Advice on run-down 11-unit multifamily in affluent area

20 Replies

Hi everyone. 

I am new to the forum but I've been putting in a lot of time going through the posts and learning as much as I can about real estate investing. 

Ive been looking at a property close to where I live here in Victoria. Its a bit of a unique case, and being that I'm new to this I'd really like the opinion from some more experienced investors. 

The property is located in a high-end part of town, in a heritage residential area about 3 blocks from the edge of the downtown core. Other houses around it are immaculate and of the same era, a very affluent community. This house is larger than most and is frankly an eye-sore. Overgrown garden, broken down cars in the driveway, garbage bags being used as window-blinds.  
It is listed on mls for $750,000. The average single-family home price in Victoria was $700,000 in 2014. 
Built in 1910, the house is 5500 square feet, a grand old mansion that has been converted into 10 units. The units are tiny, many of them sharing a bathroom. The tenants are all very low income but being that there are 10 units in the house, and a detached carriage house means the property nets $6100/month. 

A building inspector from the city looked at the property and mandated that basement suites, two one-bedroom units, be divided by a firewall and had their ceilings fireproofed as well. I would, over time, update the suites and repair the building to restore is former glory. 

I am a recent grad with an urban planning degree, but that means Im lacking the capital for a down large downpayment and therefor creative financing is my only option, and the owner has agreed to $100,000 in vendor financing which would have to be met with a traditional mortgage and secondary private funding. 

I would really like some experienced opinions on whether or not this would be a worthwhile undertaking. I realize going into such a large property without a substantial downpayment is risky, but I think the property has a ton of potential and I read somewhere that history favours the bold. 

Thanks very much BP, this community is incredible. 

Don't saddle yourself with bad debt.

In these situations even with nothing down you need money for due diligence items and repairs with reserves.

So you want to be able to hand the property back with no personal guarantee and non-recourse if it doesn't work out. Then for time invested you will have a learning experience but nothing else negative to happen.

If you don't set it up this way then if the property doesn't work out you will be working constantly on it for free and saddled with close to 1 million in debt and not able to buy the better deals that come along. So you want to set up a risk free shot of turning this around for your time and dump it back if it doesn't work.

No legal advice given.  

I am going to guess you would be paying utilities on these 10 units  but correct me if I am wrong.  If that is the case the way it stands it does not sound like the numbers would work with the units you have  $6100/month in income and what sounds like a fair amount of capital costs.   What is the possibility for fewer units at a higher rent/unit?  If it is worth turning around to higher end units and what is the timeline for doing it?  Can you make improvements  in the carriage house and see an immediate return?  I admire your intent.  I have a historic set of apartments similar to this that was turned into 5 units.  The tenants love the historic details but they also want workable apartments. There was also a lot of upfront cost that tenants don't pay more rent  for, like a new roof. Make sure you look at those costs.  I don't think you will get the rent to support this with the current tenant pool.  There are some experienced Canadian investors on this site that could probably comment better then I.  I recall that Roy N.  mentioned some long term tenant laws in Canada that might be relevant if these are long term tenants.  Again great idea and I don't want to discourage you but make sure you know all the relevant issues before you jump in. 

I don't have any advice but am from Vancouver Island and can see why you are so interested in this opportunity if you're talking about Oak Bay. Is it possible to find a partner over there? 

@Devin Marlowe  

I'm guessing this house is in James Bay (not Oak Bay).  I lived not far from there years ago when I sailed out of Esquimalt. 

Sounds like it is more or less a rooming house.  A rooming house works well when near a university as you can furnish them and cater to international students - but when your clientele are affordable housing patrons, you stand to have far more drama and administration than you care.

If it is the property I found on MLS, the listing indicates the owner has carried out decades worth of renovations without permits. It also states the property is licensed for 8-units (1 1-bdrm and 7 x light housekeeping), but is operating with the configuration you presented at the top of the thread.

These are two large flags that may make this a steep challenge for a first rental property.   Given these disclosures directly in the ICX listing, I would guess a) the property has been on the market for some time {and will continue to be on the market for more time} and b) someone else has looked at the property and, based on their findings, the Vendor had to disclose the non-permitted renovations.

In analysing this property, I would do the following:

1) until there is a written assurance from the City that the current operating licence can be amended to reflect the actual use of the property, I would evaluate the property with the revenue from only the 8 licensed units.

