All Forum Posts by: Jason D. Lewis

Hello to everyone,

I have an investment that I'm considering and would appreciate some feedback from someone who may have been in a similar spot.

Here are the details:

6plex, close to schools, transit and all the good stuff.  Smaller town with high rents and very low vacancy.

The current multi family is owned by a housing foundation in a smaller town (40,000 people) that has been subsidizing rents for seniors.  They will no longer will have this multi family subsidized and now must sell.  They have a clause in the contract that will forbid any rent increases or evictions for one year.   All of the people who currently live there are over 70 years old.  If one where to buy, evict, reno and rent, it will be a fantastic deal with a cap rate at 11.37% and a cash on cash return at 22.49%.  Of course those numbers are no brainers if it was a smooth transition, but im concerned with the optics.  Holding for one year at its current status wont cash flow, but that is of little concern.  Currently the unit is rather old (1970) and dated, so it will require a solid reno, which will "justify" the eviction.  In B.C. you can evict if a reno is required, renoviction.

Here are the after reno numbers in CND dollars:

Aquisition costs:

• Purchase 460k
• Closing costs 9k
• Down payment 115k (25%)
• 3.1% rate on a 30 year Am (no other loan cost)

Monthly expenses:

• Management fee (use local handy man on hourly basis, handle rents and tennants on my own) $150/month
• Property tax $336/month
• Repairs and maintaince $435/month 
• Insurance $120/month
• Reserve $300/month

Rent Roll:

• Rent 1k per unit, 6k/month
• Vacancy 5% ($300/month)

Reno cost:

• Renos 30k

ARV:

• 650k (conservative)

ROI:

• Cash flow $2,885.00
• CoC 22.49% (including reno costs)
• ROI 27.07%
• Cap rate 11.37%

Looking for input, thoughts or similar experiances.  Of course the clause and then subsiquent eviction is my main concern.

Thanks to all who will provide their wisdom.

Jason

@Pawan J.

Hey Pawan, from the time you wrote the post, the Vancouver island market north of Nanaimo really jumped.  In comox and Campbell river, homes were seeing multiples on almost every listing.  savvy investors who were priced out in the Lower Mainland found a vine on the island.  

you were spot on hey, one last houray from the condos and town homes last year and now things will continue to cool.  crazy how these homes in BBY, Rich, Van have been dropping since last year, but it gets glossed over by the media.  

Let me know when the next meet up is.  new to BP and have enjoyed your posts.

Jason

@Shaidah K.

Campbell River Market is awesome right now.  did you end up investing up island.  there are great deals to be had in that area as vacancy is lowest in BC.  Keep in mind, you usually don't want tenants to stay.  look to vacate them and push rental rates to the max.  You can always get new tenants and if you cant, then you wouldn't want to invest.  set the tone for the town and others will follow your lead.  Also suggest to increase rent every year.  having people get cozy and then hit with a once every three year rent increase will eat your profits.  there is no loyalty on either side.

@Kaden Prete @Giovanni Isaksen

Giovannis posts are what led me to BP.  I cant remember which one it was, but i must have read it a few times over myself.  The man knows his stuff.

As you may have noticed, the lower mainland, especially Richmond, Burnaby, the Vancouvers and Surrey have seen a drastic reduction in their prices.  They continue to try and hide it, but it is clear as day.  I watch my properties religiously (just sold my DT condo, 1000 sq, 3rd floor, 16 showings, one offer, sold at asking, 1 mil, two weeks) and the price drop has been drastic on single detached. 

In my area of Burnaby (Capital Hill) tear downs on a 33 x 120 were going for 1.4 in may of 2016, but now are asking 1.2 and getting no action.  Builders (and we know there are lots) are still trying to sell their completed projects at their original planned price to meet their margins, but they are simply sitting.  I have two new builds within a few blocks of my home and they are still sitting vacant from summer 2016 and haven't had a price reduction.  The carrying cost must be killing the investors.  Another tell tale sign IMO is the amount of realtor switches, this always shows the owner wanted a specific price, couldn't get it, blames realtor and now uses a new one who does in fact list it slightly lower, but the result doesn't change.  When these new builds do lower their price, the 20 year old homes, then push down their price.  This means these sellers will have less equity and less buying power when they relocate to the Fraser valley or Vancouver island.  When they notice they cant, or it isn't attractive anymore, they will stay put!  This will then hurt the speculators and others who were relying on those in the golden triangle to cash out and invest in their market.  Think about the guy in Surrey who bought for 900k with 10% down.  With two rate hikes and a drop in equity he/she should be getting worried.  Not to mention how closely tied they are to the construction business.  If their hand is forced to sell, they'll be a$$ backwards like our U.S. neighbors were.

