Here's my plan for 2014 - What would you do?

16 Replies

Hi BP! In my introduction, I mentioned that this is the year for big changes, so I wanted to run my plans by the great minds on this forum.

Current State: I've got two student rental properties in Waterloo (university town 1h outside of Toronto), one SFR in Mississauga (suburb of Toronto) and a condo in Toronto. I'm fully rented currently.

The Plan:

  1. Complete the rehab work. It's basic stuff, kitchens / bathrooms / flooring. And slightly bump up the rents for the next round of students.
  2. Put most, if not of my places up on the market for sale. I'm selling my places in Waterloo mostly because I feel that the market is over-saturated there. Tons of new apartment complexes going up around me. I think it will be difficult for me to compete with my little multiplex. Selling the other properties would just be to raise more capital. Cap rates are dropping in Waterloo as well - which means it's time to sell.
  3. I should have in hand after taxes about $800k - $1.2M in hand to reinvest.
  4. I'm looking to buy a small apartment block in Hamilton or Cambridge (cities outside of Toronto). They range from $2-3M and are anywhere from 15-35 units.

Questions:

  1. Am I crazy? These properties all cash flow nicely. It's a bit of a pain managing students in a town 1h drive away from where I live. I'm there almost every weekend. I'd like to get out of student rental because they are so high touch.
  2. What would you invest in with around $1M? Maybe a smarter strategy would be to split my investments amongst multiple buildings? But I feel a single apartment would be easier to manage.
  3. Are apartments worth it? I've would really be stepping outside of my comfort and more importantly my knowledge zone. I'd likely need professional property management, need an entire new set of contractors (how do I get elevators repaired?). I would need to incorporate.

Let me know what you think, and thanks for reading this lengthy post!

Cheers,

Ming

No one? I thought I would be hammed with clarification questions and people telling me I'm doing it all wrong! :)

Let's keep it simple and just play the "what if" game. What would you do with $800k to invest and why?

Here are few quick thoughts.

1) I'd sell the student rentals to avoid over saturation and too much competition.

2) Make sure that exchanging your other properties is not simply because of grass is greener thinking.

3) Diversify! Perhaps keeping your moneymaking closer properties would be a big part of that diversification.

4) Look at the US. Many jurisdictions don't have the tenant friendly laws that I believe Ontario has.

I would hang on to the Students rentals for the time being. There are currently no lenders willing to lend on them at the moment in Ontario. Which would mean if you tried to sell them a buyer wouldn't be able to get financing on them unless they used a private lender. This one of the factors why the cap rates are moving in the KWC area.

Before I answer what would be the best strategy I think the bigger question is;

What are your long term investment goals with Real Estate? Anybody can sell or buy a property but if it doesn't take you closer to your goal then is it really worth it...?

Ming -

I agree with @Cal C. for two reasons - diversify, and Canadian investment in the USA. I have many canadian investors that invest in the USA primarily because the USA offers better cash flow opportunties.

I also agree with @Gary McGowan - this needs to be tied to your investment goals and strategies. Short term, long term, income vs growth, passive vs active, tax implications, etc.

Sounds like you are tiring of the commute, and the propertty management responsibiilties. I sense that you would benefit from a more passive investment strategy, whihc I heaviliy preach for most investors. You can easily get 10%-12% annual returns that are very safe. Then you can go play golf or be with your family with the timefreed up.

I offer regular webinars on passive vs active investment. Let me know if you would like me to invite you to my next webinar on the topic.

Originally posted by @Ming Lim :
No one? I thought I would be hammed with clarification questions and people telling me I'm doing it all wrong! :)

Let's keep it simple and just play the "what if" game. What would you do with $800k to invest and why?

I think that is a good idea.

You do not need to buy a building with elevators, there is one now for sale with 21 units without elevator.

I was thinking to buy in Hamilton 6 plexes up to 12 plexes with 100% financing.

I would try to sell the current ones even if it is difficult to get financing. Maybe you can sell as non student rentals, or you do not need to specify to the banks that they are student rentals. If they are single family houses, you can sell as single family or duplex, whatever it is. If you can sell, you sell, if you don't, you don't.

It's easier to manage a 20 unit building than a bunch of small properties, you only have a maximum of 2 boilers and up to 3 water heaters to manage and you can get one manager to take care of it, its easie for him to supervise too. one trip, much less time to supervise.

Filipe

Originally posted by @Dan Brewer :
Ming -

I agree with @Cal C. for two reasons - diversify, and Canadian investment in the USA. I have many canadian investors that invest in the USA primarily because the USA offers better cash flow opportunties.

I also agree with @Gary McGowan - this needs to be tied to your investment goals and strategies. Short term, long term, income vs growth, passive vs active, tax implications, etc.

Sounds like you are tiring of the commute, and the propertty management responsibiilties. I sense that you would benefit from a more passive investment strategy, whihc I heaviliy preach for most investors. You can easily get 10%-12% annual returns that are very safe. Then you can go play golf or be with your family with the timefreed up.

I offer regular webinars on passive vs active investment. Let me know if you would like me to invite you to my next webinar on the topic.

I get around 15% cash on cash in Toronto, Canada, and over 45%ROI on my money.

In Hamilton , Canada you can probably get up to 20% cash on cash on big multi unit building with 20% down.

It depends on where and how you invest and how much money you have and hands on you want to be.

Thanks for all the replies and questions! Let me get to them one-by-one.

All - A few asked what my long term goals are. Well, long term is tougher, but I can tell you my 5-10 year goal is to leave my full-time job. The reason for selling the property would be to buy something larger, to get me closer to that monthly cash flow I need. Passive is always nice - who doesn't like "free" money - but I think mostly unrealistic or very small gains. My current places have required much blood, sweat and tears with renovations and tenant issues.

