Did i pay too much for my latest property?

18 Replies

Hello guys,

So I was wondering if any of you can share any templates or rules of thumb you have when deciding if a property is worth the investment. For example, I recently purchased a 5-plex (3-1 bed and 2-Bach) in London Ontario (1.3% vacancy)for 340,000$ I estimate 40,000$ needed to bring the building to tip top shape. I can get around 42,000$ per year in rental income once I renovate. Annual expenses will be about 6500$ total. So my question is..... did I pay too much for this building? From my numbers I cash flow about 20,000$ a year pre-tax. Is there a formula you have that can let me know how much I should pay for a property based of the historic numbers?

Secondly I was also thinking to turn the basement into 2 more bachelor units. How hard will it be for me to get the property rezoned? Can I apply before I am the actual owner? Any help will be greatly appreciated.

My initial investment for this will be about 76,000$

@Michael Sifontes , how are you getting to buy it AND renovate it, for just 20% down?

(If the $76k does NOT include the rehab, then of course, your initial investment will be ~$116k)

I'm not sure that an extra 2 units will end up costing @ cheaper than what you've already paid.

For simplicity, I'm saying that each unit grosses $700/m, which is LESS than 1%/m of their cost.

ie. This one doesn't meet the "1% Rule", so MANY Investors would have just moved along.

That's NOT to say it's a bad investment. But, how does its NOI (cap rate) compare to the area standard?

Get what I mean? ie. There's not enough background information to make an informed assessment. My 2c...

Is the 76k including the 40k in repairs?

I’ll be getting finance on 380K-20%=76k initial investment.

I think you did good. To cash flow 20k/yr with a 76k investment is over 25% cash on cash return. Well done! 

Also to be clear. The the renovation numbers does not include the two units I would want to put in the basement (pending zoning approval) I estimate 30K to net me an extra 850 in rent.

Originally posted by @Michael Sifontes :

I’ll be getting finance on 380K-20%=76k initial investment.

Good for you. I hope you haven't been stung too much by their Interest Rate.

It'll be interesting to find out how those returns look after an ACTUAL year.

My own suspicion is that on average per year, each unit will have significantly HIGHER expenses than just $540/unit.

Brett do you have a formula I could reference to determine a fair purchase price for a rental property?

@Michael Sifontes : your expense ratio looks very low.

Please share your breakdown of the expenses. in the states, expenses usually run at least 45% of gross rents. I have a feeling you're leaving out a few major ones in your calculations.

To your question on how to value a property: any formulaic way of computing value is going to be inaccurate, as even the most precise require inputs that are a little bit of guesswork (such as prevailing cap-rate for your product type in that neighborhood.)

There are some often "rules of thumb" that people use, which are usually used to pass the initial "smell test", but as you will see, will only give you ballpark accuracy.

In roughly increasing accuracy and precision:

1) Price-Per-Door: see what other multi-family units have sold at, and divide by the number of units. The closer you get to your product type and neighborhood the better. this varies wildly between neighborhoods.

2) 1% rule: you shouldn't pay more than 100 * monthly gross rents. Or another way to look at it is, gross rents should be about 1% of purchase price. (E.G. a 200K house should bring in about 2K/month in gross rents.)

3) Cap Rate : (<Gross Annual Rent> - <Total Annual Expenses EXCLUDING debt service>) / Purchase Price. This gives you a percentage. Higher is "better." You need to find the prevailing cap-rate of the neighborhood class and product type for your market. 

Those are the ones that I know about.

Hope that helps!

James

Originally posted by @Michael Sifontes :

Brett do you have a formula I could reference to determine a fair purchase price for a rental property?

Not specifically for where YOU might want to invest. @James Kojo has penned some thoughtful guidelines, above.

My guideline always includes the question: Is this property worth a lot MORE than my Offer? (If not - I don't Offer!)...

@Michael Sifontes you did a wonderful/horrible investment. Pick whichever you are looking to hear. 

If you already purchased it, what does it matter what a bunch of people on the Internet think about it?

We all have different objectives and financial goals and while some of us buy for appreciation, some of us won't touch a property that doesn't cashflow with a stick. So what a CA guy think is a great investment a OH might think it's a disaster waiting to happen. 

My advice, focus on you property and pay close attention to the numbers month over month and try to build cash reserves to handle whatever the gods of rentals throw your way. 

