$600 positive cash flow - would you buy it?

[surfermoe]

My wife and I are considering putting an offer on a property that is only a few blocks from our home and that I`ve estimated will generate positive cash flow once all expenses are in. But we`re of two minds about the property, and would appreciate some advice.

I`ve seen myREINspace members hammer people on their property analysis, and would appreciate equally brutal treatment

Property details:

- Semi-detached (aka side-by-side duplex). We have the option of purchasing both sides of the property
- 5 bedrooms per side (total = 10 bedrooms)
- Location: downtown Ottawa, walking distance to a university
- Property condition: we haven`t done an inspection yet, but on the surface it seems well-maintained

- Asking price: $640k total (both sides)
- Reason for selling: need cash to buy big block of property outside of town

Current rents:

- $5000.00 per month total ($2500 per side)
- The current owner rents to students. His strategy has been to advertise each side as a 5-bedroom unit, and find one student who organizes their friends to rent the place together. He has one lease per side, and puts every tenant on the lease. He also gets their parents to sign as "guarantors".

Expenses (per annum):

Property Tax: $7,200
Utilities: $1,200 (tenants pay all utilities on one side; on the other side tenants pay all utilities except water)
Maintenance: $2,400 (my estimate)
Insurance: $3,600
5% vacancy allowance: $3,000
Property mgmt: we`ll manage

Mortgage cost per annum (95% LTV, 35 yr amort, @ 4.39%, incl. $40k renos & CMHC premium): $38,640


What`s been holding us back:

While the numbers seem to work on this one, our concern is potential exit strategies. Because the property is close to a major (i.e. busy) road and doesn`t have a backyard, it would be hard to sell it as two family residences. Basically, it seems that we would have to sell it to another investor (who would have to be comfortable renting to students).

Also, up to now our strategy has been to focus on units that we can rent to groups of professionals - we`re not sure we want to get into student housing.

Any thoughts?

Moe

 

[Fortuneinvesting]

QUOTE (surfermoe @ Apr 22 2009, 11:44 AM) My wife and I are considering putting an offer on a property that is only a few blocks from our home and that I`ve estimated will generate positive cash flow once all expenses are in. But we`re of two minds about the property, and would appreciate some advice.

I`ve seen myREINspace members hammer people on their property analysis, and would appreciate equally brutal treatment

Property details:

- Semi-detached (aka side-by-side duplex). We have the option of purchasing both sides of the property
- 5 bedrooms per side (total = 10 bedrooms)
- Location: downtown Ottawa, walking distance to a university
- Property condition: we haven`t done an inspection yet, but on the surface it seems well-maintained

- Asking price: $640k total (both sides)
- Reason for selling: need cash to buy big block of property outside of town

Current rents:

- $5000.00 per month total ($2500 per side)
- The current owner rents to students. His strategy has been to advertise each side as a 5-bedroom unit, and find one student who organizes their friends to rent the place together. He has one lease per side, and puts every tenant on the lease. He also gets their parents to sign as "guarantors".

Expenses (per annum):

Property Tax: $7,200
Utilities: $1,200 (tenants pay all utilities on one side; on the other side tenants pay all utilities except water)
Maintenance: $2,400 (my estimate)
Insurance: $3,600
5% vacancy allowance: $3,000
Property mgmt: we`ll manage

Mortgage cost per annum (95% LTV, 35 yr amort, @ 4.39%, incl. $40k renos & CMHC premium): $38,640


What`s been holding us back:

While the numbers seem to work on this one, our concern is potential exit strategies. Because the property is close to a major (i.e. busy) road and doesn`t have a backyard, it would be hard to sell it as two family residences. Basically, it seems that we would have to sell it to another investor (who would have to be comfortable renting to students).

Also, up to now our strategy has been to focus on units that we can rent to groups of professionals - we`re not sure we want to get into student housing.

Any thoughts?

Moe

I ran this in my calculations and got a positive monthly cashflow of 762.07. I used $3000 as maintenance since that is 5% of the yearly rents. I also used $3680 as the vacancy allowance being 8.33% (1 month) of the monthly costs. The rate of return in 5 years from your 32000 DP comes to 37.633% with 0 valuation.

I think the tenancy agreement sounds reasonable and there is always a market on student housing. Read the April`s Real Estate Magazine, it has a main feature on student housing.

 

[Ken15]

I would confirm that the entire property is zoned or licensed for students.

 

[invst4profit]

Is the total cost to purchase $640,000 or $640,000 + $40,000 (reno & CMHC) + closing costs ?

