Do these numbers make sense?

[logon9]

I have a notion that there is a fair bit of real-estate wisdom that can be tapped into on this board and would like to ask for opinions on a property I am buying, and perhaps hear something I would not have come up with on my own.

The property:
Townhouse in Pickering - no maintenance.
Purchase price 182k
Built in 1970s
Tenant (family) pays 1275 + utilities (other properties like it are available for 1100, but not many available)
I'm putting 5% down
Property tax $2600
Last owner purchased for 136k in 1999

I'm hoping to hold onto it for 5-6 years without having it cost me much and sell it.

I know the margins are not high and that at 6% interest rate it will only pay for itself while at 7% it will cost me over $150/month. That's if nothing breaks and the tenant stays. I've seen properties advertised here that provide much better returns, but perhaps they had more hidden costs and would require more work...

Property will need a new roof in 3-4 years and has an issue with heating - no ducts and baseboards have been removed - the entire 3-level home is being heated by one gas furnace (fireplace type) on the middle floor. Tenant says it's not too bad, but obviously air doesn't circulate well at all. There is also a certain crookedness to the lower stairs and floor that is not a structural problem, but does make the place look weird when you enter.

Any thoughts you may have on the subject would be appreciated. I am mainly interested in the math of it and whether this is a good investment. May be a vote?

Thanks

[ErnestBidder]

  If it needs a roof soon ($$$$), has heating issues (no ducts and baseboards are removed!), and 7% is going to kill you,  you may really be contemplating financial suicide. With other (stairs) issues, why bother? My RE agent buddy thinks there are going to be foreclosures available over the next 2 yrs, so he is not buying at present. What happens if your tenant loses his job? I wouldn't touch it with the proverbial.

[Dave2]

With this type of make do heating arrangement I would hope someone would have the common sense to check for carbon monoxide very carefully.  You as owner might have more liability then just financial.

Dave2

[logon9]

More liability then just financial - I'm not sure I understand - do you mean moral? I didn't check for CO2. This is something the home inspector should have thought of, but didn't... I bought the house already; gonna head out to home depot and find some CO2 sensors I think - smoke detectors too as there are none working there! Thanks Dave.

The math (although not super high ROI) does work for me and if I still feel good about it in 3 months, I'm going to consider getting more like it. Now the question becomes locked in or variable 25 or 30 or 35 etc. And is there such a thing as a 10-year locked in mortgage - I think I'd like one of those now .

Sorry for high jacking the board with a non-tax sale topic.

[MrMuggs]

How are you financing? Traditional Mortgage? Why pay off the principal? Look into a Line Of Credit Mortgage and see if you can get the interest only payments...that'll lower your monthly paymants, and provide much better cash flow to improve the property, or do with as you wish...

[twinn1]

Personally. i do not like the numbers, it seems to only make sense if you are making 100K plus a year and looking for a tax write off to lower your taxes to the government, even in that case, there are better options available.

Have you looked into the vacancy region in that area?
Is the property even going to have posistive cash flow with a 5% down payment and property tax
Requires some upgrades, roof, etc..
For heating there are options, there are natural gas heaters that bolt right into the baseboard(look like electric heating), good option for you, no ductwork required and the property already has gas.  However, this are direct vent so it might take away from curb appeal.

I think with the new mortgage rules set to take effect April 19, a lot of this "investment properties" will likely fall in value as their will be a much smaller market for them.

[speedfreeksteve]

This is not an investment. Based on the numbers, and the amount of intangibles it's gambling.

I once was a landlord, and did make a modest income off it for a few years (until I sold). But it was only viable because it was a Toronto condo that I bought for 53k in the mid 90's. It would be worth much more than double now and I had decent positive cash flow from day one.

Believe me, I would love to just put 20k cash down and have a long term viable positive cash flow rental property. Based on the research I've been doing in the past few years, there's just not many opportunities out there without an unreasonable amount of risk (ie future repairs, vacancy, maintenance fees increasing, property taxes increasing, property values falling, etc). In every case I've found so far I could just invest the 20k in corporate bonds or debentures and get a similar return with less risk and less headaches.

The only people that I know that have bought properties for the purpose of rentals and have been successful in the past few years were the ones buying run down homes and chopping it up into 2 or ideally 3 units, but doing most of the work themselves. I'm sure this will always be a viable option, but if you want something turnkey where your hardest part of the job is counting the money, then I wouldn't be looking at rental properties.. at least for right now.

[logon9]

I'm a bit surprised by all the negative opinions on this. I'm feeling pretty ok about it.
My final purchase price was 179k.
My net cash flow is $200/month with this tenant (I'm locking in for 5 years at 3.79%, with 35 years amortization - 3.15% for CMHC insurance). My investment is under 14k (down payment + closing). After 5 years I will have 162k left unpaid on the mortgage. Presuming I sell for purchase price + 10% in 5 years (196k); I will have grossed 32k total (200*60 + 196k-162k-14k). From this, I take away 5% commission (9.8k), 3k misc legal costs, 8k in vacancy and repairs (total of 20.8k). I get 11.2k net return on my original 14k investment in 5 years. Granted there is work involved, but this being one family unit, I hope there won't be that much. If the resale value goes up by 15% in 5 years, my return on the 14k would be 21k in 5 years. I guess that's the gambling part of it. If the resale value goes down, I guess I'm screwed .

I looked at other properties near Toronto, and none made as much sense unless you're looking at 2+ units (which is more work and costs more to get into). In small towns in the middle of nowhere, it looks like you can get higher returns from multi-units, but the distance can be a big price to pay I think.

