Amazing opportunity or just a silly deal?

24 Replies

Hi guys,

I'm new to RE investing and would like to get some advice on the following property in Ontario, Canada. I've been reading up on RE investing the past year and have been browsing MLS for roughly the same amount of time. Recently I found a property that meet the spec and want to know if I am no the right track.

This 6plex is in a not so great neighbourhood but 1 km away from a University

Asking Price: $180k (Want to put in offer at $165k)

Gross Annual Income: $40,980 (Adjusted to $37,140 due to inflated rent in 2 of the units and the tenants will be moving out soon).

Vacancy Rate: 4%

Cap Rate: Close to 11%

Debt Coverage Ratio: 2.18

Expenses: Around $18,220

NOI: $17,435

Cash Flow Before Tax: $9,448.89

Case Flow Before Tax Per month: $787.41

This property also very deep at 200' and has a garage in the back with a parking area that can be access through the back alley.  I might be able to increase income by renting the spots out to University students and renting out the garage.  

2 out of the 6 units will be leaving the property in coming months.  3 out of the 6 units are rented by Chinese students with 1 year lease ended and currently on month-to-month basis. 1 Unit is rented to an elderly woman on 1 year lease and according to her neighbour, she has some mental disabilities (not sure if that's relevant).  

This property is in a decent size city with 250k population and current vacancy rate is 5.8%.  Also, the unemployment rate is 10% which is quite high. I've also got more crime stats from the Police within the block of the property. 

Here are the stats in the past 10 years:

Theft from motor vehicle: 20 incidents

Domestic Complaints: 18

Mischief: 11

Lost and found: 10

Break and Enter Dwelling: 10

Breach/Bail Conditions: 8

Theft other: 7

Assault: 5

And a bunch of other 1s and 2s of theft, Threads, MHA, Landlord issues, etc.

I would really like to know so of your thoughts from people with experience.  Thanks very much.

@Samson Tse

Numbers look decent enough, but a six-plex in that price range could be on the rougher end of the spectrum. 

I would very closely look at the tenant-quality risk associated with the neighborhood and also if there are any hidden surprises in the building. I don't know much about the market, but they are definitely your points of focus.

@Samson Tse

Looks decent from the initial numbers. Students tend to be good tenants, I would focus your efforts there.  Add a few safety type features.

Are these 1/1s?

What does each unit bring in?

However I cringe at the "expenses" being lumped into one giant bucket.  What are your individual expenses broken out?  I use the following list to calculate my total monthly income:

Monthly Mortgage payment

Taxes (you mention income BEFORE TAX, I assume you mean personal tax, right?)

Sewer and Water

Trash (do your property taxes cover this?)

Heat/Utilities (which utilities are you expected to cover?  Canada is COLD!)

HOA

Cap Ex and Ops (stuff will break.  Make sure you put at least $200 every month as a pre-paid expense in this bucket.  Put it in a separate account and don't touch it)

Insurance

Mgmt Fee (generally 10%.  Even if you intend to self manage, pay yourself)

Vacancy (4% is awesome.  If you can keep it that low, great.  I'd still put in 8.1%.  8.1% represents 1 vacancy/apartment/year)

@Samson Tse

Is that the building on Peter St.?

That's about as close as one gets to Detroit (both figuratively and physically) in this country ;-)

Who are the current tenant population?  Though you are 1km from Western (on the wrong side?), it is quite probable few students will want to live in the neighbourhood.

Once you decide it the neighbourhood is where you want to be, then study the building hard for deferred CAPEx and obsolescence.

I also think your economic vacancy allowance needs to be greater than it is and the expenses are likely a little low (you will know when you walk the building).

Aaron:  1/12 is 0.0833 .... but close enough for analysis ;-)

@Aaron Montague

Yes, they are all 1/1s (I'm assuming 1/1 means 1 bedroom, 1 bathroom)

Each unit brings in from 425-600 but the current owner is showing me 2 of the units with rent $600 and $700 which I brought it back down to $550 to get the adjusted Gross Annual Income.

Monthly mortgage payment is around $700 per month with 25% down for 20 years @ 4%.