It`s down town which I assume means an older building and has been a student rental, correct ?
How long has it been a student rental and how long has the present owner had it ?

With a rental income of $5000 I would not consider paying more than $500,000. However that may be too high as well based on this being a older building with students (they can be expensive).

You will find your estimates for expenses are far too low.

With monthly expenses running in the range of 50% you will have a negative cash flow of approx. $720/month.

Assuming you do all the maintenance work yourself you could get buy with 40% expenses leaving you a negative cash flow of $220/ month based on a total purchase cost of $640,000.

 

[surfermoe]

Fortuneinvesting, thanks for correcting my numbers. I also get a similar cash flow estimate.

Ken15, good point about confirming zoning - but does a property have to be explicitly zoned for students? I know that getting insurance can be an issue.

Greg, answers to your questions:

(1) Total cost to purchase = $640k + $40k renos (I`m assuming this, might not be so high) + CMHC + closing costs. So, total cost = more like $740k

(2) It is an older building (probably 1930s), and has been used as a student rental for the past few years. I`m not sure how much of its total life it`s been used for students, though

(3) I`ve seen 50% expenses used as a baseline before - but isn`t that a very high rule-of-thumb? A friend of mine owns 16 properties (42 doors) and I believe his expenses have run 30-35% on average

Moe

 

[invst4profit]

30-35% is low and is probably as a result of him leaving out many expenses.
Your will very likely run in the 40-50% range.
It does not really matter though, with a initial cost of $740 it is clearly way beyond what is a "good" purchase price based on only $5000 monthly income. Way too high. Wait for something in the 1% ratio as a minimum.


My advice.....Run Away.

 

[BrianPulis]

Each city has it`s own bylaws that inforce how many non-related individuals can live together. Some sities such as Waterloo reqiures you to licence your home for students homes over six occupents. Some cities inforce this while others don`t. At the end of the day if your considering to purchase a property that only makes sence from an investment point of view as a student home. You should contact city hall and be clear on what is permitted.

 

[GaryMcGowan]

QUOTE (invst4profit @ Apr 22 2009, 03:32 PM) My advice.....Run Away.
I agree with Greg, Run Away,

Can you rent this to students 12 months of the year?

Will you be able to get financing for student rental and at 35yr?

You will have to investigate the zoneing? It may only be zoned for singal family. 

How will it effect your DCR? It is probably a good deal for the current owner but not one buying in at over 600k + renos.

I don`t pretend to know the Ottawa market - the location sounds good "within walking distance to the University"

Have you managed your own properties before and do you have experince with student rentals?

If your exit strategy is to sell as a single family home I would envision spending more money to update and reno the property after you have held. Student rentals may be a lucrative business but it comes with a price $.



my 2 cents,

 

[TIMWEMBLEY]

I agree with Greg and Gary the numbers do not work. Realize students or any room by room or even suited homes usually have minumum double vacancy and maintance and much more attention by the property manager. Look for 12% cap or better for this type of rental. This shows a 8% cap so you need to buy it much less 500k area. If you can find a single family home with alot of rooms near a school then get it zoned/converted to student house you will be able to hit that type of cap much easier.. if student housing is what you want to do but as mentioned it is very hands on.

 

[Dan_Eisenhauer]

As a student rooming house, your vacancy is going to be above average. Even though you will be self-managing, your time and effort will also be above average, Put a $$$ figure on that. I suggest at least 15%, and maybe 20% of gross rent.

I agree with the comments above. There are probably better deals for you to consider.

 

[Thomas Beyer]

QUOTE (surfermoe @ Apr 22 2009, 11:44 AM) ...
- $5000.00 per month total ($2500 per side)
- The current owner rents to students. His strategy has been to advertise each side as a 5-bedroom unit, and find one student who organizes their friends to rent the place together. He has one lease per side, and puts every tenant on the lease. He also gets their parents to sign as "guarantors"...

Mortgage cost per annum (95% LTV, 35 yr amort, @ 4.39%, incl. $40k renos & CMHC premium): $38,640..
95% financed .. are you out of your mind ??

640K for a duplex ?

This is VERY HIGH RISK unless you know what you are doing in student rentals AND have an extremely high risk tolerance ! Are you married ? Divorce lawyer will love this "deal" !!

vacancies will be higher .. and expenses too ..

DO NOT DO IT .. not at this price .. and certainly not at this leverage !!

 

[Nir]

Hi,
As mentioned by a few investors already - RUN AWAY!
640K is around DOUBLE what it should cost in order for me to buy it. I`ll say it again, this is not a typo - it should cost around HALF for me to consider it.

