Newbie looking for help on analyzing Deal

6 Replies

Looking for advice on this property 

7 unit which needs to be converted back to 5 as city only allows it to be zoned 5 unit. 4 units and a small commercial space (hair salon)

currently set up as  1- 3 bedroom  1- hair salon   5 bach

would convert to 1- 3bedroom  1 hair salon   1 -bach      1- 2 bedroom  and 1-1 bedroom(possibly 2 bedroom) 

Asking price $199,000

current Rental income 7 units 

1 3bedroom $1000

1hair salon $600

 5 bach  $500 

rental $4100

after  convert to 5 units 

1- 3 bedroom $1200 

1 hair salon $ 600

1 bach 500

1- 2 bedroom  $850

1- 1bedroom $700

rental income $3850    less money but has to be done to abide by city 

total $46,200

expenses based   from the 7 unit  last year   could be little  lower with less units  

power $6700

property tax $7400

water 1950 

garbage $1000

repairs $ 2540 

insurance $3500

vacancy rate $385 (10%) 

total   $27710

mortgage  on $150,000  - $850  -$10,200

total  $37910

income 46,200 

 net income  +8,209 before repayment of $50,000 downpayment back to my line of credit    $833  based on repaying back in 6 years ( is this normal practice?)  would like to payback before have enough equity to refinance   $833  -  $9996   

which then would bring net income to  $ -1706 

How can I make this property work? 

also that is not including $15000 that would need to be put into building to make the units right. 

any advice is greatly appreciated 

@Sean Illman

Why not put it back on the Vendor to obtain a zoning confirmation letter from the City for the 7-units.  We are presently in talks over an opportunity here where a zoning variance would be required for the present operation of the building and we made the zoning confirmation letter a condition.

If the Vendor produces the letter, there is no need to covert the property to 5-units ... or, rather, you could convert it at your own pace.

In your case, are you able to convert those 5 bachelors into 1 x 3-bedroom and 2 x 1-bedroom ... or alternatively 1 x 2-bedroom and 2 x 1-bedroom?

Now, if the Vendor is unable to obtain a zoning confirmation letter sanctioning the present use of the building, then you must shutdown two of the units to comply.  Assuming you select two bachelor units, this is a loss of revenue of $1000/month (12,000/year) which is 24% of the present revenue.   Sure, you can recapture some (or perhaps all) of that by reconfiguring the property, but you will need to spend some significant beer money to make it happen.   In all, I would be looking to a corresponding reduction in the purchase price of the property. 

BTW:  I'll be in-town tomorrow (from ~11:30 until 14:30), if you have a window and want to grab a coffee.

Hey roy 

current owner went to city  just 1year ago and got it increased to 5 from 3. talked to someone at city sounds like they will not allow 7 due to the high residential area . Maybe over time but can not see them overturning what they said just one year ago.  owner  made it 7 units before got  approval :(.   Wish i did not work a 7:30 - 6pm  job with not much flexibility to be able to meet for coffee during week. Need someone to help me get started  in real estate investing  .   TTYL 

Originally posted by @Sean Illman :

reduction of purchase price by $30,000 ? 

You a buying a business (cash flow), not a building.  If the cash flow is 24% less than advertised, then it would follow you would pay somewhere around 24% less for the business ... which is closer to $48K

Very good advice. I might add check the city for any development scheduled either in the area or in front of your property – water, sewer, electricity, etc.. that might cause distress to tenant Also check calls for service with police and give to see if anything really bad has happened – such as a past fire or flood that has not been disclosed. Last have a building inspector look very coldly (not closely but coldly) at the building – and look for legacy issues such as banned materials, dodgy plumbing or electricity, deferred maintenance etc.. Last – what upgrade would you be required to make if you did any remodeling? That is a city code issue. All bit of information add to the weight in negotiation.

Originally posted by @Account Closed :

Very good advice. I might add check the city for any development scheduled either in the area or in front of your property – water, sewer, electricity, etc.. that might cause distress to tenant Also check calls for service with police and give to see if anything really bad has happened – such as a past fire or flood that has not been disclosed. Last have a building inspector look very coldly (not closely but coldly) at the building – and look for legacy issues such as banned materials, dodgy plumbing or electricity, deferred maintenance etc.. Last – what upgrade would you be required to make if you did any remodeling? That is a city code issue. All bit of information add to the weight in negotiation.

 Burke:

Primary code compliance requirements (electrical, plumbing, building, fire) during an upgrade/renovation are provincially / nationally regulated, but in some instances inspected and enforced by the City.   The City has additional zoning related requirements - setbacks, parking, density {the one the OP has encountered}, occupancy and use.  It is possible for a building to be in contravention of the zoning under the current municipal plan, but to have been in compliance under zoning at the time of construction/modification to its present configuration {allowing it to persist unless the building is altered again in some significant manner} - this is the rational behind requesting the Vendor obtain a zoning confirmation letter.