New to the business. Can someone help look over my numbers?

Question

Hi, I'm 23 and new to real estate investing business. I live in Ontario and would like to buy my first multi-family house in the near future. I've read a lot of the threads on this forum and there's a lot of great advice! If anyone could look over my numbers/give any advice to a younger investor who is just starting out that would be awesome! Thanks!
	 
	 These are the numbers for one of the houses that I'm looking at. The asking price is $199,000. I'll be putting 20% down with a 20/yr mortgage on the property that I end up purchasing. 
	 
	 Unit #1 - 3 bedroom, $975/mth,
	 Unit #2 - 2 bedroom, $825/mth,
	 Unit #3 - 1 bedroom, $875/mth.
	 Rentals are month to month all inclusive.
	 Gross Income $32,100/yr.

Taxes $3,384/yr.
	 Electricity $3,180/yr.
	 Sewer/Water $574/yr.
	 Heating(Gas) $3,012/yr.
	 Insurance $2,212/yr.
	 Maintenance: I'm assuming $3,500/yr to be on the safe side.
	 Total Expenses: $15,862/yr
	 NET Income: $16,238/yr

Mortgage: 11,110.44
	 1st/yr Interest: 5,470.34
	 1st/yr Principal: 5,640.10
	 NET after mortgage: 5,127.56 (10,767.56 including principal paid)
	 
	 I noticed that a lot of the houses in the USA bring in comparable rent but are nearly half the cost of the houses in Canada. Does anyone have any advice on investing in the US for an out of country investor, would you recommend it?

Simon Lloyd · Answer

First of all Noah, welcome to BP!  We are almost literally neighbours--I'm in King Township as well! (Schomberg)  Great to see a local here on BP and excellent that you're looking to start in REI at such a young age.

This looks like a great deal for sure.  I wouldn't wait until Sunday to go see it...one thing I've learned shopping for my next deal is to jump on good deals or they will be gone!  If this $50k property is anywhere in southern Ontario it will have 15 offers by yesterday so you really have to jump on it.  Also I'd recommend writing a cover letter to go with your offer saying that you are young investor looking to fix up the property to provide a family a nice place to live, yadayada...sometimes the sentimental stuff works and at the very least it could make your offer stand out amongst the dozens!

Best of luck on this deal and all your future REI endeavours!  Please keep in touch!

Roy N. · Answer

@Noah Zielinski

Those numbers give you a CAP of 10.3 and a Cash-on-Cash of 21%; a profitability index (PI) of 1.43 {over 1.00 is profitable} and an internal rate of return of 10%.  Debt Coverage would be 2.0 and Break-Even-Ratio is 64.3%.

I made a slight alteration to your data and assumed maintenance/CAPex and Property Management allowances of 10% each and that your opportunity cost of capital would be 8%.   In my adjusted scenario, NOI is ~5150 and Cash-Flow-Before-Taxes (CFBT) is 2627 (annually).

On the surface it looks like a keeper!  In fact, it looks so good in the context of the current market, it also raises a few "if it quacks like a duck" flags:

- a 50K house in Southern Ontario {where most things with windows and a door start at 200K} is either going to be in a rural area {making it more difficult to rent) or be in desperate disrepair ... or both.  I would brace for the possibility of extensive rehabilitation costs.  If there is nothing wrong with the house or its location, it would not still be on the market.

- You may have difficulty securing a mortgage of <50K from a conventional lender.   The Big-5 banks really do not like to take mortgages that small - but you never know.  You could also approach a local credit union which may be more likely to take such a small mortgage.

Noah Zielinski · Answer

Thanks Marco & Ali,
	 I took the advice given and did another search in my area with the new criteria. To me, this looks comparable to what some of the US investors were talking about. I like the idea of starting out a little smaller than what I had initially planned, just to make sure I can handle everything & build confidence. This time the tenant would pay utilities. 
	 
	 Singe Family, 3 bed 1 bath in southern Ontario.
	 House: $50,000
	 Down Payment: $10,000 OR 20%
	 Interest: 4% @ 5yr fixed
	 Amortization: 25yr
	 Mortgage: $210.41 month / $2,524.93 year
	 Average Rent: $854 month
	 Gross Rent:  $10,248 yr ($9,253.8 with 10% vacancy)
	 Average Vacancy: 4.5% average in area OR 10% to be safe

Expenses (after closing fees etc.):
	 Tax: $827
	 Insurance: $553
	 Repairs: $500 (maybe more to initially fix it up?)
	 Misc: $500 (grass, snow)
	 Sewers: $334
	 Prop Management: $1,020
	 --------------
	 Total: $3,734 OR $2,714 if no prop management
	 Including Mortgage: $3,734 + $2,524.93 (- $961 of principal paid) = $5,297.93
	 
	 Net: $3,956 
	 Cash-on-Cash: 1.0248 OR .925 with 10% vacancy
	 CAP rate: 19%
	 ROI: 39.56%

What do you guys think? I'm planning to view it on Sunday.

Ali Boone · Answer

Is it possible to charge the utilities to the tenants? That would make a HUGE difference in your profits. I'm not familiar with Canada to know if the owner paying all the utilities is standard or not. I'd be interested to know about the area this building is located. Is it a nice area? I wouldn't be ruling it out if there was a way to change those utility costs around. Another big one though is, what condition is it in? Does it need any work at all? If it does, that changes the game too. If it doesn't, I'd still be looking at it.

As far as buying the US, it's very doable for Canadian investors. I know quite a few who are doing it. The biggest thing you have to make sure you have set up correctly is your entity and tax structuring. If those aren't set up perfectly correct, you could suffer a lot of nasty tax repercussions. But that is easy to do if you have an expert set it up.