For your NEXT property, you can use the BP calculator (biggerpockets.com/calc) to analyze it BEFORE you buy...

Good luck and congrats on purchasing your (first?) multifamily!

Just a small tip I use, I try to assume that my investments are ok at best. This way I never get overly confident (which may or may no happened to me in the past)
When you know your investment is just ok you look at you money situation differently.
Also, I'm not sure what is the rentability of a basement studio. Did you consider storage units in the basement? Low maintenance + steady Cashflow

Hey guys,
Let me give you some more information on this property......

While I did already purchase it I am still learning so identifying if I made and mistakes is stubs valuable lesson for me.
Asking price- 385k
Purchase price - 340k
Estimated Reno’s - 40k
My investment -76 k

Expenses (annual)
Insurance-2200
Hydro-750
Taxes-3500
Misc-1000

Income monthly
Unit 1-750 plus hydro and 1/5 gas
Unit 2-750 plus hydro and 1/5 gas
Unit 3-750 plus hydro and 1/5 gas
Unit 4-650 plus hydro and 1/5 gas
Unit 5-650 plus hydro and 1/5 gas

My Reno’s include:

New laminate in all units
Refurbished stainless steel appliances
Ikea kitchen and vanity
Stackable laundry in each unit
All new plumbing fixtures
New Furnace/Ac and water heater

Side note I own an hvac and plumbing company so I get that stuff dirt cheap and will get my guys to install them.

Another question I have is it too ambitious of me to put a card operated system for each laundry machine?

All units will have smart locks on them and I will include WiFi to my tenants.

If I were to renovate the basement I estimate it would cast 30-35k and get me 2 units for about 500$ per month inclusive per unit. I’m just not sure I can get the permits. Thinking about it..... it would make more sense for me to put that money towards another multi unit purchase..... please share your thoughts guys.

@Michael Sifontes Congrats on the purchase.

1. Doesn't sound like you overpaid, gross revenue of 42K on a purchase of let's say 380K all in are pretty good numbers.

2. I think you're underestimating your cashflow numbers....Unless I'm missing something (factor in tax, insurance, whatever shared utilities etc.)

3. Getting the property re-zoned will likely be a challenge and not worth it. 

Something to consider, 4 units or less in Canada fall under much less strict financing guidelines than 5 units or above.

Some 5-plex's can be financed under 4-unit terms depending on the lender and structure of the building. Pushing this to even more units I think will actually hurt your marketability of the property down the road. So unless there was very strong cash flow upside by doing this I would steer clear of the headache completely. 

Originally posted by @Joseph Gozlan :

@Michael Sifontes you did a wonderful/horrible investment. Pick whichever you are looking to hear. 

If you already purchased it, what does it matter what a bunch of people on the Internet think about it?

We all have different objectives and financial goals and while some of us buy for appreciation, some of us won't touch a property that doesn't cashflow with a stick. So what a CA guy think is a great investment a OH might think it's a disaster waiting to happen. 

My advice, focus on you property and pay close attention to the numbers month over month and try to build cash reserves to handle whatever the gods of rentals throw your way. 

For your NEXT property, you can use the BP calculator (biggerpockets.com/calc) to analyze it BEFORE you buy...

Good luck and congrats on purchasing your (first?) multifamily!

If I stuck to the formulas I was given on this site, I wouldn’t have bought the property I have currently.

Do the math. Do you have a net profit at the end of each month? That’s how I calculated mine. I use https://www.whatsmypayment.com/ to get a ballpark of the mortgage (With taxes, insurance). From what I have read if you are making $100 a door net profit, you made a good buy. But like others have said some buy for appreciation, some for cashflow, some want to live for free. The real question is for whatever reason you bought the property, is it fulfilling that task?

Just a couple questions:

1) In your cash flow estimation, did you account for commonly overlooked expenses like:

- vacancy

- CapEx

- Property Management

2) Assuming that your numbers are reasonably correct, that sounds like a reasonable cash on cash return, so let's turn to appreciation potential.

- Do you believe that the prospects of the area that this property is located in, for myriad reasons, will improve over the next few years/decades? Are you forgoing future potential that you might realize from an area that you believe more strongly in? While the first and most important requirement for me is a strong positive cash flow, I am easily willing to take a slightly less strong (but still very positive) cash flow if it affords me the opportunity to buy in an area with significantly better prospects. 

