Looking for Someone Else's Opinion on a Rental Property

[Andrew Jones]

Hello everyone,

I'm looking for someone else's opinion on a rental property

Some of the numbers of the property look like this:

Bedrooms: 2
Bathrooms:1
Lot Assessment:$66,400.00
Building Assessment:$76,300.00
Total Assessment:$142,700.00
Annual Municipal Taxes: 3400

Built in 1961

It's a one story home with a crawl space as a basement. It sits on a piece of land close to 5000 square feet.

I'm going to try and get the property for 139,000.

I did some numbers and if I amortized the property over 25 years at a 3.5% (at the moment it's 2.79 for a 2 year fixed mortgage but I'm playing it safe) mortgage rate with a 30% down payment (41,000$) it would be a $480 monthly payment.

I'd put the property up for rent as is for $600 a month. I'd let the tenant pay for the electricity. Snow removal and grass cutting will be offered to them as a extra and will not be included within the rent.

Exit Strategy

Land in the area is going for around 38$ a square foot (kind of high but it's a suburban area with close access to a major city).

The way I see it I can't go wrong, I could always sell the land for basically what I would have paid for it.

This would be my first property. I'm open to opinions, thoughts and please tell me if there is anything I over looked.

[Michael Seeker]

@Andrew Jones - you will lose a lot of money if those are your expected numbers.  I'd run away from this "deal" if I were you.  $600/mo rent for a $140K property is not a good investment.

[Andrew Jones]

@Michael Seeker 

Would it be a bad investment because the numbers are so low?

[Joel Owens]

I know nothing of Canada.

From a rent standpoint 600 in rent for 139,000 is not even a 1% rent to sales price ratio. From a cash flow perspective it just isn't there.

2 bed 1 baths do not appreciate here as well as a 3 bed 2 bath. I do not know how Canada is.

I don't know how the mortgages work over there but a 2 year loan you could get hit with a refi bomb where the rate climbs up and you do not have the excess in rental rates rising fast enough to cover the spread. In that situation you could end up cash flow negative.

If you are holding for land value see if the area has a current and future land use plan to see what county or city is doing with the area where the property you want to buy sits.

[Andrew Jones]

@Joel Owens 

Thanks for your input. I'd like to ask you a question on your post.

Let's pretend we don't have to worry about any refinancing. If I was guaranteed that 600$ rent each month that would pay my mortgage of 480$. I'd be making 120$ a month. It isn't a lot of money but it is a property which has a tenant paying down my mortgage and giving me an extra 100 dollars to save to put into the property if need be. Wouldn't that be a good start for someone who is just starting out?

[Andrew Jones]

@Joel Owens 

My ratio might not be very high in the rent to sales price ratio but as an investment isn't it still making me more than my 2% at the bank?

[Nathan Emmert]

You don't pay property taxes?  What about property insurance?  What happens when the dishwasher breaks?  The fridge?  The HVAC?  The hot water heater?  The roof springs a leak?  What happens when your tenant moves out and you have a vacancy for a month... or two... or three... what happens if the prior tenant trashes the place and you have to spend a few thousand getting it rent ready?  What if they stop paying and you have to pay for an eviction, that's about $800 here?  Who is paying for water/sewer/trash?

Do yourself a favor and do some more research.  Look up the 50% rule for expenses.

[Joel Owens]

Hard to say Andrew without knowing your goals and liquidity and net worth.

If you have a great area where rent growth is strong and you just want a paid off asset for retirement then it might work for you.

If you wanted no turnover then if going rents are 600 you generally want to not push top market rents and stay 525 to 550 so you are one of the best deals around. Each time it turns over you have repair costs and lost rent.  

[Joel Owens]

Andrew lot's of investments pay out more than a bank.......... : )

2% there and here in the United States it's about 1 to 1.5% annually.

Last year billions from the Canadians rolled into the Untied States for real estate investing.

My clients on commercial properties usually generate 10 to 15% annual returns and have rental increases each year. The value is off the cap rate and NOI so the value keeps growing usually ahead of inflation.

[Cole Walker]

Check out the Bigger Pockets Investment Calculator.

Its in the blue bar at the top of this screen under "Analyze". It will walk you through all the things you need to add and come up with a pretty accurate cash-flow analysis for you.

Hope that helps!

[Roy N.]

@Andrew Jones 

Welcome.  Roughly where in St-Hubert is the property?  It sounds like one of the old PMQs ... if it were younger, I would guess a pre-fab mini-home.  

