BRRRR Strategy with a Niche - Oversize Garage/Shop

19 Replies

Hey BP,

I wanted to share a deal we just closed on, in a market where cashflow is very tight and hard to find. The deal is in Calgary Alberta, which is currently a buyers market, but still hard to find good cashflowing properties. It's a Bungalow in a great neighborhood that provides a decent spread from purchase price to ARV. We found the deal on the MLS and bought it slightly under market value. The lot has a sloped backyard which drops about 15ft to the alley. We are going to renovate the main floor, add a suite in the basement, and build a large 3 car garage/shop. Because of the slope of the yard, we'll be able to build a deck for the upstairs tenants on the flat roof of the garage, adding bonus value for the tenants in the house.

Before we closed on the property I posted a classified ad to rent garage/shop  for $1000/month. I received a ton of inquiries and found out there is a large need in our market for woodworkers, car enthusiasts, hobbyists, and people looking for more storage. The rent in our market for a typical garage goes for $250-$350, but since we have the space and are building it from scratch, we can add an extra bay and charge a premium. We are also making sure it will have 11-12ft ceilings and a 9ft double car door, to make it attractive to potential tenants. 

Cashflowing $200/door in Calgary is hard to find, but with adding this large garage, we've increased our cashlow on this property to around $1500/month. With the extensive renovation to the property and the garage addition, we should be able to pull out all, or very close too, the initial investment after we re-finance in six months. I am the working partner in this joint venture project with a financial partner holding the mortgage, providing the down payment, and renovation budget. It is a 60/40 split, 60 for the financial partner. We should be have enough spread from the purchase price, renovations and ARV, that we'll be able to pull out all of the initial capital on the re-finance depending on how the appraisals are going in a softer Calgary market

See below for the numbers,

Purhase Price - 360k Down Payment - 72k Closing - 2k Reno's - 120k Holding Costs - 6k LOC Debt Service 4k

Total Initial Investment and Holding costs - 204k

ARV - 520k to 560k Main Floor Rent - $1500 Basement Suite Rent - $1200 Garage Rent - $1000

Total Monthly Income - $3700

Monthly Exp - Mort pymt - $1250   Prop Tax - $190    Ins.  -  $130    Vac Rate 8% (1 month) - $240  Capex5% - $150  Repair(5%) - $150

Total Monthly Expenses - $2110

Total Monthly Cashflow - $1590

We will build up the operating account to around $8000, and then start taking the vacancy rate, capex, and repair budget as cashflow adding another $540/mth to our pockets. If all goes well on the re-finance we'll have all of the initial investment pulled out of the project, or very close too it, providing and infinite ROI for many years into the future, and can recycle the money into the next project.

Filling the need for people looking for a large garage/shop gave us a niche and took this project from average to amazing returns. Hopefully this helps anyone who's struggling to find cashflow in more expensive markets with typically low cashflow. Feel free to reach out with any questions regarding the deal, our market, or how we structured the joint venture. Happy Investing,


Travis Hewlett

In the real world there is no way this property will produce positive cash flow long term. Rental income is way too low compared to the value of the property and relying on rent from garage is not realistic. When it goes vacant it will remain that way for a long time. You are trying to make a property work that simply can not. Unfortunately you will not see this until it is way too late.

$3700 monthly rental income on a 520K property....the numbers simply will not work.

   

I should clarify, that after the Re-Fi, the cashflow drops to $1000/month. The new mortgage payment is $1900. I've had a ton of interest in the garage and am in discussions with an individual to sign a 2 year lease before we even break ground on the garage. We've shared the plans and have offered to add some features to fit the tenants use. There is a huge jump in price for hobbyists, contractors, and car guys from smaller garage space to commercial bays for rent. We've found a good size and price point to fill a need for a lot of people and from the initial interest, don't believe we'll have any issues in the future getting $1000/month rent. The numbers still work when the garage is rented for $350, contrary to the gracious comment above.

Howdy @Travis Hewlett

Congratulations on being innovative.  It sounds like you’ve done the proper market research to support your plan.  That type project may not work in all markets, but, your initial feedback seems to show otherwise.

By the way.  One of my properties had an old wooden oversized garage/shop.  We renovated it and have had it leased for 4 years now.  I originally was going to use it for my own warehouse.  But had someone approach me about renting it.  In my case it was bonus income.

Good luck.  Let us know how it turns out.

Also remember to think about power needs for light industrial tenants...  as well as osha requirements for fire escapes, things like that...  parking if they have customers come there etc..... zoning....

Congrats @Travis Hewlett , looks like you got quite a deal. Calgary is an equity/appreciation market, so 1% or 2% rules are just about impossible, but getting that much in cashflow plus that amount of upside - sweet!

You've managed to add to cashflow to what I think your niche is (adding basement suites?). I didn't know garages could go for that much, good work with testing the market. But if built to spec, and you can push the envelope, take it! But I'll add to what @Carson Wilcox said about noise/odors, might want to have some rules in place to control the various tenants.

What communities are you buying in? (Looks like older, established neighbourhoods). Also how do you handle splitting utilities between tenants?

Hey @Tony Akhigbe and @Carson Wilcox ,

The niche is the large workshop/garage, where we will definitely be very careful/picky on the tenant we rent it to. We've already got a guy lined up that would be using it for some small woodworking projects and working on a car project in the evenings. There has been lots of interest from mechanic types that would be using air tools during the day and as you mentiond, it would attract too many noise/odor issues. The uniqueness of the lot will help keep the tenants from the house and the garage completely separate so they don't have to interact at all. 