The media has turned every happy renter into a buy now or never person and they drive up lower end condo pricing, which we saw after the foreign buyer tax was implemented and the home partnership program was started (although most don't use, it drove up demand and interest).  As you may have saw, very low end Surrey condos were seeing a 20% + increase in price after the foreign tax was implemented in June 2016.  Why? because all those "need to buy", were rushing out to get whatever they could.  While this is going on, mom and pop wannabe investors are refing so they can purchase a second property.  will this be an income property, flip, hold for equity growth? they never have a plan, they simply assume it is the right thing to do.  Now we see two rate increases, China creating policies, Vancouverites acting like the Chinese investors are the devil (read the message boards), new government being forced to do something, cancel of short term housing, no aribnb ( almost all dt condos have signs stating they're against it), implementing a empty home tax, and now the new mortgage stress test for uninsured mortgages.  All of this points to a cooling, which is already in full effect in BC, but the condo and townhouse sector is hiding the demise and inflating the dismal numbers, but only for a short time.  

As Condo and Townhouses were the last to see the big increases, they will also be the last to fall.  A sure sign is the availability of pre sale units still available.  a year or so ago, there were line ups around the block to buy a pre sale and now we have units that are almost complete without a purchaser in place for some remaining units.  Very telling.  I have clients who bought pre sale, 20% down, but now can't qualify for the mortgage as completion approaches (they came to me after buying and we will make it happen, but they were close to assigning) and with the uncertainty, private investors aren't as willing to lend, even with solid equity in the home, not to mention the private lenders are drying up as they did a lot of lending on the private builds that were booming.  Those who used private, with the intention to refi once complete, now have issues with a lower valuation on their build and more stringent mortgage rules, so they are holding private funds longer than expected.

I know I can't articulate it as beautifully as Giovanni does, but from what I'm seeing, BC is in trouble!  If you haven't already, sell any condo or townhouse you have (in lower mainland area, while it is still hot) and ride out your single family with hopefully decent buy and hold income.

Jason

Hey @Wade Sikkink is there any other analysers our there that you would recommend, aside from what you've designed for your needs.  my only interest in their property analysers.  If I use them, do I own their rights?  This is helpful when presenting to investors and my current ones aren't as beautifully laid out as the BP ones.  Thanks!

It’s been happening already with high ratio loans. Also won’t drop as much as you think, as most people are limited by their DP, not the level of debt they can service.  I never had any issues getting the high ratio insured clients funds when the stresss test was introduced a yr ago. Although their purchases are usually lower, so yes, we should see an impact, but I think it will be more due to uncertainty and not actually being denied. 

@Rick L.

I think your repairs and maintained are pretty high. 5% of purchase price is really up there. If there is HOA, you shouldn't need a manager either. Not saying they're all perfect, just if this deal is to even be considered, it should be self managed. I usually only use managers in slum areas or out of town buys. All in all however, this is a bad deal and the homework done should be burned. Keep hunting. Instead of using a manager, simply look to use a handyman as a proxy and pay them hourly once a relationship is established. I go months without ever calling them, then when something does come up, it usually costs 50to $75 bones. Far easier. Of course I don't trust mgrs to source proper tenants, but that's the doing of my business's mentor from back in the day.

Whether it is friends, family, or hard money lenders, it’s all private and the rates should reflect market conditions. When funds start to dry up, you’ll find less lenders, so rates go up. If cash is readily available in your area, the rates be 3 to 4% higher than the banks. IMO I would always avoid family and friends. If you’re well established, just use their funds and go 50/50 of some deals. I’ve seen that work once trust is established and you’ve shown proof of concept.

@jake k. 

There is still a charge on the house and if it goes to forclosure, it rests on you. Avoid hard money or private (all the same to me” unless you have a true exit strategy. IMO that strategy shouldn’t last longer that one year and you best be sure you can handle to load. 

It is my experience in dealing with private lending and lending privately myself, that an investor would only lend if they were a charge on the mortgage.  I would not advise a client to accept a deal otherwise, as there would be limited security.

Seeing as you need these funds up front to act as a DP for the bank, it wouldn't be  very appealing deal to the hard money lender.  I suspect that they would be advised to avoid it.  most private lenders look to secure deals where they hold the first charge, or there is significant equity in the property.  They want to ensure you have serious skin in the game, which will help them sleep comfortably, knowing you most likely wont walk away.

Maybe to get started, you might consider becoming a wholesaler.   This will expose you to the different markets, expand your network and help you save for a dp.

The other option (which I suggest, or worked for me when I started out) is to secure a property that will cash flow, complete your due deligence, complete a thorough analysis and then present it to a partner (friend or family) who will put down the cash, while you act as the industry professional with all the knowledge.   if your numbers work, there is often enough meat to feed two lions.