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Getting Started After the Book

Galvin

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Jun 29, 2015
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I posted this in the general discussion forum, realizing after this would be the correct place to post this. Sorry about that.

Hello Everyone,

First off let me thank you for taking the time to read my post, everyone's time is valuable and I appreciate you taking the time to assist me achieve my goals.

About me: I'm a 30 year old IT professional working in the Toronto area. I've owned my home since 2009, renovated/landscaped the property thus increasing it's value above the market rate in Whitby where I currently live. I'm very driven once I set my mind on something I always find a way to achieve it. Part of my home has been renovated on Mike Holmes' TV show "Holmes Inspection" here: hgtv.ca/video/pane-full-truth/video.html?v=350645827723 this is just a fun example of how much one can achieve when they try. It took me three months to get on that show, worth every penny. I've rented the extra rooms in my home since I first bought it and only removed my last tenant at the request of my significant other.

I'm looking at buy and hold properties in Ontario, anywhere I can drive to really. I've done a lot of research and joined the Durham Real Estate group to gather with like minded people who will have the connections to assist me with the process. Everyone in the group appears to love Durham as a place to invest in, with good reason seeing that prices have climbed (ripple effect of Toronto) and with the 407/Go transit expansions it scores fairly well on the goldmine score card. The market has been HOT, far too hot for too long for me to feel like the transit improvements will be enough to help maintain the values of any properties I purchase. The area doesn't really have "local employment" strong enough to support the continued growth in home values as most commute to Toronto in the area for work. If Toronto is affected then naturally commuter towns would be as well right?

Lets say I'm wrong, so I grab a duplex in the area or more likely a home with an in-law suite which I can convert to a legal duplex. How do I know when to get out? I can look at stats Canada until I'm blue in the face but the data is old, most of the data I'm finding online is old. This is my biggest concern. I've already found a property in Bowmanville ON that will return an outstanding $675 ROI monthly from rent. That's factoring in a 3.6% vacancy allowance, 5% repair costs, insurance, property taxes and property management costs. It seems too good to be true.

I will continue to research, any help you fine people can provide is much appreciated.

Thanks again,
Dan
 

Matt Crowley

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Dec 14, 2013
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How do I know when to get out? I can look at stats Canada until I'm blue in the face but the data is old, most of the data I'm finding online is old. This is my biggest concern. I've already found a property in Bowmanville ON that will return an outstanding $675 ROI monthly from rent. That's factoring in a 3.6% vacancy allowance, 5% repair costs, insurance, property taxes and property management costs. It seems too good to be true.

Nice work on getting onto Holmes.

How to know when to get out? When you have had enough. You have the formula right here. Buy based on the after-tax cash return you can be satisfied with. But, I'll come back to this once I've discussed your "too good to be true" comment.

I think your input assumptions here are very aggressive. Using percentages like 5% or whatever for R&M (repairs and maintenance) is a lot more relevant when you are looking at large multi-family purchases. To give you an idea, 10 - 15% is much closer to a realistic R&M number for well maintained multi-family (sample size ~3,000 units).

When you are looking at the R&M numbers for a SFH purchase, look to the property inspection report. If you have done renovations yourself before, you know when the repairs need to be done. Roof this year, HW tank next year, lino in upstairs bath in 3 years, paint in year 4 and windows in year 5 and so on. That creates the cash timing expectancy for your R&M budget. Then, those annual numbers become your best guess at an R&M budget.

Let's put some math to our repairs & maintenance budget:
Roof $5,000
HW Tank $1,500
Lino $500
Paint $1,300
Windows $7,000
= 5-year R&M budget $15,300
annual R&M $3,060

Now let's take a look at your 5% R&M assumption. That means that 5% of gross operating income is dedicated to R&M. So we are talking about 3,060 / 0.05 = $61,200 gross operating income. Take your next assumption of 3.6% vacancy allowance and we find out our annual revenue = 61,200 / (1-0.036) = $63,485 annual revenue from the property. This means that for the moderate R&M SFH budget, you are planning to get a monthly income of $5,290 from this property....not realistic.

Take a look at the rest of the operating expense percentages. As you can see above, you need to look at the gross annual amount and re-question your assumptions. I'm not sure where your 3.6% vacancy rate comes from but you should probably budget on one month vacancy per suite per year. That is 8.3%.

So, coming back to your question about "How do you know when to get out?" To me, this is really more of a question "how do you know you should get in?" A huge part of this is crashing down the idols "real estate always appreciates" and "if I hold on long enough it will go back up". I work for the largest privately held residential property owner in western Canada and when the owner sits down to review the financials prepared, it isn't about anything speculative. Every operating expense needs to be defended. 0% rental growth assumption. 4.5% interest rate. What is the cash on cash return, and can we live with that? Look at market rents that are actually achieved in the marketplace and don't assume you are 25% better than everything else out there. You probably aren't. Be satisfied with the cash you will take home on an after cash basis using the most realistic assumptions possible. The time to get out depends on your long term game plan and you should buy the asset that fits into that.

- long term buy and hold. Very expensive repairs and maintenance. Very tiny initial yield. Over time, rents will increase and you will be able to get refinancing if the market doesn't dip.
- cash play: develop and sell or rent to own
- cash broke: VTB or AFS. Better be a pro at what you are doing.
 

kfort

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That's an excellent response above. Do take note of the realistic expenses angle to that, very often an investor's downfall right there.

I break down this decision the exact same way on entry/ exit. Simply:
Is my money better off (ROI) here or elsewhere? And if there answer is elsewhere, I need to properly estimate the financial upside and compare that to the work input required. By that I mean, don't spend dozens of hours working trying to exit from/ to a property that you expect will make you $4 more per month.

The only one I've sold so far I got out of because it was deteriorating to the point of being a knockdown. As it sat, I sold it as owner occupied for $50k more than lot value. I knew I wouldn't have the funds to knock it down and build in the near enough future so the choice was sell it for $150 that year or $90-100 a few years later.. Easy choice.

There are reasons to sell in all kinds of markets, same as reasons to buy. It's not 100% based off the cycle (though you'd better darn well be aware of it).
 
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