2) get in writing from the City inspectors what work-orders are outstanding on the property and/or what work they will require to be completed when the property changes hands;

3) find out how many days the property has been on the market and how much interest there has been  to-date.  If you are using a buyers agent, s/he will be able to do this for you.  If you are not using a buyer agent, but are going through the Vendor's/listing agent, I would suggest you get your own agent as the Vendor's agent is primarily committed to the interests of the vendor.

Based upon the answers to the three points above, combined with the disclosure that all past work by the Vendor has been performed w/o permits, I am guessing the NOI thrown off will not come close to supporting the ask price ... maybe not even a price of $500 - $550K. If would also check to see if the Vendor is prepared to do a full carry on the property - this gives you the space to make a lower offer and for the Vendor to earn closer to the same amount through deferring capital gains and interest income on the note they will issue to you.

If your plan is to proceed with the property as it presently operates, you will want to secure assurances from the City that they will amend the current licence to reflect actual operations.   This would leave you with a property with decades worth of surprises lurking in the walls from the non-permitted and non-inspected renovations.  You may have problems obtaining reasonable insurance on such a building.

Another alternative, and likely the approach I would take if I were able to turn the present situation into an actual deal,  would be to determine if the building could be reconfigured to have 4-6 2-bdrm & 1-bdrm units and perform a deep retrofit of the entire building while it was being reconfigured .... I say this on the hunch that most of the current owners renovations are not compliant with current building or fire codes and that we always endeavour to make our old buildings as energy efficient as practical.   The downside is this will take money ... likely a lot of money.

I would suggest that to tackle this property, you will need a partner - or partners - with capital - which will be difficult to secure without a track record. 

@Roy N.  

Wow, thanks for the detailed response.

Yep its in James Bay, about 2 blocks behind the Legislature. The building is mainly set up as a rooming house, although the owner calls them housekeeping suites (they don't look like they've had much housekeeping). They are basically bedrooms with a hotplate and a shared bathroom. 
The longterm plan would absolutely be to renovate, remove some walls and divide the main house into 2-3 bedroom units that would command higher rents and a better clientele. 

The property was inspected by the city not long ago and a copy of the report has been given to me. It seems that the only major concern they had was the firewalls needing to be installed in the basement and the removal of a small shed outbuilding that extends past the property line. 
I have a meeting with the city this coming Tuesday to confirm this and, like you say, get in writing an assurance that no other legal surprises are waiting. 

Just yesterday I have found a partner here in town who owns a contracting business and has access to much more capital than I have. So it looks like I can avoid having to use secondary private funding which is a huge relief. 

I'll also look into a buying agent to help with our side of things. 

@Colleen F.  


The utilities are renter-paid for about half of the units. I would try to update the carriage house for a higher rent right away. Its a large space, about 1000 square feet, and a few modern fixtures and some paint would really make the place nice. 
All the units are currently occupied though, I have to do some more research surrounding the protocol for evicting residents to rehab units. 

@Devin Marlowe  

If you are that close to the legislature, I would amend my above response slightly.  We have a Victorian duplex not far from the legislature here in Fredericton.

I would still focus on reconfiguring the building into 4 - 6 units, but I would finish them more upscale, attempting to keep/restore the period finishes and feel, while property insulating and air sealing the building envelope itself.   Despite paying homage to the original architecture, I would also modernize the layout and try to keep the newly configured units open concept enough to allow a ductless mini-split to be used as the primary heating/cooling source for each unit.

I would then furnish at least half of the units ... the upper units in the main house ... and target the MLAs who need local accommodations while the legislature is sitting.   I would then target the less prestigiously located units (basement, converted porch/carriage house) at the staff of the legislature.    MLAs all have a housing and travel budget and you can set your rent to be a little less than the standard amount ... which will still be substantially greater than renting a standard flat.  You will want to include a cleaning service in the rent, along with Internet (you can put Fibre-Op into the building) and possibly utilities.

We target our duplex at young professionals working as staff to the MLAs and I have an acquaintance who has an old Second Empire home converted into a Triplex - all two bedroom units which are furnished as executive rentals.  The units rent for $1800 - $2600 per month.

The meeting with the city concluded and there was some updates to me that aren't great news. First, the owner admitted that he built the rear carriage house in 1989 without a permit. For the city to allow it to stay, it will need an inspection to ensure it is up to building codes - opening the walls and the ceiling etc. Not great news, but I'm more concerned that the loft which is connected to one of the upper suites brings the house to 4 floors, and therefore is subject to fire codes that require a sprinkler system for buildings 4 floors and up. 

The city recommends that the loft be blocked off permanently, and that the carriage house be removed. Both these areas were in better shape than the rest of the house and I'm wondering if anyone has experience pushing back against these kind of things. 