I think you have a great mindset! I wouldn't rule out either option, this property or US properties.

Marco Santarelli · Answer

Hello @Noah Zielinski,

Welcome to BiggerPockets!  Nice to see another fellow Canadian.

First of all, it is not a fair comparison to compare houses in "Canada" to the houses in the "USA". All real estate is local.  It is best to compare the cap rates and rent-to-value ratios of one market to another market in order to find the market that best fits your investment criteria.

Glad to see you're starting out at such a young age.  I started investing when I was 18 years old in Calgary.  Biggest regret was selling my properties there after the incredible rise in property values there over the last 10 years!

I talk to quite a few Canadian investors that are looking to invest in the U.S.  The first thing I tell them is that there are very few, if any, lending options for foreign nationals buying US real estate.  The second thing I tell them is that the purchase process is very similar to Canada's, but many states use title and escrow companies as opposed to attorneys.  Other than that, it's nothing complicated.  The first step is determining the market(s) that best meet your investment goals and criteria.

Post or PM any questions you have.

Continues success!

Noah Zielinski · Answer

Thanks for the advice everyone! Yes, house prices in my area are high and Canadian winters make utilities expensive if there aren't separate meters.
	@Roy N.
	@Steve Smith
	@Jonathan La Rosa
	@Patrick L.
	@Aaron Yates

Roy N. · Answer

@Noah Zielinski

First, allow me to welcome you to BP!  You should pop-over to the New Member Introductions forum and let us know who you are.

It's been a long time, but isn't Holland Landing in Gwilliumbury Twnsp north of New Market?

You are still probably close enough to the Big Smoke that housing prices are distorted  - they are distorted in most of the country, but the closer you get to TO (or Calgaray or Vancouver) the worse things become.

$200K for a 3-2-1 triplex (66K per unit) will seem outlandish to most of our friends to the south, but it is not out of the ordinary in your neck of the woods (nor here in the Maritimes, unless you go to a small, rural town).

Vacancy:

As others have pointed out, you need to add (or, rather subtract) and allowance for vacancy from your scheduled rent.  Use at least 8.33% (1 month in 12), but you are better off using 10%.  I would also visit the Stats Can or CMHC website and pull the historical vacancy and average rent numbers for your area over the past 2-3 years to give yourself an understanding of the market.

Expenses:

You also should analyse the property with an allowance for property management in your expenses (7 - 10% of gross revenue) even if you plan to manage the property yourself.   This gives you a little space if you need to outsource management for any reason ... or if you have an unexpected repair or prolonged vacancy.

If you plan to live in one of the units, then you may receive a small reduction/rebate in property tax for the portion that consists of your primary residence {I cannot recall if Ontario works that way}.

I do not see expenses for garbage, snow removal, lawncare/landscaping

Finance:

Where this is a residential property (<= 4 units) you will have to qualify for a mortgage at the 5-year fixed rate (5.34% according to BoC) with a 25yr amortization.  Even if your bank is offering a promotional rate (most of the Big-5 are offering 5-yr fixed at 3.8x - 4.0%), I believe the new rules require you qualify at the BoC posted rate.  Same holds if you plan to use a {capped} variable rate mortgage product (2.6 -3.1% at most of the banks) - you must still qualify at the 5yr fixed w/ 25-yr amortization.

That said, why would you want a 20yr amortization?  Take the longest amortization you can get (25 for certain, 30 if your bank will still offer it) - you can always pre-pay and paydown to achieve an effective amortization which is far less.

Also, if you plan to live in the property, you can get a high-ration mortgage with a downpayment of 10% {I do not think 5% is available on multi-units, but perhaps it is}.  You will have to take CMHC (or private) mortgage insurance which will add another 6-8K to your mortgage ... but your tenants will be paying it.

All that said, if you are purchasing this as a straight rental property, your operating expenses (with the above allowances) are above 60% of your gross revenue.   If you secure a loan at 3.5% or less, you can make this property cash-flow positive at an LTV of 80 -90%.

However, you should not confuse this with being a good investment.  A quick discounted cash analysis results in most of the indicators - Cash-on-Cash, Profitability Index (PI), IRR, ROI, etc. - indicating this property will not be profitable over the long term.    Furthermore, your debt coverage (1.18) and Break-even-Ratio (86.1) are outside the boundaries most of the traditional bank lenders require (DC >=1.25; BER <85%).

I'm not trying to discourage you, but I see this current deal as a sows ear.

If you were planning to live in it and just wanted someone to pay your mortgage, then it is a different story and this could fulfill that purpose.

Roy N. · Answer

Steve,

Actually, payments would be $993.11/month.  Remember, interest on residential mortgages in Canada is compounded semi-annually.

That said, in todays market should be able to secure an interest rate of <=3.5% ... <=3.0 if he is willing to go variable or take a short term (2-3 year) fixed mortgage.  We are closing two properties this month whose mortgages will be at 2.6%.

Steve Smith · Answer

@Noah Zielinski  your payments using an  int. rate of 4.375 % for 20 yrs with 20% down would run around $996.47 per month

Account Closed · Answer

Those utility bills sure do seem high up there in Canada! I'll have to agree with Aaron that your net return is pretty low considering what you are putting in up front. You also failed to factor in any vacancy losses you might incur, which can definitely put a dent in your wallet, especially if the tenants are on a month-to-month lease. In addition, will you be managing the property or will you hire a manager? This should be factored in as another expense if the latter is the case.

I don't know anything about real estate in Canada, but I do know that there are still really good deals here in the US in select markets. I think your deal above would be a lot more appealing if you didn't pay those utility costs and made each tenant do so. Is water, electricity, gas all separately metered?