SF vs Suited house

Derek3397

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#1
Just thought I'd get your guys opinions on which route you prefer. I'm currently at alittle bit of a crossroad on deciding which one to move forward with. I currently have 3 SF properties and a Suited house I purchased back in April. These are located in red deer. With rents being down and expenses being alittle higher because of carrying utilities in the Suited house I don't see the big advantage to putting another 60k into the next place to make it Suited when it seems I don't make much more month to month right now. Especially if you needed to finance the Reno for a suite in the first place. If it were cash then it looks like a smaller ROI to put 120k into a 300k house to have a down payment and money to Reno. Certainly a bonus to be able to still have income when one suite is vacant but also more turnover expense in the Suited places. I've only had one turnover on the single family properties in 3 years that I was fortunate enough to get filled this month without a day of vacancy. If you had the energy to read all that then please let me know what your guys thoughts are on the two options!

Thanks in advance!
Derek


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Matt Crowley

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#2
I think I see what you are saying. On a relatively simple basis, look at where your returns are going to be.

Most SFH (suited / not suited) have $0 cash flow after cyclical expenses (roof, concrete, exterior, flooring, bathrooms, ect). So 100% of your risk-adjusted return comes from price appreciation.

The question is how much after-tax return can I make based on price appreciation? Remember, what you get from the PPD on your rental property as a return is less than your own personal residence, as if you sell your personal residence you owe no tax, but you owe tax every year on the PPD from your rental property.

If you are 20% down on a $300k home then you are $60k equity in. To pay no taxes every year, you will depreciate the property which will all need to be paid out in the end, but this is roughly 2% of property value per year.

As a starting point, NCREIF made 7.0% last year (before tax), so to make at least as much as a professional RE investment fund, before taxes, you need to make 7% from 100% property appreciation, or $4,200 / increase in value per year. However, to get that equity out you need to afford the selling costs of ~4.5%, so that means you break even on your $60,000 once the home value is $314,136 (before any interest penalties).

Now, I can invest in a private real estate fund using my RRSP meaning that for $1 I get $1 of investment value deferred until I retire and only pay taxes when I cash in the RRSP when I'm 65.

If I invest in SFH, I invest $1 it costs me $1.35 after taxes, an immediate 35% cut. I am also taxed on every single year of the investment. And taxed on the disposition.

....
Direct investing makes fairly little sense on an after-tax basis unless: 1) maxed out TFSA 2) have an unbeatable opportunity at 15%+ IRR 3) maxed out your RRSPs. Otherwise, for the amount of risk and time invested, it is really more of an expensive hobby with really poor returns for the amount of risk underlying in the investment. This can be different if you are a Realtor, renovator, or have some other day-by-day insider advantage.
 

ThomasBeyer

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#3
I think I see what you are saying. On a relatively simple basis, look at where your returns are going to be.

Most SFH (suited / not suited) have $0 cash flow after cyclical expenses (roof, concrete, exterior, flooring, bathrooms, ect). So 100% of your risk-adjusted return comes from price appreciation.

The question is how much after-tax return can I make based on price appreciation? Remember, what you get from the PPD on your rental property as a return is less than your own personal residence, as if you sell your personal residence you owe no tax, but you owe tax every year on the PPD from your rental property.

If you are 20% down on a $300k home then you are $60k equity in. To pay no taxes every year, you will depreciate the property which will all need to be paid out in the end, but this is roughly 2% of property value per year.

As a starting point, NCREIF made 7.0% last year (before tax), so to make at least as much as a professional RE investment fund, before taxes, you need to make 7% from 100% property appreciation, or $4,200 / increase in value per year. However, to get that equity out you need to afford the selling costs of ~4.5%, so that means you break even on your $60,000 once the home value is $314,136 (before any interest penalties).

Now, I can invest in a private real estate fund using my RRSP meaning that for $1 I get $1 of investment value deferred until I retire and only pay taxes when I cash in the RRSP when I'm 65.

If I invest in SFH, I invest $1 it costs me $1.35 after taxes, an immediate 35% cut. I am also taxed on every single year of the investment. And taxed on the disposition.