The house is on the market for $750k. I'm on the fence now, moving forward or not on this deal. If I'm to move ahead with this, with the removal of 2 of the higher value suites I will have to adjust and make a substantially lower offer, which I'm having trouble calculating and landing on a number.  Any tips for calculating a lowball offer?

Thanks again everyone, this is a huge help. 

@Devin Marlowe everything you have sited, that the city has said, since it is writing the owner should not have problem coming down off of the price, personally I wouldn't worry about hurting the deal I would low ball offer him and let him counter you have the control factors now, good luck.

@Devin Marlowe  

I'd probably walk at this point ... you can always poke at it later.

If you are intent on pursuit, you could make it a condition of any offer that all zoning, work order and code compliance issues be resolved prior to Close.

Now that you have had this discussion with the City and, I presume, conveyed the information to the Vendor and his agent {hopefully you asked the City to put it in writing - to help you keep the list straight.  You can then give the Vendor a copy}, who would then be required to disclose to any other potential buyers.

Wait another 4-6 months, evaluate the property based on the revenue of those units which are licensed and not required to be removed, put a big healthy risk factor on it and offer the Vendor 50-60% of ask.

Though I would still walk away ... for your first property you will be on a steep enough curve without having a "surprise" property.

@Devin Marlowe  - this sounds like A LOT to bite off for a first project.  Like the others, I don't want to discourage but I've done many rehabs and am currently tackling the conversion of a boarding house to a smaller unit count.  There are a ton of considerations and when you've got a boarding set up you pretty much have to have the building completely empty at some point (likely most of the project).  If your goal is to attract a higher quality clientele it will be required.  Even if you can vacate a couple units at a time and do work on them, it's unlikely you'll be able to attract good tenants at good rents if the rest of the building is full of low-income boarders.

You could easily be looking at $300K+ to complete the extensive rehab that is needed to get the building where you want it to be. The neighbors would love you, but your investor may not. For a project like this, the absolute minimum would be for the purchase price plus cost of rehab to be less than the repaired value of the building. So perhaps a good starting point would be finding what the value might be after you repair it. This is where an experienced agent would be quite valuable...just taking the average 2014 sales price for SFR's in the same city is not an acceptable substitute for an actual valuation from somebody experienced in valuing multi-family properties in this particular area. Determine what you'd be willing to pay based on these things and don't exceed that price. You'll probably want to start a little lower in hopes of building in some extra cushion.

Historic rehabs are long and tedious and it sounds like you've already determined the current owner did not do anything correctly so you'll need a detailed budget with a huge contingency before you should even think about making an offer!

Thanks everyone for the advice. I've done all the mental gymnastics I can on this property, and it looks like walking away is the only choice. 

Hopefully something comes along that isn't such a mess. 
Im sure I'll have more questions as I get deeper into this industry. 

This is an interesting case.  Being in the US, and on the other side of the continent, I have a couple of questions and comments.

First, a major question.  If you buy the property, other than letting them stay out their leases, are you stuck with the existing renters?  In NYC itself and in some parts of the metro area, there are rent regulations that prevent a landlord for evicting a tenant at will, even if they have no lease.  I have no idea what the laws are in BC.

If this is not the case, and you can get this building, given that it appears to be in a highly desirable area, would it not make sense to reconfigure it to a smaller number of much more upscale units, possibly for sale (ie condos)?  Even if you keep it as rentals, going upmarket with a smaller number of better units may make it easier to manage, get you a better quality (ie more reliable) tenants, and get you much higher rents.

Have you looked into attracting investors for this property.  You're going to need more capital, and investors who have a longer term outlook.

@Michael Wolffs  

In most, if not all,  provinces and territories in Canada you inherited leases when you purchase a building.  In addition, there is typically a "default" lease in the residential tenancy legislation which comes into effect if there is no written lease.  

That said, in many jurisdictions there are specific circumstances where you can terminate leases prematurely, examples are if you, or an immediate family member, are going to make a unit/property your primary residence; if a substantial renovation is to be undertaken which necessitates the property or unit be vacate; or if the building is to be demolished.

I am not certain if BC permits termination of leases under such circumstances.

This property is in a desirable area, but is none-the-less overpriced whether you were planning to reconfigure it or replace it.

Originally posted by @Roy N.:

@Michael Wolffs 

In most, if not all,  provinces and territories in Canada you inherited leases when you purchase a building.  In addition, there is typically a "default" lease in the residential tenancy legislation which comes into effect if there is no written lease.  

