Investment Idea?

[Matt Parlato]

I just want to exercises as many possible solutions as I can for a future investment. I am currently finishing renovating a brick bungalow in Oshawa converting it into a legal duplex. I purchased it for $290,000 last November and will have put in around 80k-90k once complete. Comparable duplex's in the area go for between $430,000-$450,000. I put down 5% we I purchased it . I am thinking of either refinancing to buy another one possibly two already renovated duplexes. Or selling to buy 2 or 3 more properties. What are your thoughts ? My goal is to maximize the money. Any ideas would be great. Thanks

 

[Thomas Beyer]

You can refinance up to 80% of new appraised value. So 80% of say $450,000 is $360,000. If you current mortgage is $270,000 you can increase loan by roughly $90,000 minus all the fees and heavy discharge penalties you will have to pay. But you may be able to get most of your repair work refinanced out in cash.

Then you can rent the units and move to another property.

5% down is fairly expensive money if you consider the fees you pay on the whole loan ( namely 4.5%) on an additional 15%. It is 30% money ! Consider the overall price of money.

If you pay too much for your money you slow down or cripple your real estate deal flow.

 

[Matt Crowley]

Some numbers...

Must clarify:
1. Is $90k after carrying costs? (construction loan interest + mortgage loan interest & payments) If it isn't there is even less profit in this development. You have to include cost of financing before calculating profit.
2. What kind of mortgage do you have? What are the interest / early payout penalties?

Sell:

purchase 290,000.00
Renos 90,000.00
Realtor 16,900.00
legal 1,200.00
Total cost 398,100.00

sale 430,000.00
margin on cost 31,900.00

Refinance: minimum 80% LTV for rental properties (to my knowledge). You need to look at how much construction financing you used to see if this option is viable.

Value 430,000.00
Minimum 80% LTV 344,000.00
Equity required 86,000.00

My goal is to maximize the money.

I'm not sure what this means. If you want more cash money then sell property and keep flipping.

With a $344,000 mortgage you will have a mortgage around $1,500 / month (2.25%, 25 year), operating expenses of around $1,120 ($250 property insurance, $100 insurance, $83 maint, $313 PM, $21 marketing, $73 legal / bookkeeping, $280 utilities). So a total monthly hurdle of $2,621.

How much above ~$2,600 can you rent the entire property per month, including utilities.

Then create a major capital expense schedule.

 

[Matt Parlato]

You can refinance up to 80% of new appraised value. So 80% of say $450,000 is $360,000. If you current mortgage is $270,000 you can increase loan by roughly $90,000 minus all the fees and heavy discharge penalties you will have to pay. But you may be able to get most of your repair work refinanced out in cash.

Then you can rent the units and move to another property.

5% down is fairly expensive money if you consider the fees you pay on the whole loan ( namely 4.5%) on an additional 15%. It is 30% money ! Consider the overall price of money.

If you pay too much for your money you slow down or cripple your real estate deal flow.

 

[Matt Parlato]

You can refinance up to 80% of new appraised value. So 80% of say $450,000 is $360,000. If you current mortgage is $270,000 you can increase loan by roughly $90,000 minus all the fees and heavy discharge penalties you will have to pay. But you may be able to get most of your repair work refinanced out in cash.

Then you can rent the units and move to another property.

5% down is fairly expensive money if you consider the fees you pay on the whole loan ( namely 4.5%) on an additional 15%. It is 30% money ! Consider the overall price of money.

If you pay too much for your money you slow down or cripple your real estate deal flow.

What % down would you put on the next property ?

 

[Thomas Beyer]

What % down would you put on the next property ?

20% if a rental as that is the law of the land.

Less than 20% if personal residence with the earlier comment that the last 20% are expensive due to heavy CMHC fees.

What is the goal overall here, and what is the plan with the first rehabbed asset ? What is your other income ?

 

[Matt Parlato]

To most likely refinance then buy an existing duplex. I have a business called Just Junk its a franchise and I am currently selling my other business which is called Fit Body Bootcamp which is another franchise. I was told by my broker I could put 5% down again but under certain circumstances I guess?

 

[Matt Crowley]

Sure you can put 5% down again on another personal residence you live in.

20% minimum equity to refinance

99% of the guys I've seen get into trouble with 5% down strategy sink themselves because they don't ever consider that:

1. real estate values can go down
2. rents can go down and are cyclical by their very nature
3. $83 / month savings for "maintenance" is not actually going to pay for new shingles, hot water tank, furnace
4. Budgeted for $0 cash flow from day one banking on "appreciation"
​

"Refinance" is not a golden goose. Remember that the duplex's value and 80% rule may not coincide with a DCR that gives you enough room to maintain and operate your property. DCR of 1.1 means rents can drop 10% before you break even. If you refinance from 70% to 80% you are probably going to end up with a DCR of below 1 and long-term unsustainable on the property.

Real estate is somewhere to invest money when you have a whole lot of it together. The most experienced investors use the least amount of leverage.

 

[RandyDalton]

Hi Matt,

All good advise above by seasoned veterans.

I believe strongly in the refinance scenario but you have to consider all the costs as outlined above. Usually I refinance around the 70% mark. This gives me a cushion with regards to positive cash flow and DCR. Either way you must really run the numbers under both scenarios. Since you are close and I am in Toronto often, happy to meet to go over your numbers together.

Regards...Randy Dalton
Silver REIN Member
REIA Level II