How does this deal look?

Question

Hey Folks,

I've been a long time lurker here on BP and happy to share details on potentially my first Buy and Hold property. Really excited to get your feedback on this deal. Thanks in advance!

Quick background:

My parents own 12 units  in the same townhouse complex I live in here in St. Catharines, Ontario. They have no problems finding good, long term tenants and rarely have units vacant. I am 29 and will have my home paid off by November 2017 but already have extra cash flow available to invest.

Property and financing details:

A neighbour in this complex passed so my brother, and I are considering purchasing it as our first investment property.  The units are part of a condo corp whose fees covers water, snow removal, basic landscaping etc. We also have the added benefit that my parents have offered to finance the purchase with their HELOC (Prime + 0.5%) as well as manage it for us at no cost.

Questions:

• I'd love some feedback on this deal and your thoughts on it for a long-term rental
• How would you include payments for the HELOC in your rental analysis? Should I assume that my cashflow (not including vacancy and maintenance funds) would be directed to the HELOC?

Analysis

Spreadsheet is available here

Purchase price = $145k

Rent = $1,375Taxes = $125Condo Fee = $265Insurance = $33Vacancy = $138CapEx = $62

Cash Flow = $752

Cap Rate = 6.2%Expense % = 45%

Thanks,

Alessandro

Brent Coombs · Answer

@Alessandro Zamai, whether the triplex is value for money depends on several factors, including the answers to the questions that @Roshni Patel asked. My main recommendation for any real estate investment is: never offer full market value! Find motivated Sellers, who will sell at a good discount. Don't get sucked into the "it's a competitive market" reasoning. If your competing Buyers include owner occupier wannabes, you'll likely NOT get the bargains you need. ie. Move on.

The triplex analysis shows a Cash-on-Cash return of 9.4%/y for your $52k outlay. Not the best. Not the worst. I've seen others write that they look for (and get) 1%+/m NET ie. 12%+/y. ie. Better!

Regarding a HELOC, yes, it would require minimum monthly payments once you draw down on it. It'd be up to you whether you wanted to put ALL your cash flow back into it, thus using it as a revolving line of credit. It takes great discipline to ONLY use a HELOC for investing purposes, where every dollar borrowed ALWAYS expects a greater return than its cost. Cheers...

Roshni Patel · Answer

So as someone that invests into multi-families,  I think that this makes more sense because you have a higher cash flow, and you are including PM fees and etc.

I am curious where this triplex is, what the rentability of this area is because that is additional information to consider. In your case, I would also look into what the zoning of the property is and whether it is a legal tri-plex or not.

Feel free to PM me if you have any additional questions and/or what have you. I might  be able to connect you with PM in the area if I know people in the area.

Roshni Patel · Answer

Honestly, for 50 bucks monthly, I would pass this property for a couple of reasons. (a) There isn't a large amount of cash flow. (b) You haven't factored in property management fees, even though you would manage the property yourself. If you were to consider them, then the property would have negative cash flow. You won't be able to get out of the condo fees.  The only way that this property MIGHT work is trying to negotiate the price down. Assuming that 145k is the appraisal value, if you can buy under appraisal value then at least you have some  equity. But even then, I think that it is slim margin.

Brent Coombs · Answer

@Alessandro Zamai, sorry to say, I don't believe you are being given any favors here. (Not that you should be asking for them). I foresee any cash flow being completely swallowed by its mortgage.

(Rule of thumb: if you're leveraged at 80%, and rent is less than 1%/m - it'll negatively cash flow).

Meaning: it'll likely COST you extra dollars out of your own pocket - many/most months!

Investments are supposed to GET you extra dollars, right?

If it's so good, why wouldn't you use a HELOC against your OWN home? Get what I mean?

Welcome to BP. If you disagree with my response, I'm happy to debate it further. All the best...

Yaseen Ali · Answer

@Alessandro Zamai, Did you end up buying either of the properties?

Alessandro Zamai · Answer

Thanks for the feedback everyone, you confirmed my original suspicions.

My parents are dead set on bidding for this unit, which works for them since they have the cashflow from their other units to pay it down in 2-3 years. I am trying to make the case that looking outside of this complex will produce better cash flows and would allow my brother and I to confidently invest in.

I went online and found found a triplex that looks promising and want to propose as an alternative investment for us.  It would be our first investment outside of our home area and require a property manager to manage and find tenants. This alone will make it a hard sell, but I think the numbers speak for themselves.

Detailed analysis available here

Purchase price = $235

Rent = $2,850Vacancy = $285Expenses+PM = $1,156Mortgage = $1,000

Cash Flow = $537Cap rate is 7.8%

Couple questions:

• How would you factor in payments to the HELOC? Assume a typical mortgage payment?
• Any additional expenses I should take into consideration?

Mike Oliveira · Answer

With 20 percent down your mortgage will be about 116k which with 2.8percent mortgage rate will be probably be around 540 a month

How does this deal look?

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