[twinn1]

I'm a bit surprised by all the negative opinions on this. I'm feeling pretty ok about it.
My final purchase price was 179k.
My net cash flow is $200/month with this tenant (I'm locking in for 5 years at 3.79%, with 35 years amortization - 3.15% for CMHC insurance). My investment is under 14k (down payment + closing). After 5 years I will have 162k left unpaid on the mortgage. Presuming I sell for purchase price + 10% in 5 years (196k); I will have grossed 32k total (200*60 + 196k-162k-14k). From this, I take away 5% commission (9.8k), 3k misc legal costs, 8k in vacancy and repairs (total of 20.8k). I get 11.2k net return on my original 14k investment in 5 years. Granted there is work involved, but this being one family unit, I hope there won't be that much. If the resale value goes up by 15% in 5 years, my return on the 14k would be 21k in 5 years. I guess that's the gambling part of it. If the resale value goes down, I guess I'm screwed .

 No one is trying to rain on your parade, just giving you our honest insight with our experience.

From the numbers you quoted, here is what I think,
3K for legal, does that include land transfer tax?

8K for vacancy and repairs seems too low, as with $1275/month rent, that only gives you 6 months of vacancy within a 60 month period, never mind repairs.

One bad tenant not paying their rent, forcing you to evict wil cost you $1275 rent x 3 months it takes to evict them  plus $1000 legal fees =  $4825/ $200 net cash flow that = 24 months of net cash to recoup that one bad tenant.   Do you have the cash onhand to cover that expense?

$200 net cash flow does not leave anyroom for interest rate rise or possible repairs.

You forgot to factor in the mortgage penalty should you sell in 5 years, thats going to be in the $3000 range.

Big money repairs, like installing a new furnace/AC will cost you $4000, roof another $1500-2000.  Applicances, $1000

Not saying that you will have to do all of these things, but you will have to spend money on the unit if you want to rent it and sell it.

With the changes in mortgage rules taking effect April 19, there will be a much smaller market for small investment properties like this one.

[Pfm1011]

The only upside is your 10% increase  in five years is very low,   Expect 7% annual increase plus increase in value due to your repairs  so expect it to be MIMIMUM  250K in 5 years

Thats the good news, The bad news is the heat is probably not legal under the landlord tenant act. Since there is no ducts you have to reinstall the baseboards or install hot water based system ( which is more expensive but actually cheaper to run and nice to use) .

 If the tenant chooses not to use the baseboards and use the gas stove that's their business however you can be sued for the condition it is now. The cost of the baseboards or boiler are nothing compared to the lost revenue when you lose the tenants and the several months rent they will get back  . Do it now and keep the tenants happy .

Plus you don't want to be a slumlord and cause a child to sleep in a unheated room , Good tenants are what pays your mortgage so give them a nice product as  1250 a month for a under 200K townhouse is really good rent. Most of the GTA wont get 1250 for a 300 to 350k townhouse


If you cant do the boiler, which is good for the resale  , this is a good compromise..electric hydronic baseboard  

http://www.heater-home.com/product/HBB500.aspx



Or you can do ductless minisplit heat pumps  for ac and heat  and the government will kick in 500 ( 500 grant means the installers raise the price by 500..pricks)  but it will cost 5k at least but give heat and aircon which will help you keep the place rented

http://www.mehvac.com/Products/itemDetail.asp?ProductSubCategoryID=140&ProductCategoryID=24&ProductID=1488


There are some good deals on Ebay  , just don't buy cheap Chinese crap and watch the decibel rating

[Jayz]

The property I have here http://taxsaleproperty.org/forum/index.php?topic=816.0 gives me $400 cash each month with my current high mortgage rate at 5.75% and low downpayment initially put in. Except the old a/c unit was replaced a couple of years ago it hasn't given me much headache so far. With the potential price surge because of the upcoming new Ivey Business School nearby, it sounds a better deal, doesn't it?     

[logon9]

The property I have here http://taxsaleproperty.org/forum/index.php?topic=816.0 gives me $400 cash each month with my current high mortgage rate at 5.75% and low downpayment initially put in. Except the old a/c unit was replaced a couple of years ago it hasn't given me much headache so far. With the potential price surge because of the upcoming new Ivey Business School nearby, it sounds a better deal, doesn't it?     

Sure it does, but it's a smaller town multi-unit and those do seem to offer the best returns. I now use a quick eyeball method: take sale price and divide by income. Feel free to apply this to yours and mine for fun. I did find a few 4+plexes in smaller towns that are way beyond our numbers - about twice as good; but running a 5-plex seems like much more work.

I had a pleasant extra on the mortgage front: my mortgage payments start almost two months after closing - I do get the rent though . Note to self: always close in the beginning of the month.

[Jayz]

The property I have here http://taxsaleproperty.org/forum/index.php?topic=816.0 gives me $400 cash each month with my current high mortgage rate at 5.75% and low downpayment initially put in. Except the old a/c unit was replaced a couple of years ago it hasn't given me much headache so far. With the potential price surge because of the upcoming new Ivey Business School nearby, it sounds a better deal, doesn't it?    

Sure it does, but it's a smaller town multi-unit and those do seem to offer the best returns. I now use a quick eyeball method: take sale price and divide by income. Feel free to apply this to yours and mine for fun. I did find a few 4+plexes in smaller towns that are way beyond our numbers - about twice as good; but running a 5-plex seems like much more work.

I had a pleasant extra on the mortgage front: my mortgage payments start almost two months after closing - I do get the rent though . Note to self: always close in the beginning of the month.

London is no small town, and this detached house I have is almost the largest in the area. And the best part of it is you never run of tenants.