All Forum Posts by: Justin Girod
Justin Girod has started 1 posts and replied 7 times.
Yeah, I definitely wouldn't want to be responsible (financially or morally) if someone was to get hurt due to not having proper egress out of a basement suite.
There are a lot of new rules coming out in Edmonton regarding basement suites, and like mentioned the biggest thing is an egress window in the bedroom and fire detectors hardwired into the electrical system.
There are plenty of older non conforming suites that I believe are grandfathered, however I would be going in there myself and building a suite...taking out the permits etc. because this would be a long term investment I wouldn't want to have to deal with any of the above mentioned "crap".
Anyways I think the prices have a ways to come down....therefore I've got more time to think about this.
Thanks again to the both of you for your input. This will be my first rental so I want to avoid all the mistakes that I can.
Originally posted by Taz:
You are also basing this on an ARM that will adjust upwards, sorry but rates just aren't going any lower, folks.
Also, once you factor in vacancies at 10% your apparent cash flow is about $318 a month.
At that thin a margin you are going to have to self manage.
Then what are you going to do when the interest rate adjusts to market? Something around 8.5% or so.
This is so razor thin you are really doing an appreciation play and that may or may not be wise depending on the local market conditions. But, I'd bet not the wisest move right now.
Thank you very much. I'm dealing with a market that is on the downside of a boom and am trying to invest in real estate. Unfortunately, the up/down suites are the only thing that provide "apparent" cash flow...for example a newer 2 bed condo that would rent for $1300 still runs around 200K with 230/month fees and 1500/year taxes...any way you slice it it doesn't really work.
I guess I'm just trying to manipulate the numbers so that I can buy a rental, but I believe we've got a ways to go down before it makes sense to buy a rental.
BTW we saw a 38% increase in prices last year and almost 50 the year before...either prices have to come back down or rents have to go way up.
Thanks guys. I guess it was a poor example and I was trying to make things consistent by using the same ratios, which obviously didn't work.
Maybe you guys could do a quick evaluation of a property that I'm looking at.
I'm looking at houses with basement suites, in an area close to the university. These typically run 330-400K and gather rents of 1200-1400 for the top and 800-1000 for the basement, with tenants paying all utilities.
Say I could get my hands on one (these houses are built in the 50's) with new furnace, roof, siding, windows, electrical service for around the 300K mark.
That would put my costs at:
Down payment borrowed from home equity line of credit - (20% = 60000) @ prime rate = $237.50/$2850
Mortgage (35 years @ 4.15 var) - $1211.25/$14,535
Property Taxes - $200/2400
Insurance - $50/$600
This puts my basic operating costs (not including vacancy) at $1571.86 or 1371.86 without property taxes.
If I was to rent @ $2100/month that would give an "apparent" cash flow of $528.14 a month.
But with using the 50% rule:
$1050 expenses
$1371.86 mortgage and borrowing costs.
This would leave me with a negative cash flow of $271.86 per month????
Do I really need more than $500 bucks positive cash flow to account for capital expenses, vacancy, etc?
I just thought these suites, if bought at the right price would be an excellent cash flow property...but I can't for the life of me find a property that meets the 50% rule or the 2% rule.
Thanks
Originally posted by Taz:
The other thing to remember is the $500k property is going to have some kind of association fee or building fee and in downtown areas that fee often rivals the mortgage payment.
Thanks taz for the quick reply, and that is the answer that I was hoping to hear. I'm not familiar with real estate prices in the US, I'm from Edmonton, AB.
As for the property being downtown, I just used it as an example. It could be a bungalow in the suburbs. I was just trying to illustrate that two similar properties with the same cap rate can demand a lot different prices depending on where they are.
And that the more you pay for a SFH, and the more rent you charge, your capital expenses, property management etc. will not go up as much as the increase in rent so your ratio is going to drop.
Thanks again
Edit: Remainder for property 1 = 2950, Remainder for Property 2=$14,500
Hi everyone, I just discovered this site a few days ago and have been doing a lot of reading and have learned a LOT. My question is regarding the 50% rule - my understanding is that it is a fairly conservative ratio of operating expenses to rent. Some properties may run at less and some may run higher than 50%.
Operating expenses being :
Property taxes
Maintenance
Vacancy
Property management
Advertising, etc.
Capital expenditures.
The operating expenses do not take into account purchase price or mortgage rates, so is this really an accurate tool to use for cash flow?
For example, say there are two similar properties, in two different markets.
Property 1 - 1000 sq ft bungalow, 30 years old, small town
Purchase price $100,000
Rent @ 10% - $10,000 per year
Taxes @ 1% - $1000 per year
Insurance @ 3% - $300 per year
Vacancy @ 8% - $800 per year
Remainder for 50% rule on Capital costs, property management, maintenance etc = $5000-1000-300-800=[b]
Property 2 - 1000 sq ft bungalow, 30 years old, downtown major center
Purchase Price - $500,000
Rent @ 10% - $50,000 per year
Taxes @ 1% - $5,000 per year
Insurance @ 3% - $1500 per year
Vacancy @ 8% - $4000 per year
Remainder for 50% rule on capital costs, property management, maintenance etc = $25,000-5000-1500-4000=[/b]
Capital costs, property management, maintenance etc should be similar for the two properties, should it not? I realize that if you're in an area with higher property values labor may be higher but not that much higher....right?
If I was to use the $2900 in property 1 my ratio would be ($5000+1500+4000+2900)/50000 or a ratio of 26.8%
So I guess my arguement is that with higher rents the operating expense ratio becomes less relevant and mortgage rates and purchase price become more relevant. Thoughts?