I am a Young Invester and maybe Trapped?

[Dirt]

I need your help. I have a home in Charleswood, Calgary. I purchased the home 1.5 years ago for 425,000. My intention was to renovate and resell. I spent 80,000 in renovation costs refinanced and now have a mortgage of 473,000,open variable mortgage. Put the house on the market for 6 months with no offers. Now I have tenants in the house renting for 1700 a month. I need to inject 600 a month to keep taxes, insurance, and mortgage in check.A comparable home, which has been on the market for a year, is selling for 480,000. Should I try and sell or hold on?

I have little to no confidence in my old realtor. Who should I use?

I am young and this is my first solo venture. I now rent in Fort McMurray and work two jobs. I am looking for constructive criticism which leads to a solution. I have thick skin so shoot me straight.

 

[Thomas Beyer]

QUOTE (Dirt @ Feb 28 2009, 11:23 AM) I need your help. I have a home in Charleswood, Calgary. I purchased the home 1.5 years ago for 425,000. My intention was to renovate and resell. I spent 80,000 in renovation costs refinanced and now have a mortgage of 473,000,open variable mortgage. Put the house on the market for 6 months with no offers. Now I have tenants in the house renting for 1700 a month. I need to inject 600 a month to keep taxes, insurance, and mortgage in check.A comparable home, which has been on the market for a year, is selling for 480,000. Should I try and sell or hold on?

I have little to no confidence in my old realtor. Who should I use?

I am young and this is my first solo venture. I now rent in Fort McMurray and work two jobs. I am looking for constructive criticism which leads to a solution. I have thick skin so shoot me straight.



$1700 is just too low a rent for a $480,000 house. Only if you can afford the $600/month for say, 3 years, then keep it.

If you are awake at night, worry, have therefore a poor job performance, prefer to at least break even, have a life ... SELL IT.

Find a competent realtor .. there are quite a few !!

 

[Dirt]

$1700 to low for a $480,000 house or to low for a house in that area?

Thanks for your Input.

 

[mortgageman]

Have you done some market research to see what comparable homes with the same number of bedrooms, bathrooms, garage size etc. are renting for in the area?
Your rent may be significantly below the market and you may be able to reduce your monthly outlay considerably with a rent increase.
Check out rentfaster.ca, rentboard, kijiji.ca, the local papers to see what other landlords are charging.
Good luck!

 

[lanedry77]

QUOTE (Dirt @ Feb 28 2009, 11:23 AM) I need your help. I have a home in Charleswood, Calgary. I purchased the home 1.5 years ago for 425,000. My intention was to renovate and resell. I spent 80,000 in renovation costs refinanced and now have a mortgage of 473,000,open variable mortgage. Put the house on the market for 6 months with no offers. Now I have tenants in the house renting for 1700 a month. I need to inject 600 a month to keep taxes, insurance, and mortgage in check.A comparable home, which has been on the market for a year, is selling for 480,000. Should I try and sell or hold on?

I have little to no confidence in my old realtor. Who should I use?

I am young and this is my first solo venture. I now rent in Fort McMurray and work two jobs. I am looking for constructive criticism which leads to a solution. I have thick skin so shoot me straight.


Hi Dirt,

- It looks like the average home in Charleswood is listed for between $400k and $450k right now. I`m not arguing your valuation of the property (in fact you don`t say what it`s listed at), but if it`s been listed for six months with no offers, changes are that it`s priced too high.

- You mention that a compatible home has been on the market for a year and is selling for $480k, but it sounds like that might be the asking price, not a sale price. Again, if it`s been listed for a full year, it`s probably over priced.

- Find a new realtor. there are hundreds of them, and many are great. Find one that fells you things that you don`t like to hear, since chances are that realtor is being honest with you and not stepping softly around your expectations of a sale price. Also keep in mind a listing contract can be very short if you want it to be, so you don`t have to get stuck with another bad realtor for six more months.

- Maybe it could be turned into an executive rental? that would drive cash flow up while you wait for the market to turn. tough to do if you have tenants in there now on a least though.

- Have you reduced the payment on your variable mortgage? that might save you that $600/month.