....
Direct investing makes fairly little sense on an after-tax basis unless: 1) maxed out TFSA 2) have an unbeatable opportunity at 15%+ IRR 3) maxed out your RRSPs. Otherwise, for the amount of risk and time invested, it is really more of an expensive hobby with really poor returns for the amount of risk underlying in the investment. This can be different if you are a Realtor, renovator, or have some other day-by-day insider advantage.
A little negative I’d say.

If you assume a modest 2% annual average asset appreciation and break even cash flow I arrive at these returns over say a 5 year period:

Asset is worth 10% more or $330,000.

Mortgage is down from $240,000 to about $210,000 so you make 30 on value upside and another 30 on mortgage pay down which sounds like 60 on 60 to me or 100% ROI. Yes, before taxes and realtor & legal fees thus 10 years is better. Hence better to refi in 5 years to buy another one and keep going until net worth has reached sufficiently high 7 digit territory. More on this agony of selling vs refi
http://blog.reincanada.com/sell-or-refinance-the-agony-and-the-ecstasy

Of course we know 2% is an average inflation target so a prudent modest assumption but we also know that some markets have done FAR better than that the last 5, 10 or 25 years.

Cash flow does not make you rich hence I assume all is banked to fix cyclical upgrades such as new carpets, new roof, a new paint job every few years, a new fridge, tree trimming, new hot water tank etc. As such, a suite adds to cash-flow and allows a longer hold period, i.e. equity gain and mortgage paydown. [ As to exact details of what to invest into an extra suite that is highly dependent, i.e. is $15,000 extra for a suite or $56,000 too high ? ] I'd say any extra income allowing you to hold longer helps: rent the garage, separate utilities from base rent, add basement income etc ..

RRSPs make sense too as you get an immediate tax rebate but you can’t lever the cash directly, only indirectly by stocks or REITs you may own within the RRSP. Keep in mind most REITs rarely exceed 50% LTV so $60,000 in an RRSP buys you only $120,000 in (indirect, fluctuating) real estate not $300,000 ! But you can get a real 4-9% yield. That is what one can retire on once net worth is high enough.

Distinguish between wealth creation and wealth preservation ( with cash flow ) !

Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Husband, Chief Bottleneck Remover, Mentor www.prestprop.com
 
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Derek3397

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#4
I very much appreciate both takes and thanks very much for taking the time to do so. I am still very pro real estate investing and would love to trade in a few single family homes down the road to be able to get into multi family one day. I guess just looking for the next property. Can't decide if I would stay SF and spread out more assets or find properties to suite and have less of them. Rents are down so by the time that utilities are included in a Suited property I'm not making that much more cash flow for the added amount of capital required. Especially not if I have to finance the suite Reno.


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alaas

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#5
Hi Derek

You should have the tenants pay the utilities, in our suited properties we do a flat rate for each suite, we usually add a bit extra to cover excess usage etc. This has worked really well for us, suited properties have more cash flow hence you can weather the storms of up and down rents etc. There is of course more turnover and therefore more management, so it's a great idea for suited properties and then later transition to multifamily or sell your suited properties and buy single families with low mortgages hence more cashflow later on in your investing career.

My favourite properties are my duplexes in which we own both sides of the buildings, far less management and much easier to rent as people prefer not to share.

Lisa
 

Sherilynn

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#6
Most SFH (suited / not suited) have $0 cash flow after cyclical expenses (roof, concrete, exterior, flooring, bathrooms, ect). So 100% of your risk-adjusted return comes from price appreciation.
I strongly disagree. Using one of our older Suited houses as an example: we've owned it for nearly 9 years and net profit totals $76,000. I think that would more than cover any renovations or cyclical expenses we have yet to do (many of which are done, with no more expected any time soon).