Yup, BEFORE TAX means before personal income tax.

Expenses are broken down in my spreadsheet but I just included the whole number for simplicity.

Gas: $2,469

Hydro/Water: $6,212

Landlord Insurance Quote: $3,200

Property Tax: $3,859

Internet: $945

What's HOA?

Maintenance/repair cost: $840 (probably will increase this if you are saying $200/month)

I did not include management fee, I guess I should put that in.

Thanks for the vacancy tip, I'll adjust it to 8.1%

@Roy N.

Haha, no it's not on Peter St., although I did look at a house there but couldn't pull the trigger due to the neighborhood.  Are you from Windsor?

The property is actually on the opposite side of the university, so it's bad but not that bad. Within the 1km radius, there are a lot of student population. 

I'll up the vacancy rate for sure.  Thanks so much!

Hmm, after the vacancy adjustment, increase in maintenance/repair to 10% and including the management cost of 10%, the monthly CashFlow before tax is only $224.....

Originally posted by @Samson Tse :

Hmm, after the vacancy adjustment, increase in maintenance/repair to 10% and including the management cost of 10%, the monthly CashFlow before tax is only $224.....

 That sounds a little more realistic for the price-point and area.

If you are looking to target students, then your preference is to be within walking distance (<=500m).  The further you get from campus, the more you need to look at availability of public transit (folks do not like to walk more than 300m), parking, bundled amenities and, naturally, price to be competitive. 

We have several student rentals in two different Cities - all but one are within 4-blocks of campus.  The outlier we acquired only because we paid very little for it and it had en-suite laundry (the "draw" amenity).

So the other direction from Peter Street ... not the old Victorian on Campbell?

Originally posted by @Samson Tse :

Hmm, after the vacancy adjustment, increase in maintenance/repair to 10% and including the management cost of 10%, the monthly CashFlow before tax is only $224.....

Yeah, the primary appeal of this place appears to be price.  Everything included for $550/month is rather awesome.  Those Hydro/Water (Hydro = sewer?) bills are insane.  I figured it might be $400/year.  

HOA = Home Owner's Association. Usually just a Condo thing, but once in a while neighborhoods have them attached.

This would be a good investment from a numbers perspective if the tenants each paid about $650 and took care of everything except your Hydro/Water bill.  

Given everything I've seen, plus the input from Roy N, I'd pass on this place.

Originally posted by @Roy N. :
Originally posted by @Samson Tse:

Hmm, after the vacancy adjustment, increase in maintenance/repair to 10% and including the management cost of 10%, the monthly CashFlow before tax is only $224.....

 That sounds a little more realistic for the price-point and area.

If you are looking to target students, then your preference is to be within walking distance (<=500m).  The further you get from campus, the more you need to look at availability of public transit (folks do not like to walk more than 300m), parking, bundled amenities and, naturally, price to be competitive. 

We have several student rentals in two different Cities - all but one are within 4-blocks of campus.  The outlier we acquired only because we paid very little for it and it had en-suite laundry (the "draw" amenity).

So the other direction from Peter Street ... not the old Victorian on Campbell?

Thanks for all the feedback.  I don't think $224 per month will cut it.  It's easier to just go drive for Uber for a few hours.  haha

Ya, the other direction not the old Victorian on Campbell.

Originally posted by @Aaron Montague :
Originally posted by @Samson Tse:

Hmm, after the vacancy adjustment, increase in maintenance/repair to 10% and including the management cost of 10%, the monthly CashFlow before tax is only $224.....

Yeah, the primary appeal of this place appears to be price.  Everything included for $550/month is rather awesome.  Those Hydro/Water (Hydro = sewer?) bills are insane.  I figured it might be $400/year.  

HOA = Home Owner's Association. Usually just a Condo thing, but once in a while neighborhoods have them attached.

This would be a good investment from a numbers perspective if the tenants each paid about $650 and took care of everything except your Hydro/Water bill.  

Given everything I've seen, plus the input from Roy N, I'd pass on this place.

Thanks for all your input!