The reason it is a terrible deal is it is way too expensive for 5K rent!

Regards & Good luck,
Neil

 

[surfermoe]

Brutally honest feedback is what I asked for...and that`s what I got!

Thanks very much for all of the thoughtful comments. I`ve been feeling uncomfortable all along about the price tag and the amount of maintenance this would require...and everyone has added many more good points to think about.

We`ll be passing on this property. But I really like Tim`s idea of finding a (much cheaper) single nearby with lots of rooms.

Moe

 

[housingrental]

Actually it`s units over three unrelated occupants that equire a license in Waterloo


QUOTE (BrianPulis @ Apr 22 2009, 05:47 PM) Each city has it`s own bylaws that inforce how many non-related individuals can live together. Some sities such as Waterloo reqiures you to licence your home for students homes over six occupents. Some cities inforce this while others don`t. At the end of the day if your considering to purchase a property that only makes sence from an investment point of view as a student home. You should contact city hall and be clear on what is permitted.

 

[housingrental]

I disagree with this post.
Well managed student rentals have a low vacancy rate.
I`ve seen this not only in Waterloo but from knowing other owners and managers in places like London, Kingston, Hamilton, etc..
For sure though more management intensive.
From reviewing sales data from mls back 20 years I`m not sure of a single purchase in Waterloo during than that has ever been at a 12% cap rate... Even during mid 90`s a true 10% cap was rare on often on places needing work.
TIMWEMBLEY - Are you saying these shouldn`t have been purchased by investors?


QUOTE (TIMWEMBLEY @ Apr 22 2009, 06:26 PM) I agree with Greg and Gary the numbers do not work. Realize students or any room by room or even suited homes usually have minumum double vacancy and maintance and much more attention by the property manager. Look for 12% cap or better for this type of rental. This shows a 8% cap so you need to buy it much less 500k area. If you can find a single family home with alot of rooms near a school then get it zoned/converted to student house you will be able to hit that type of cap much easier.. if student housing is what you want to do but as mentioned it is very hands on.

 

[housingrental]

I'd like to add a dissenting opinion.

A well managed student rental can cash flow well at 64k/bed and $500/rent with tenants paying utilities.

If you have little to put down, aren't familiar with the market, and don't have a property manager experienced with this type of property this deal can bite you.

If you can take care of those items it's worth looking into.






QUOTE (surfermoe @ Apr 22 2009, 08:46 PM)
Brutally honest feedback is what I asked for...and that's what I got!

Thanks very much for all of the thoughtful comments. I've been feeling uncomfortable all along about the price tag and the amount of maintenance this would require...and everyone has added many more good points to think about.



We'll be passing on this property. But I really like Tim's idea of finding a (much cheaper) single nearby with lots of rooms.



Moe

 

[Goodstuff]

And why 4.39% ?

You can easily get 5-yr terms under 4% now. I`ve seen 4.62% for properties over $500 K.

Find a better broker.

 

[Goodstuff]

Oops. I meant 3.62% not 4.62%


QUOTE (Goodstuff @ Apr 23 2009, 11:04 PM) And why 4.39% ?

You can easily get 5-yr terms under 4% now. I`ve seen 4.62% for properties over $500 K.

Find a better broker.

 

[surfermoe]

Thanks for the dissenting opinion, Adam. I appreciate your advice.

We`ve decided to pass on the deal, regardless. Our concern is potential exit strategies. Due to where it`s located, it`s hard to imagine how we could sell this property to anyone but an investor.

The strategy we started out with was to buy duplexes that can be rented out to working professionals - and would have a large market of potential buyers when we want to sell. The feedback in this thread has made us realize that by getting into student rentals, we would be deviating substantially from our strategy.

Moe

 

[EricBurgin]

QUOTE (surfermoe @ Apr 27 2009, 11:28 AM) Thanks for the dissenting opinion, Adam. I appreciate your advice.

We`ve decided to pass on the deal, regardless. Our concern is potential exit strategies. Due to where it`s located, it`s hard to imagine how we could sell this property to anyone but an investor.

The strategy we started out with was to buy duplexes that can be rented out to working professionals - and would have a large market of potential buyers when we want to sell. The feedback in this thread has made us realize that by getting into student rentals, we would be deviating substantially from our strategy.

Moe


Moe:

I may be a bit late to weigh in on this one as you have already made your decision, but I would be pleased to offer you my professional services in your search for duplexes that are geared towards working professionals. I live, work and invest in the Ottawa market, so I feel I might be able to offer some insight that some of the other members might not. I just thought I would put that offer out there for you.

-Eric