Another example: we own new suited houses in Leduc. The rents total nearly $3000 (plus utilities). As single family homes, the rent would likely be about $2300. That's a difference of $8400 per year. And as rents increase, that difference will grow. Even as brand new homes (much bigger mortgage payments than if one buys an older property and gradually renovates), the net profit in their first year of operation was up to $15,000 each. (They are available as JV's, in case anyone is interested.) ;)
 
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Derek3397

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#7
I strongly disagree. Using one of our older Suited houses as an example: we've owned it for nearly 9 years and net profit totals $76,000. I think that would more than cover any renovations or cyclical expenses we have yet to do (many of which are done, with no more expected any time soon).

Another example: we own new suited houses in Leduc. The rents total nearly $3000 (plus utilities). As single family homes, the rent would likely be about $2300. That's a difference of $8400 per year. And as rents increase, that difference will grow. Even as brand new homes (much bigger mortgage payments than if one buys an older property and gradually renovates), the net profit in their first year of operation was up to $15,000 each. (They are available as JV's, in case anyone is interested.) ;)
Great numbers Sherilynn! The renovate over time is my plan for my current single family properties as they pay down and my reserve builds up. How do you normally do your Suited properties in terms of financing?


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Sherilynn

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#8
How do you normally do your Suited properties in terms of financing?
If you are asking how I finance the renovations, I maintain a zero balance on a fairly sizeable line of credit. Then we pay it off as quickly as possible to have it ready for the next reno or emergency. We have also utilized Edmonton's Cornerstones Grant.

If you are asking how I get mortgages, I have never had issues getting conventional mortgages. High rents in suited properties result in excellent Debt Coverage Ratios, and banks love that (as we all know).

When we were starting out and living in each property as we had the reno's done, we would get insured "purchase + improvements" mortgages to fund the suites.

More recently, we have chosen mortgages with readvanceable lines of credit built in. This way, as we build equity in a property, we are able to withdraw that equity to fund renovations (or other down payments).
 

Derek3397

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#9
Ya ok that’s great I’ve been doing the re-advance mortgages as well. I started in 2014 so I don’t have a lot of equity yet. When you say pay off as quickly as you can. Are you paying off with the property itself from cash flow, refinance or something else?

And thanks very much for all the info! Very much appreciated!


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Sherilynn

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#10
Are you paying off with the property itself from cash flow, refinance or something else?
We pay off our line of credit with cashflow from all properties.

(For those of you who use separate bank accounts for each property, we don't for a plethora of reasons. One bank account is perfect if you have excellent bookkeeping - which is an absolute must.)
 
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Matt Crowley

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#11
@Sherilynn what are "net profits" on your 9-year deal? Free cash flow? Or free cash + property appreciation. 9-years overall $76,000 is $703 cash / month. I'm calling BS, that includes an appreciation write-up, that's not free cash flow. "Net profits" is not a real term either, never heard that before. Are you talking about net income? Development margin? Before tax cash flow? Operating cash flow?

@ThomasBeyer if REITs are a good buy then get whatever leverage you want. Take your pick of debt or options. Any LTV in the books easily constructable.

This is all a bit off topic... coming back around @Derek3397 Red Deer is a busted market right now with lots of options. If you are sold on SFH investing, then buy from existing investors who are trouble. Don't put more money into this project. Look at margins from developing. I can almost guarantee you in Red Deer they are far less than buying in place with the amount on the market right now. Be very, very wary of people who think that creative financing, moving around money, playing with multiple LOC create margins or underlying profit, because they don't. Look at cost today vs. value once developed. Is there a margin? How much? What is the annual cash flow? How much? Then, look at how to finance. Looking at financing before the cash flow and development margin is pretty ridiculous. If it makes money there are many ways to finance. But at high LTV be cautious about doubling-down.
 

ThomasBeyer

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#12
@ThomasBeyer if REITs are a good buy then get whatever leverage you want. Take your pick of debt or options. Any LTV in the books easily constructable.

.
To increase leverage with REITs buy on margin if you can stomach the volatility !