That said, in many jurisdictions there are specific circumstances where you can terminate leases prematurely, examples are if you, or an immediate family member, are going to make a unit/property your primary residence; if a substantial renovation is to be undertaken which necessitates the property or unit be vacate; or if the building is to be demolished.

I am not certain if BC permits termination of leases under such circumstances.

This property is in a desirable area, but is none-the-less overpriced whether you were planning to reconfigure it or replace it.

 Roy,

I realize you inherit the leases.  In NYC, and some other localities in the US, even when a lease expires, you're required to offer the same tenant a new lease on basically fixed terms.  You can't just take back and apartment at the end of a lease.  I was wondering if Canada in general, or the locality we're talking about specifically, had anything like that.

@Michael Wolffs  

If depends on what type of lease (periodic or fixed term) and what you do following the expiration of the lease.   Periodic leases automatically renew at the end of the period, unless notice has been appropriately served by either the tenant or landlord.  If notice has been served, the lease expires at the end of the period.

Fixed term leases have a definite termination date (end of the term) with no renewal.  If you had a fixed term lease which ended April 30, but then accepted rent from the tenant on May 01, in most jurisdictions you would be deemed to be under the "default" lease which is a month-to-month periodic ... so you can terminate with 30-days notice.

In some provinces, such as here in NB, there are slight differences when dealing with long-term tenants (defined here as being >5-yrs) which restricts the conditions under which you can terminate the lease ... however, a major renovation during which the building would be uninhabitable is one of the conditions under which the lease could be terminated.  In BC, the landlord can server a 2-month notice to terminate a lease when a major renovation is to take place.

You can read BC's Residential Tenancy Act here

This sounds like a labor of love and not an investment property. Some really great advice here.

I can absolutely see the attraction. Being in real estate for the money is important but most of us would be lying if we said we weren't also motivated by how we can make neighborhoods better, make an old ugly house beautiful again, etc.

If you have never been a landlord, I would suggest starting with maybe a duplex or fourplex to see if this is something you can do.  Landlording is not easy and takes a lot of time and effort.  One book I highly recommend is "Landlording" by Leigh Robinson...you can actually pick up a used copy...any edition is good to start.  I update mine as they print new editions but it a real eye opener with a comical twist and fun to read.... 

As you get the hang of it, then maybe do a 1031 into a larger multi-family property...or split whatever equity you have and use the equity to buy two other properties!....  The best of luck to you....

@Devon Young  @Joyce Tavares  

While Leigh Robinson's book is a good read, perhaps a better first resource in this instance would be Douglas Gray's "The Canadian Landlord's Guide"

Additionally, a 1031 is a U.S.A. taxation vehicle which would not be applicable in this instance with sovereignty coming into play and all.  We do not have an equivalent shelter in Canada which allows you to stay taxation when selling one property to purchase another.

@Joyce Tavares    Im actually not too concerned about the landlord side of things. I have worked for 8 years in residential care facilities with mental health and addiction clients, so I've probably seen and had to deal with some of the worst of the worst as far as tenants go. 

I said I would walk away from this property, but the landlord is really desperate to get rid of it, so I had another look around with my potential partner. We're going over the numbers again and putting together an offer. If he doesnt take a serious reduction to the asking price, it just wont work. Still working out exactly how far to drop it though. 

Has anybody any experience offering about 75% of the asking price on a property? I imagine he'll likely try to fistfight me, but going much higher than that doesnt make sense based on the work the property needs. 

75%?  My gut feel is an offer will need to be lower than that ... say in the 50 - 60, perhaps 65% range.

Run the numbers using the portion of the current revenue stream that permitted under the owners zoning and license.  Then account for all the not-to-code homegrown maintenance  ... this will give you an idea what the property is really worth as it presently operates.

Then figure out what your intended use will look like and what revenue it will generate (based on a survey of comparable product in the local rental market).   Assume your operating costs will be 50 - 60% of your revenue [this is a hypothetical "what if" at the moment] ... from here you should be able to figure out the value you would be willing to pay for the new cash-flow of the rehabbed product and obtain your desired rate of return.

Now work backwards by deducting your retrofit/reconfiguration cost estimates; next deduct your holding costs (while you are rehabbing the property); next deduct a contingency buffer.   The number you have is the top-end of what you could pay for the property and still have a profitable rental in the end.

If this second number is greater than what you arrived at as the value of the current business, then the delta is your negotiating space.  If it is lower, there is no deal here.

I'm not sure I explained things clearly above ... feel free to drop me a PM and I'll try to provide more clarification.

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