@Cal C. - The market saturation worries me and being a small fry, I can't compete with these huge apartments. I've already been finding it more difficult to rent to students, just because it's harder to market against these places. I'm looking at investment in the US, but it worries me a bit. Not being able to force appreciate with my own two hands is something I need to get over. Do you invest in the US? Any suggestions on where to start?

@Gary McGowan - I didn't know about the lending situation. How come people aren't willing to lend out? Is it because of the market saturation?

@Dan Brewer - Sure! I'm always up to learn more.. and how did you know I was a golfer? :)

@Filipe Matos - I've been looking at Hamilton as well. It's easier for me to travel too and the cap rates are much more reasonable. It's actually the only place left in the GTA with reasonable cap rates. I feel the same about the management piece. I spend as much time working on my multi-plex as I do my SFR's, but one earns 4 times the income. What are you looking at though that has a 20% Cash on cash? Best I've found was 10%, but maybe I'm assuming a larger down payment (30%).

I cannot tell you 100% for sure that you can get 20% coc since i have not bought in Hamilton yet, that is just what I came up with on my calculations on some very specific properties sold previously and what they could profit after some renos.

The only way I think it would be possible it would be with a 10+ plex with 15% downpayment with CMHC, or a 5+ plex with residential mortgage and 20% downpayment (RBC)

You can only get these results by doing some renos. Its almost impossible to get high coc "as is" . For example, in Hamilton I would put around 5/10K on each unit to increase rents. The plexes I buy in Toronto are all cash flow negative and I turn them into 10+ cash on cash properties.

I totally ignore Cap rates when I buy, what is important for me is the value/return after renovations. This is not for most people though, Renovations can be very stressful.

I have been looking there for 2 years but I always end up investing in Toronto Downtown where I plug all my money and get almost the same cash on cash and very good appreciation, one triplex per year.

A couple of months ago i was ready to buy in Hamilton, costs in Toronto are too hight, but again... I found another way to get better returns than in Hamilton.

Filipe

@Filipe Matos - I'm pretty comfortable with renovations. I've done everything short of building an extension now. So your strategy has been to specifically look for distressed rentals, force appreciate them and keep them for the higher cash flow? Or are you betting on the appreciation of the property as well?

Originally posted by @Ming Lim :
@Filipe Matos - I'm pretty comfortable with renovations. I've done everything short of building an extension now. So your strategy has been to specifically look for distressed rentals, force appreciate them and keep them for the higher cash flow? Or are you betting on the appreciation of the property as well?

Correct, and I do not bet on appreciation.

in the next months I am going to sell all my properties for a cap rate of 5.5% and buy more.

I tried refinancing the properties and it did not work well at all, so now I am going to sell them at market value which is much more than refi.

I only see renos to work very well in Toronto, I would not spend as much in Hamilton since rents are very low, but talk with investors there and see what they say.

I have owned a number of properties in Hamilton and still own one there. It is a very different market than the rest of the GTA. I even wrote an eBook about the city and the real estate market there.

The tenant profile is much harder to work with and you need to have very good property management company. The cash on cash return will be less than what you think it is at the start. You will see equity growth if you purchase a property that requires work. Every property that I bought there I put in thousands to turn it around. I have done well there although I'm looking elsewhere now.

If you need some guidance feel free to reach out to me.

Originally posted by @Gary McGowan :
I have owned a number of properties in Hamilton and still own one there. It is a very different market than the rest of the GTA. I even wrote an eBook about the city and the real estate market there.

The tenant profile is much harder to work with and you need to have very good property management company. The cash on cash return will be less than what you think it is at the start. You will see equity growth if you purchase a property that requires work. Every property that I bought there I put in thousands to turn it around. I have done well there although I'm looking elsewhere now.

If you need some guidance feel free to reach out to me.

"Looking elsewhere now"

Not the first time I hear that:)

@Gary McGowan - Thanks for the offer Gary. I'm not set on Hamilton, heck I'm not even set on Canada! If the numbers work, then I'm more than happy to set my sights elsewhere. I'll be at your meetup on the 24th, you can fill me in then on all the wonders The Hammer has to offer an investor!

@Ming Lim  

Interesting discussion you had going on. If there is one thing I have learned so far is leverage. Borrow as much money from others as possible.

So what have you decided on? Any updates?

@Gary McGowan  

Any indication if the lenders will start to lend for student rental? Especially with the amount of student rental complexes being developed all-around ON (Waterloo, Guelph, Brock, etc). Why aren't they lending on student rental? And I find it interesting that investors are still able to close on them...are they buying it on cash?

They buy with private lenders or cash. Also they can buy a single family home and convert it back to a student rental after they close. 

Originally posted by @Ming Lim:

No one? I thought I would be hammed with clarification questions and people telling me I'm doing it all wrong! :)

Let's keep it simple and just play the "what if" game. What would you do with $800k to invest and why?

 First thing I would do is convert all that to USD when the cash is need for downpayment acquisitions costs etc.. 

Then I would look for a multi family foreclosure/short sale etc.. that needs rehab on vacant units and that is about 40-50% occupied that can at least cover your holding costs. You will be using hard money with crazy points and interest which may push your occupancy to even 60% to break even every month.

When rehab nicely you can ask for full market rent that will drive NOI increasing value. Its always easier to increase the rents on a newly renovated unit vs an already tenanted unit that had no changes done.

Having multiple ways to increase value on your property is always my best choice..

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