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Sherilynn

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#13
@Sherilynn what are "net profits" on your 9-year deal? Free cash flow? Or free cash + property appreciation. 9-years overall $76,000 is $703 cash / month. I'm calling BS, that includes an appreciation write-up, that's not free cash flow. "Net profits" is not a real term either, never heard that before. Are you talking about net income? Development margin? Before tax cash flow? Operating cash flow?
You can call BS all you want. I pulled the numbers directly off my financial statements. No, that does not include appreciation. (That would add another $30k at least, even in this buyers' market.) And in regards to your comment on cyclical expenses eroding all profits, my posted income is after $49000 of repairs and maintenance have been accounted for.

However that income does include mortgage paydown of $31766, since principal payments are not expenses and therefore do not affect net income. So cash in my pocket over those 9 years is only $44234 (or $4914 per year...or $409.57 per month). Regardless, my tenants fund those principal payments, so if I were to sell the property today, I would have $31766 more in my pocket as a result of my property. (Plus the $30k+ in appreciation, of course.)

BTW, I'm quite certain the majority of people on REINspace don't appreciate your consistent condescension. I am confused as to what you hope to gain by addressing people in this manner. Oh, and my sincere apologies for mistakenly using one incorrect word in my reply. Naturally you would take that opportunity to attempt to discredit everything I say based on that tiny mistake. Bravo.

(I don't recall being condescending every time Matt Crowley posts completely inaccurate comments about rent to own, but someone please let me know if I do. Aside from my obvious tone in this particular post, that's not how I roll.)
 

bb2

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#14
You can call BS all you want. I pulled the numbers directly off my financial statements. No, that does not include appreciation. (That would add another $30k at least, even in this buyers' market.) And in regards to your comment on cyclical expenses eroding all profits, my posted income is after $49000 of repairs and maintenance have been accounted for.

However that income does include mortgage paydown of $31766, since principal payments are not expenses and therefore do not affect net income. So cash in my pocket over those 9 years is only $44234 (or $4914 per year...or $409.57 per month). Regardless, my tenants fund those principal payments, so if I were to sell the property today, I would have $31766 more in my pocket as a result of my property. (Plus the $30k+ in appreciation, of course.)

BTW, I'm quite certain the majority of people on REINspace don't appreciate your consistent condescension. I am confused as to what you hope to gain by addressing people in this manner. Oh, and my sincere apologies for mistakenly using one incorrect word in my reply. Naturally you would take that opportunity to attempt to discredit everything I say based on that tiny mistake. Bravo.

(I don't recall being condescending every time Matt Crowley posts completely inaccurate comments about rent to own, but someone please let me know if I do. Aside from my obvious tone in this particular post, that's not how I roll.)
Totally agree




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bb2

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#15
Just thought I'd get your guys opinions on which route you prefer. I'm currently at alittle bit of a crossroad on deciding which one to move forward with. I currently have 3 SF properties and a Suited house I purchased back in April. These are located in red deer. With rents being down and expenses being alittle higher because of carrying utilities in the Suited house I don't see the big advantage to putting another 60k into the next place to make it Suited when it seems I don't make much more month to month right now. Especially if you needed to finance the Reno for a suite in the first place. If it were cash then it looks like a smaller ROI to put 120k into a 300k house to have a down payment and money to Reno. Certainly a bonus to be able to still have income when one suite is vacant but also more turnover expense in the Suited places. I've only had one turnover on the single family properties in 3 years that I was fortunate enough to get filled this month without a day of vacancy. If you had the energy to read all that then please let me know what your guys thoughts are on the two options!

Thanks in advance!
Derek


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I’ve been buying properties since the 80’s - both single family and suited. The suited properties totally out perform the sf. I️ typically get 500.00 positive cash flow from my suited houses. I️ can’t get that kind of cash flow on sf. I’m selling off some of my sf for that reason.

Brenda Bastell


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Willyboy

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#16
forget about cash flow for a second especially for someone with huge cash that can help hold the property for a very long time even with zero cash flow. Did you account for the cost of more maintenance and repairs in suited houses? did you account for more tenant turnover as well? Did you account for more vacancy as suited house tenants tend to move out and in more frequently on average? Did you account for the possibility of less appreciation in suited houses?