I hope that helps.

 

[Thomas Beyer]

QUOTE (Dirt @ Feb 28 2009, 12:11 PM) $1700 to low for a $480,000 house or to low for a house in that area?
too low for $480,000 ANYWHERE ..

a $480,000 house should break even @ $2500 to $3000 or so in rent .. and to make money in real estate you have to hold 5+ years .. i.e. at least break even cash-flow ..

 

[mrembecki]

If you`re happy with the tenants and they seem to be interested in staying for a few years than try and refinance to a longer amortization period (35 yrs). If you are strapped for cash maybe negotiate paying the interest only for a while. I don`t know what the house is capable of, but perhaps you can convert it to house two sets of tenants (1 upstairs, 1 downstairs) in order to increase your rents and get you back to covering all costs. Every property has its` day and I`m sure yours will too. Good luck

 

[Dirt]

QUOTE (mortgageman @ Feb 28 2009, 12:47 PM) Have you done some market research to see what comparable homes with the same number of bedrooms, bathrooms, garage size etc. are renting for in the area?
Your rent may be significantly below the market and you may be able to reduce your monthly outlay considerably with a rent increase.
Check out rentfaster.ca, rentboard, kijiji.ca, the local papers to see what other landlords are charging.
Good luck!


Thanks mortgageman. I only looked at rentfaster.ca and was in a hurry to rent. There are three months left on the lease. I’ll look in to comparable rentals. Thank you.

 

[Dirt]

QUOTE (DavidSandbrand @ Feb 28 2009, 01:23 PM) Hi Dirt,

- It looks like the average home in Charleswood is listed for between $400k and $450k right now. I`m not arguing your valuation of the property (in fact you don`t say what it`s listed at), but if it`s been listed for six months with no offers, changes are that it`s priced too high.

- You mention that a compatible home has been on the market for a year and is selling for $480k, but it sounds like that might be the asking price, not a sale price. Again, if it`s been listed for a full year, it`s probably over priced.

- Find a new realtor. there are hundreds of them, and many are great. Find one that fells you things that you don`t like to hear, since chances are that realtor is being honest with you and not stepping softly around your expectations of a sale price. Also keep in mind a listing contract can be very short if you want it to be, so you don`t have to get stuck with another bad realtor for six more months.

- Maybe it could be turned into an executive rental? that would drive cash flow up while you wait for the market to turn. tough to do if you have tenants in there now on a least though.

- Have you reduced the payment on your variable mortgage? that might save you that $600/month.


I hope that helps.

Thanks David Sandbrand. What exactly classifies a rental as an “executive” rental? 3 months left on the tenants lease.

 

[Thomas Beyer]

QUOTE (mrembecki @ Feb 28 2009, 04:36 PM) If you`re happy with the tenants and they seem to be interested in staying for a few years than try and refinance to a longer amortization period (35 yrs). If you are strapped for cash maybe negotiate paying the interest only for a while. I don`t know what the house is capable of, but perhaps you can convert it to house two sets of tenants (1 upstairs, 1 downstairs) in order to increase your rents and get you back to covering all costs. Every property has its` day and I`m sure yours will too. Good luck
That`s how the US got into trouble: too many expensive homes too overlevered !

Do not over-lever ! Use mortgages prudently ! A house over $350,000 is, in most cases, not an investment property .. it is speculation on (possibly, likely) equity upside that will take years to materialize ! You must have cash-flow to hold onto an asset .. cash-flow that is realistically AND CONSISTENTLY achievable only with cheaper properties .. We have yet to by an asset over $78,000/door .. and occasionally I think that is high ..

Long-term wealth is built by HOLDING long-term .. and that requires enough cash coming in to pay all expenses going out: taxes, management fees, vacancies, utilities, insurance and mortgage interest.

If the property does not cash-flow with a 6%, 25 year amortized mortgaged using realistic rent and expense assumptions: do not buy it .. or if you own it: sell it .. and find s.th. that can be held more comfortably long-term (even if the mortgage you have is 4% and 35 year amortization) !!!