- Are you able to force appreciation - you touch on this with the permitting to add more bedrooms. how much value can you add?

3) Network - you are posting this on the BiggerPockets Community for our advice. Notice, however, that zero of the people that replied to this post are from Canada, including myself. We could be completely off base, as we think about these things from an American perspective. I suggest combing through BP and the Canada forum and through other resources on BP and around the internet in pursuit of physically and personally meeting with investors that are local to you. Make some friends that actually know your market. There is no substitute for an experienced local opinion that you trust and respect.

It is by doing these things that you will be able to tell if you overpaid, and increase your odds of successfully buying future properties.

Originally posted by @Scott Trench :

Just a couple questions:

1) In your cash flow estimation, did you account for commonly overlooked expenses like:

- vacancy

- CapEx

 Scott:

Now, now ... while vacancy and CapEx do impact your free cash flow, they are not expenses. Vacancy is lost revenue and CAPEx is just as it reads a Capital Expenditure (comes from retained earnings ... a "below the line" item).

Originally posted by @Rick M. :
Originally posted by @Joseph Gozlan:

@Michael Sifontes you did a wonderful/horrible investment. Pick whichever you are looking to hear. 

If you already purchased it, what does it matter what a bunch of people on the Internet think about it?

We all have different objectives and financial goals and while some of us buy for appreciation, some of us won't touch a property that doesn't cashflow with a stick. So what a CA guy think is a great investment a OH might think it's a disaster waiting to happen. 

My advice, focus on you property and pay close attention to the numbers month over month and try to build cash reserves to handle whatever the gods of rentals throw your way. 

For your NEXT property, you can use the BP calculator (biggerpockets.com/calc) to analyze it BEFORE you buy...

Good luck and congrats on purchasing your (first?) multifamily!

If I stuck to the formulas I was given on this site, I wouldn’t have bought the property I have currently.

Do the math. Do you have a net profit at the end of each month? That’s how I calculated mine. I use https://www.whatsmypayment.com/ to get a ballpark of the mortgage (With taxes, insurance). From what I have read if you are making $100 a door net profit, you made a good buy. But like others have said some buy for appreciation, some for cashflow, some want to live for free. The real question is for whatever reason you bought the property, is it fulfilling that task?

Which "formulas given on this site" did you ignore? The "1% Rule"? If so, Are you SURE it'll consistently cash flow positively? And yet you're prepared to accept "if you are making $100 a door net profit, you made a good buy"?

Like with everything, BOTH those "Rules" have a big "it depends" component, specific to individual deals...

Originally posted by @Michael Sifontes :

Hey guys,
Let me give you some more information on this property......

While I did already purchase it I am still learning so identifying if I made and mistakes is stubs valuable lesson for me.
Asking price- 385k
Purchase price - 340k
Estimated Reno’s - 40k
My investment -76 k

Expenses (annual)
Insurance-2200
Hydro-750
Taxes-3500
Misc-1000

Income monthly
Unit 1-750 plus hydro and 1/5 gas
Unit 2-750 plus hydro and 1/5 gas
Unit 3-750 plus hydro and 1/5 gas
Unit 4-650 plus hydro and 1/5 gas
Unit 5-650 plus hydro and 1/5 gas

My Reno’s include:

New laminate in all units
Refurbished stainless steel appliances
Ikea kitchen and vanity
Stackable laundry in each unit
All new plumbing fixtures
New Furnace/Ac and water heater

Side note I own an hvac and plumbing company so I get that stuff dirt cheap and will get my guys to install them.

Another question I have is it too ambitious of me to put a card operated system for each laundry machine?

All units will have smart locks on them and I will include WiFi to my tenants.

If I were to renovate the basement I estimate it would cast 30-35k and get me 2 units for about 500$ per month inclusive per unit. I’m just not sure I can get the permits. Thinking about it..... it would make more sense for me to put that money towards another multi unit purchase..... please share your thoughts guys.

 Michael, I'm interested if after owning it for some time you got better idea if it was good investment or not.  

Running numbers on what you posted I noticed there is no mortgage payment, which I assume will be about $1.4k/mo.  Per my calculation (without gas expenses, which I assume will be on you) you will have $11k/year or $924/mo profit from entire complex.  

Am I close?

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