As for utilities, we are checking with the provider to see if we can separately meter the garage, as we have to run new services. If not, we'll charge the garage tenant a $50-75 utility fee, and split the remainder of the utilities 60/40 for the tenants in the house. I will leave them in my name and issue the bill to the tenants monthly. There will also be strict guidelines written within the lease for the garage pertaining to utilities and use. I had included utilities in the rent on a condo I own, and the tenant was mining crypto-currencies. After 3 months I ended up evicting him for a few breaches of the lease. He had an electrician add an extra breaker, and had pets in the condo when I was doing an inspection. If he hadn't broken the lease on multiple fronts, I would have been on the hook for  $500/month power bills. 

As others noted here, calgary is the type of place where it has a heavy handed and rigorous bureaucracy.  Use of a residential garage for such purposes is likely to get you on the wrong side of your local nimby enthusiast, the type of person with nothing better to do than study bylaws and try and get you shut down.  

you are correct though that commercial rents are insane and a business killer.  my mechanic works out of his home garage, but likely has cut some deals with the neighbours not to complain.  He tried to get a permit to build a new and appropriate garage to work out of but ran into the headaches and obstacles that led him to abandon ship.  I'd stay away from any mechanical work requiring clients come to the location, could just bring so much trouble on you.  

@Travis Hewlett how is the project coming along? What neighbourhood are you in? One other thing to be cautious about is whether or not the garage/shop will help or hinder your appraisal. 

Last year, I bought 7 acres of land near Strathmore and moved a 3/1.5 bungalow from Charleswood onto a new basement foundation. We did our first refi at that time, and then we gutted the main floor, did a bunch of landscaping and fencing, and are in the process of adding a triple garage, and then we'll do another refi in about a month when it's all done. This is our primary so I'm not concerned about cashflow (this is our dream property) but I still want to come out ahead on it. Originally we were planning on building an approx 52 x 30, half double garage, half 4-stall barn. I was under the impression that an appraisal would only count 1 outbuilding, which is why we combined the 2 into a multi-purpose building. Kill 2 birds with 1 stone, sounds great right? Incorrect. Most lenders will only count the GARAGE portion of a building for value. They also have other silly rules like most lenders will only count 5 acres for an appraisal on rural property. We ended up modifying our plans and are now building a 30 x 38 triple garage, and after the refi we'll convert one bay into a couple stalls for animals. Just make sure that what you're building is a "garage" rather than shop if the future lender has strict rules. You might want to find out exactly what they'll count for an appraisal. Good luck!

Hi @Brianne H. ,

The project is going really well, although there's definitely some scope creep. We are in full construction on the house and suite, and going through the permitting process for the garage. We've reached out to quite a few appraisers to find out how they appraise the garage. There aren't many comparables for triple car garages, or legal suites in Ranchlands, so they are having a tough time putting together our As-Complete Appraisal for us to let us know how much we'll be able to re-coup of the construction budget at Re-Fi. In speaking with a few appraisers they mentioned as a minimum they would use the cost of a standard 3-car garage, 37.5k, and any additional value from the deck and size would be based on the appraisers opinion. 

I will send you a DM, and hopefully we can line up a coffee and I'd like to hear about some of your projects! Have a great day,

Travis

Hi Travis,

Fellow Calgary investor here! Good for you, this sounds like a really interesting deal. We are currently looking at putting a suite in our current house and were going to try to Airbnb for a bit and see how that goes. Does the city require you to provide parking for the tenants? We haven't gotten to building the suite yet, we are adding an additional washroom to the upper unit (while living in it) first. We have a suited rental in Cochrane and had to provide additional parking for the lower tenant in order to comply with the towns regulations on suites. Either way it is a creative way to create cashflow in a hard market!

Hey Travis,

My is Robert and i am brand new to real estate investing in Calgary. Reading your post is certainly a breath of fresh air after coming to realize how tight cash flow opportunities actually are in this city. Creativity is indeed necessary in this market environment and i love your workshop/garage project for people who don't want to fork up the huge cash for commercial space. I think you have found a great niche. Im my  (minimally-educated) opinion i think that there is more room for depreciation in the market this year but ultimately i think we may be reaching the bottom in 2019. That being said i will be looking at purchasing an investment property this year- something cheap, probably single family, in a great area. I plan to use the "buy, rehab, rent, refinance, repeat" approach to build equity and hopefully generate some + cash flow. Right now i am learning as much as possible about the Calgary market and fine tuning my analytical skills. You seem like a really smart fellow that knows what they're doing in this market. It would be awesome if i could pick your brain sometime via email/phone or maybe we can link up for coffee eventually. Would be greatly appreciated!

All the best Travis! 

Outstanding job Travis 👍

Calgary certainly is a challenging market at the moment but there are opportunities out there. I work as a Realtor in Calgary and I’ve helped a number of investors navigate the tricky market. If anyone ever needs any advice at assistance, please reach out to me. I’d be happy to discuss some of the strategies that are currently effective in Calgary.

Thanks.

Stu

Hi @Muriya Bosch ,

It was a really fun deal, and we learned a ton in the process! To have a legal suite, I believe you need at least four parking spaces. Right now the city is offering free development permits for legal suites, so it's a great time to add a suite. I would definitely look up the regulations for basement suites, because they have been changing regularly over the past few years. The city is trying to make things easier, and make the process easier. They will also start cracking down on illegal suites over the next few years. Good luck!


Travis

Hi @Bobby Mailloux ,

Thanks for the comments, I'd definitely be up for a call or coffee sometime. Shoot me a dm and we can line up a time to connect. Thanks and have a great day,

Travis

Hi Travis, 

This sounds like a great approach to adapt the property to increase cash flow. I like that you researched your options via Kijiji to get a sense of what potential was available and secured interest. I am curious if you would be open to taking a few more questions about the partnership and how scope creep has changed your project from when your first started. 

Keep up the good work, 

Cody