Not sure where that came from...

But the important part - glad you took the time to run the numbers. We are meeting with our RE agent on Monday totalk about opportunities in the area and get comfortable with LL-ing. There are actually 2 that meet these same specs. I'm guessing my next bunch of questions will be on empty posession vs inherited tenant...

Thanks for taking a second look!




Title: Re: Still playing with numbers - potential duplex???
Post by: FrugalFan on February 05, 2016, 12:21:23 PM
But remember that the money you put aside for maintenance has to cover the small regular stuff, but also the larger long term expenses (new roof, new floors, painting between tenants, new furnace, new appliances, etc). I'd rather have a safe chunk set aside that I don't end up needing than coming up short. Maybe if I slowly accumulate an amount I consider sufficient, I can start setting aside less, but until then this feels like a not-unreasonably-high number. I like the new name you gave me!
Title: Re: Still playing with numbers - potential duplex???
Post by: arebelspy on February 07, 2016, 07:04:56 AM
This one looks cash flow negative if you actually outsourced the work.. in other words, you'd have to do a bunch of work on it yourself, for free, to break even.  That doesn't sound like an investment, to me.

What are your alternate investment options if you can't find local RE with acceptable numbers?
Title: Re: Still playing with numbers - potential duplex???
Post by: Le Poisson on February 08, 2016, 05:45:25 AM
This one looks cash flow negative if you actually outsourced the work.. in other words, you'd have to do a bunch of work on it yourself, for free, to break even.  That doesn't sound like an investment, to me.

What are your alternate investment options if you can't find local RE with acceptable numbers?

From this comment it sounds like you define investments as "income without effort." Am I right? Last night we drove by one of the duplexes and it would need a lot of effort - but then, it would be a decent place when done. Not really in a prime neighbourhood, but a nice house with lots of SFA and potential for 3 units.

I am looking for places close to home specifically because I want to do the maintenance etc. to keep costs down.

When you say other investment opportunities, are you talking about outside the stock market/ETF's???
Title: Re: Still playing with numbers - potential duplex???
Post by: arebelspy on February 08, 2016, 07:05:47 AM
This one looks cash flow negative if you actually outsourced the work.. in other words, you'd have to do a bunch of work on it yourself, for free, to break even.  That doesn't sound like an investment, to me.

What are your alternate investment options if you can't find local RE with acceptable numbers?

From this comment it sounds like you define investments as "income without effort." Am I right? Last night we drove by one of the duplexes and it would need a lot of effort - but then, it would be a decent place when done. Not really in a prime neighbourhood, but a nice house with lots of SFA and potential for 3 units.

I am looking for places close to home specifically because I want to do the maintenance etc. to keep costs down.

No, it doesn't necessarily mean zero work, and any real estate, even totally hands off, takes some work, but you should run the comparison on the return as if you do no work at all.

It's fine to up your money received by doing some work, but it doesn't up your return, if you get me, because the extra money received for doing that work is a payment for your labor, not for the money invested.

For example, say you bought a place where you invested 100k, and it would net 1k profit if you outsourced labor, but instead you insource 5k of it.  You now net 6k cash, but you don't have a 6% return on your 100k, because most of that 6k is a return on your labor, not a return on your investment.  The investment return is 1k, or 1%.  And then you gained an extra 5k handyman side-gig.

Maybe that's what you want, and that's fine, but I'd look for a good investment first.  Because you can always pick up a side gig job anywhere.  Handyman sidegig job on craigslist is easy to find.

Find a good investment that does a good return, and if you side-gig your own labor on it to boost your cash, cool, great.  But don't count that reduced costs into your numbers.

Make more sense?

Quote
When you say other investment opportunities, are you talking about outside the stock market/ETF's???

Any and all opportunity costs for the money.
Title: Re: Still playing with numbers - potential duplex???
Post by: Le Poisson on February 08, 2016, 07:14:49 AM
This one looks cash flow negative if you actually outsourced the work.. in other words, you'd have to do a bunch of work on it yourself, for free, to break even.  That doesn't sound like an investment, to me.

What are your alternate investment options if you can't find local RE with acceptable numbers?

From this comment it sounds like you define investments as "income without effort." Am I right? Last night we drove by one of the duplexes and it would need a lot of effort - but then, it would be a decent place when done. Not really in a prime neighbourhood, but a nice house with lots of SFA and potential for 3 units.

I am looking for places close to home specifically because I want to do the maintenance etc. to keep costs down.

No, it doesn't necessarily mean zero work, and any real estate, even totally hands off, takes some work, but you should run the comparison on the return as if you do no work at all.

It's fine to up your money received by doing some work, but it doesn't up your return, if you get me, because the extra money received for doing that work is a payment for your labor, not for the money invested.

For example, say you bought a place where you invested 100k, and it would net 1k profit if you outsourced labor, but instead you insource 5k of it.  You now net 6k cash, but you don't have a 6% return on your 100k, because most of that 6k is a return on your labor, not a return on your investment.  The investment return is 1k, or 1%.  And then you gained an extra 5k handyman side-gig.

Maybe that's what you want, and that's fine, but I'd look for a good investment first.  Because you can always pick up a side gig job anywhere.  Handyman sidegig job on craigslist is easy to find.

Find a good investment that does a good return, and if you side-gig your own labor on it to boost your cash, cool, great.  But don't count that reduced costs into your numbers.

Make more sense?

Quote
When you say other investment opportunities, are you talking about outside the stock market/ETF's???

Any and all opportunity costs for the money.

Makes complete sense - its value of your time versus the return on cash - got it.

Looking through the listings this AM, I came across 2 that are of interest, One is a 4-plex with laundry, ready for tenants at $650,000 (more than I could afford). The other is a Bank Repo with holes  in the walls and no kitchen cabinetry that could be duplexed or flipped for a little over $200,000 (but I wonder if I would have the time to really git-er-done).

One is appealing as a long term item for all the reasons you point out, the other is appealing as short term option because I don't put a value on my time, and I see myself in and out in 3 months to net around $50,000.
Title: Re: Still playing with numbers - potential duplex???
Post by: NoNonsenseLandlord on February 08, 2016, 04:38:14 PM
Use a 10% of rents for a maintenance figure, not your number.
Use a 5% vacancy expense.
Use a 10% management figure.  If you want to manage properties for free, please let me know.

Then come up with a cash on cash return and an ROI.
Title: Re: Still playing with numbers - potential duplex???
Post by: Le Poisson on February 12, 2016, 02:54:48 PM
OK... another question. According to our real estate agent (the devil's own accomplice) we should only put 5% down on a rental and finance the rest via a HELOC. She tells us that this is the best strategy since interest on a rental is a tax deduction.

No comment was made on CHMC insurance premiums though.

Using this mortgage calculator, (http://www.ratehub.ca/ontario-mortgage-calculator) I get a good spread on the difference in mortgage payments using a variety of down payments. Using this calculator (http://www.cmhc-schl.gc.ca/en/co/buho/buho_023.cfm) I can see the cost of CMHC insurance, which could be paid out of the HELOC or rolled back into the mortgage.

My question for the masses is whether it is a better choice to pay the CMHC insurance or put down a larger down payment using the HELOC? A secondary question would be how many of you have used a "Mortgage Application loophole" - Real estate agent's terminology- to buy a second property at 5% down? Should we be nervous about doing this? Right now it feels uncomfortable.
Title: Re: Still playing with numbers - potential duplex???
Post by: clarkfan1979 on February 15, 2016, 10:05:56 AM
Mortgage advice should come from the lender.