 

[Dirt]

QUOTE (thomasbeyer2000 @ Feb 28 2009, 05:55 PM) That`s how the US got into trouble: too many expensive homes too overlevered !

Do not over-lever ! Use mortgages prudently ! A house over $350,000 is, in most cases, not an investment property .. it is speculation on (possibly, likely) equity upside that will take years to materialize ! You must have cash-flow to hold onto an asset .. cash-flow that is realistically AND CONSISTENTLY achievable only with cheaper properties .. We have yet to by an asset over $78,000/door .. and occasionally I think that is high ..

Long-term wealth is built by HOLDING long-term .. and that requires enough cash coming in to pay all expenses going out: taxes, management fees, vacancies, utilities, insurance and mortgage interest.

If the property does not cash-flow with a 6%, 25 year amortized mortgaged using realistic rent and expense assumptions: do not buy it .. or if you own it: sell it .. and find s.th. that can be held more comfortably long-term (even if the mortgage you have is 4% and 35 year amortization) !!!

I may have had a sheep mentality when I purchased. I was looking to get in do some upgrades and then get out. Is it prudent to take a loss today and rebuild? Or hang on? No lender will lend me money for a $78,000 cash flowing property with this monster on the books.

 

[NeilUttamsingh]

QUOTE (DavidSandbrand @ Feb 28 2009, 03:23 PM) Hi Dirt,

- It looks like the average home in Charleswood is listed for between $400k and $450k right now. I`m not arguing your valuation of the property (in fact you don`t say what it`s listed at), but if it`s been listed for six months with no offers, changes are that it`s priced too high.

- You mention that a compatible home has been on the market for a year and is selling for $480k, but it sounds like that might be the asking price, not a sale price. Again, if it`s been listed for a full year, it`s probably over priced.

- Find a new realtor. there are hundreds of them, and many are great. Find one that fells you things that you don`t like to hear, since chances are that realtor is being honest with you and not stepping softly around your expectations of a sale price. Also keep in mind a listing contract can be very short if you want it to be, so you don`t have to get stuck with another bad realtor for six more months.

- Maybe it could be turned into an executive rental? that would drive cash flow up while you wait for the market to turn. tough to do if you have tenants in there now on a least though.

- Have you reduced the payment on your variable mortgage? that might save you that $600/month.


I hope that helps.

Dirt,

Some very good points have been raised that you should take into consideration.
Fundamentally, having negative cash flow properties is not the way to build a real estate portfolio.

At REIN, Don teaches us that these negative cash flow properties are alligators, because they eat away at all your money, and will eat you alive.

You need to build your real estate portfolio with positive cash flow properties, because it is these properties that will continue to cash flow through the good times and the bad.

If you are able to somehow convert this property into a positive cash flowing property, this is a good thing. Examine carefully all of the input previously mentioned in this thread.

If you are not able to change this property to a positive cash flowing property, it really does not make sense to keep it. If you are stressing out about it, and the $600 bucks a month out of your pocket is keeping you up at night…get rid of the property, and move on.

David raised some good points:

If there is a demand in your market for Executive Rentals (fully furnished accommodation), consider converting this property into one. In this scenario, you would be able to substantially increase your monthly rent.

If you have an open variable rate mortgage, have your monthly payments been adjusted downward in step with the decline in the prime-lending rate? If not, contact your lender, and have them readjust the payment.

Also, if your mortgage is currently amortized at 25 years, consider changing the amortization to 35 years.

 

[Nir]

Dirt, you mentioned you have a thick skin so I`ll be brutally honest - it`s a very difficult situation.

If you want to continue investing in real estate you should reduce the price significantly and sell unfortunately with a loss of around $100K (just a guess, maybe 25K, maybe 150K).. Then purchase positive cash flow properties in the right areas, price, vacancy rate etc.

Interestingly, if you do not want to continue investing in real estate perhaps you should NOT sell and hold for like 10 years. you see, it`s the worse time to sell a property now BUT because it`s also the best time to buy a property you might have to sell in order to buy and not lose today`s opportunities (again, if you want to continue investing in RE).

The good thing is you are young and I know you will never repeat this mistake. In other words, it`s a big lesson learned early in the investment Journey.