Hydro/Water is Electricity/Water, for us, the same company service both so the bills are lumped together.

I guess at this point, I'll see if there are more flex in the price, otherwise it's time to move on.

Originally posted by @Aaron Montague :

@Samson Tse

I like to be at $125/door with my investments.  So for this place they'd have to knock 100k off the price to get me to $750/month.

 That's not likely... it's a private sale right now, I think she will just get a realtor and test her luck.

Originally posted by @Samson Tse :
Originally posted by @Aaron Montague:

@Samson Tse

I like to be at $125/door with my investments.  So for this place they'd have to knock 100k off the price to get me to $750/month.

 That's not likely... it's a private sale right now, I think she will just get a realtor and test her luck.

 Samson:

If you are certain about this property and neighbourhood, write up an open ended LOI for the valuation which works for you (i.e. whatever will give you $100 - $150/door in free cash flow) and give it to the vendor. Then let her test her luck with a realtor.

Sometimes this works, I received a call Monday from a vendor to whom we gave an open-ended offer fifteen months ago.  At the time he was most offended, but almost 1.5 years later, the place still has not sold and he now would like to talk.

@Zach Adams

 True, I should ask for more than 1 year

@Roy N.

That's a good idea. LOI don't need to be drafted by a lawyer right? I'm trying to find some samples online.

It's pretty amazing that you received feedback after 1.5 years.  I never really imagined that will happen.  Thanks so much for the tips!

@Samson Tse , I invest in Owen Sound, and I've always been fascinated by Windsor. As others have said, it sounds like this building has deferred maintenance. Even if it doesn't though, it can be tough to pay for repairs and upgrades on lower-priced buildings. I have one property where a bunch of new carpet can really stretch the budget. On my more expensive properties (with correspondingly higher rents), the carpet is the same price and its not a big deal.

I know you are concerned about cash flow, but don't forget that you are also paying off approximately $350/month in principal. I know it's not cash in your pocket, but the worst-case scenario is that you wind up debt-free in 20 years. Alternatively, you can refinance after a couple of years and pull it back out.

I know nothing of your area but given the price point even if it were to be accepted at $165,000.00 you are most likely dealing with an older building and your maintenance figure might be one that will increase considerably over the years. I would not touch this deal if the net cash flow per month was less than $1600.00 per month. Always evaluate a building based on what is there and not what you imagine you will do or could do if this and that referring to your idea of using the garage area as a potential area for additional income. If is should work out great but don't count on it for purposes of evaluating the building in an as is condition. Given your figures and your description of the area, the building and the tenants I would agree to pass on this deal. 

@Jon Kepler

 You are absolutely right on the repair part and that's really one of my biggest concern.  There are a lot of things that needs to be fixed including roof, plumbing and mold.  At this price, there is no way for me to fix all of them in the near future and I really have no desire to be a slumlord. 

Buyers sometimes get hooked on a private sale that Is NOT exposed to the market yet. The idea of getting something that hasn't been seen by others yet preys on the ego.

Investors all like to talk about the recent acquisition that nobody knew about that was a great deal.

Now you have to take off-market out of it and still evaluate it if it makes sense to buy. Buyers used to equate anything REO and bank owned with being a great deal. I have found just like regular sellers a lot of it is overpriced junk and occasionally you run across a great deal. So no matter what it is called and marketed by the verified numbers tell what is really going on.

I think when you get into it you will find those tenants leaving in a few months you will need to dump thousands to get the units rent ready again and the impact to the numbers will be substantial.

From the sellers perspective it's human nature to want to find an inexperienced buyer. Veteran sellers will throw numbers out there and will not offer up anything the buyer does not ask about. Do not count on bank lenders to keep you from doing a bad deal either. Their requirements for a personal guarantee and money down to loan doesn't mean the property is a winner. In fact I see a lot of horrible loans and decisions on property from banks that I would never buy.    

Single family homes are moving quick. Multiple offers over asking price. I just moved back after 5 years and the market has changed immensely. Nothing but sold signs in the good areas (South Windsor, Walkerville, Lasalle & Tecumseh)