I lived in both MTL and St-Jean-sur-Richelieu back in the 80's, and though we return frequently, it's been a long time since I've tromped through St-Hubert.

What is the zoning for the lot?  While there is always development happening around MTL, things are not exactly booming on the south shore these days. I would wager that if there was an immediate higher use for the property, than a developer would have it already.   Is the zoning and location appropriate for use as an office?

Since there is no immediate, profitable exit strategy (ie. < 24-months), the property as is, must make a profit.    In reading your post the immediate red flags are:

- 2-bdrm

- no functional basement 

- rent level

While it is always easier to rent a 3-bdrm house, there will be a market for 2-bdrm, but your clientele will be different: single roommates, young couples w/o children, empty nesters/seniors wanting to downsize.   None of these clientele groups will be especially keen on yard work (with possible exception of the young couple), so I would have an easy option to have it included.

How big is the house?  Is there an opportunity to create a third bedroom (and at what cost)?  Is the crawl space dry and high enough (4-5') to serve as functional storage?

Finally, the rent seems terribly low, even for St-Hubert ... I paid $600/mth for a 2-bdrm apartment on the Island 30 years ago.   Have you looked at Kijiji and called the numbers on other À Louer signs in the neighbourhood to ascertain the going rate for rent?

Based on the numbers you provided and making allowances for vacancy, taxes, utilities (water/sewer ... unless you bill it through) and maintenance, you would need to be able to rent the house for $900 - $1100/mth to make it work at the price you plan to pay ... even then things would be tight and you won't make the same level of return you could purchasing a blue-chip dividend stock.   Additionally, you very probably could be dipping into your own funds when something major like roof or HVAC needs repaired/replaced.

While your basic plan is a good one - if you are certain of eventual redevelopment of the area - but any purchase needs to be profitable out of the gate and not "maybe" in the future.   I would probably walk on this deal and definitely would not pay more than $100 - $110K without a guaranteed short term exit and a certainty it would rent for $900 - $1100/mth.

As for your financing plan, you can do better than 2.79% ... we renewed a couple of properties earlier in the year on a 5-yr term variable notes for 2.4/2.5% - these products can be converted to a fixed rate at any point in time if there was a real threat of a spike in rates.

@Joel Owens  - while a 2-yr fixed rate would not be my choice, Andrew's rate is .21 below prime.  Residential mortgages in Canada must be amortized at 25yrs or less and mortgage terms range from 6-mths to 10-yrs with the most frequent, but not statistically the best, choice being a 5-yr term fixed rate.  In addition, most residential mortgages (all the fixed ones) compound interest semi-annually.

@Cole Walker  - the BP analyzer is a good tool, but it speaks only U.S.A. real estate.  Unless Andrew knows how to adapt the numbers to account for the differences in financing, purchasing, etc. the tool could lead him astray.

[Andy Mirza]

@Andrew Jones When doing your numbers, remember to include your expenses, specifically Taxes, Insurance, Maintenance, Management, Utilities, and Repairs. Then account for a Vacancy factor, which is specific to your area and property type. With $600 in rent and $480 in a mortgage payment, there's not much left over to cover your expenses. You will be cash flow negative. Unless you have a specific exit plan that makes the upside worth it, your energy and capital would probably better off in another investment. 

[Michael Olesky]

Just to put some quick numbers to what everyone above is saying, don't know about quebec so i'm using some general florida numbers:

puchase:

purchase: 13900

closing estimate: 3000

renovations: 1000 - you didn't say if it needed work but it will need something

monthly:

rent: 600

property tax: -1000 

management fee: - 60  (even if i plan to manage myself i include this)

insurance: -67

capx: -60

vacancy: -50

Totals

Cash to purchase: 45,700

Net monthly income: -207.11

[Roy N.]

@Michael Olesky 

Closing doesn't work quite the same way up here. On an SFR like this, costs should stay below $1500 - 1800 ... and that would include the transfer tax and building inspection.

It the property is the one I believe it to be, taxes will be $1600 - 1700/year

Those pedantic bits aside, your demonstration is correct and why I indicated above the house would need to rent for $900 - $1100/mth to make the deal viable.

[Andrew Jones]

Wow! Thank-you for your wisdom. You guys have reminded me and shed light onto certain numbers and situations I didn't think of. I listen to the podcast quite often and try to explore the forums but for a newbie it isn't always easily to remember all this information.

Thanks again!