Good luck,
Neil
ps. if you read Thomas note again, he probably referred to an apartment building with many units not a $78K property as you mentioned. but you got the point - much lower price per door than $425K.

 

[lanedry77]

QUOTE (Dirt @ Feb 28 2009, 05:38 PM) Thanks David Sandbrand. What exactly classifies a rental as an “executive” rental? 3 months left on the tenants lease.
Hi Dirt,

Sorry. An executive rental would be a furnished property that could be moved into with nothing more than a toothbrush and clothing. Furniture, internet, cable TV, and all utilities are included. This would be marketed towards an upper-end tenant, often a company that has executives that travel to town often. It`s a lot like a hotel, only less expensive.

You get a premium on standard rents because it`s "move-in ready". usually these premiums would cover the cost of financed furniture and so on.

I`m not speaking from personal experience here, so this is where my knowledge on the concept ends. do a search or post some questions about `furnished` or `executive` suites, as there should be plenty of info on the subject.

Have you adjusted your mortgage payment to reflect the lower prime rate? - that would be the easiest way to ease your cash flow issues.


David.

 

[Dirt]

QUOTE (DavidSandbrand @ Feb 28 2009, 10:24 PM) Hi Dirt,

Sorry. An executive rental would be a furnished property that could be moved into with nothing more than a toothbrush and clothing. Furniture, internet, cable TV, and all utilities are included. This would be marketed towards an upper-end tenant, often a company that has executives that travel to town often. It`s a lot like a hotel, only less expensive.

You get a premium on standard rents because it`s "move-in ready". usually these premiums would cover the cost of financed furniture and so on.

I`m not speaking from personal experience here, so this is where my knowledge on the concept ends. do a search or post some questions about `furnished` or `executive` suites, as there should be plenty of info on the subject.

Have you adjusted your mortgage payment to reflect the lower prime rate? - that would be the easiest way to ease your cash flow issues.


David.


Yes my payments have been going down with prime. Thank you for the info on executive rentals.

 

[joe123]

Yeah should have bought cashflow, I`m sure he gets that, but let`s try to help this guy with the situation he has got now....?
Owing 470ish on the mortgage, after commission etc. sounds like you would owe more than you can pay off by selling? Sucks. Maybe you can "unload" it assumable?
Perhaps jack up the rent like some of the suggestions, lower payments etc. and/or get a few "cashflowing" JV partnerships to offset your monthly loss?
Hopefully a bounce back in prices will have things in order for you soon. With the middle class housing getting beaten up so hard here in Alberta, hopefully it will rebound the most? or at least maintain more... I mean how much closer can it get to starter/lower end housing prices? Either the middle will stay constant and lower should fall, or the starter will remain constant and the middle should rise again? The spread between the middle class homes and starter are just too close from what I`ve seen in the past. Yes, this gets into speculation, but most of us on here need inflation to make this all work in the end and are buying single cashflowing properties one at a time, getting the biggest bang out of the inflation at the end while having everything paid for and a bit of cash per month, not by buying entire apartment buildings by the door focusing on the net per month and the inflation only being the icing on the cake.

 

[Thomas Beyer]

QUOTE (joe123 @ Mar 2 2009, 01:00 AM) ...
Hopefully a bounce back in prices will have things in order for you soon. ...
Depends on your definition of "soon" .. I think it`ll be 2010 or 2011 ..

 

[DaveRhydderch]

Your very close to the University. Have you considered trying to rent out per room (i.e. 500 per room)? Its more labour intensive, but you can get more rent if you do it that way. I have a fair amount of experience with this, so feel free to ask me any questions.

 

[Dirt]

Thanks Joe.

If I use a Realtor I will, more than likely, end up owing. I believe my rent rate is competitive for a 3 bed room, there are a lot of homes for rent right now. I still have not made a decision. All the input is very helpful.

My other concern falling rent. Edmonton vacancy rates are increasing. Will Calgary follow?

 

[Thomas Beyer]

QUOTE (Dirt @ Mar 8 2009, 01:42 PM) ... Will Calgary follow? ...
Calgary "following" Edmonton .. since when is that ??