I may have forgotten other stuff but just considering the above didn't you notice that in the long term they both might yield identical results?
 

bb2

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#17
forget about cash flow for a second especially for someone with huge cash that can help hold the property for a very long time even with zero cash flow. Did you account for the cost of more maintenance and repairs in suited houses? did you account for more tenant turnover as well? Did you account for more vacancy as suited house tenants tend to move out and in more frequently on average? Did you account for the possibility of less appreciation in suited houses?

I may have forgotten other stuff but just considering the above didn't you notice that in the long term they both might yield identical results?
I don’t agree. I have held properties for more than 30 years - both SF and suited. The suited have totally outperformed SF, especially in cash flow. My suited properties have not had less appreciation than the SF. If the suited properties are totally renovated and LEGAL the turn over is not that bad. People like to live in nice properties and will stay longer if they love the suites. After 30+ years of doing this and learning from my mistakes my favorite type of property to hold for the long term is a totally renovated (both up and down)suited property with a garage. When they are like new you have very little maintenance issues, they give good cash flow and are easy to rent.
With SF you are only dealing with one Tenant making them easier to manage and if you keep them long term they can produce impressive results also.


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Victor Pidkowich

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#18
I don’t agree. I have held properties for more than 30 years - both SF and suited. The suited have totally outperformed SF, especially in cash flow. My suited properties have not had less appreciation than the SF. If the suited properties are totally renovated and LEGAL the turn over is not that bad. People like to live in nice properties and will stay longer if they love the suites. After 30+ years of doing this and learning from my mistakes my favorite type of property to hold for the long term is a totally renovated (both up and down)suited property with a garage. When they are like new you have very little maintenance issues, they give good cash flow and are easy to rent.
With SF you are only dealing with one Tenant making them easier to manage and if you keep them long term they can produce impressive results also.


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I second that.

With 3 legally suited homes, it’s clear they are winners.

One secret sauce I discovered after living in and testing out some basement suites was to pay particularly close to heat source as well as insulation.

I found I, and nearly every other tenant, that runs into the $600 electric bill from radiant bad board heaters on cheap manual dials wants to move out in a hurry... go figure...

I also noticed that standing on direct concrete even in a brand new built legal suite was severely uncomfortable.... sweating from the heaters constantly throwing off heat in a 1 ft radio us while chilled to the bone from cold feet.

My vacancy rate has been 0% since I started in 2009 and it’s because I go to great lengths to provide a superior experience.

My churn rate is quite low.. 12-24+ months, and I charge a premium... vacancy in the city is pushing 7% and every other Basement is vacant, and that’s after talking to some of the larger owners of suites homes.

My solution to get these numbers, aside from ruthless marketing, is dri-core+ insulated sub floor paired up with ouellete forced fan heaters on digital thermostats if you don’t have options for natural gas.

Relatively inexpensive for the results it’s yeilded. Tested on one property then seen how well it did so replicated across all.

Proud to say, it does wonders and even on the one suite I have an upper middle to high income earner looking to stay up to 3 years.
 

Novice

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#19
I second that.

With 3 legally suited homes, it’s clear they are winners.

One secret sauce I discovered after living in and testing out some basement suites was to pay particularly close to heat source as well as insulation.

I found I, and nearly every other tenant, that runs into the $600 electric bill from radiant bad board heaters on cheap manual dials wants to move out in a hurry... go figure...

I also noticed that standing on direct concrete even in a brand new built legal suite was severely uncomfortable.... sweating from the heaters constantly throwing off heat in a 1 ft radio us while chilled to the bone from cold feet.

My vacancy rate has been 0% since I started in 2009 and it’s because I go to great lengths to provide a superior experience.

My churn rate is quite low.. 12-24+ months, and I charge a premium... vacancy in the city is pushing 7% and every other Basement is vacant, and that’s after talking to some of the larger owners of suites homes.

My solution to get these numbers, aside from ruthless marketing, is dri-core+ insulated sub floor paired up with ouellete forced fan heaters on digital thermostats if you don’t have options for natural gas.

Relatively inexpensive for the results it’s yeilded. Tested on one property then seen how well it did so replicated across all.

Proud to say, it does wonders and even on the one suite I have an upper middle to high income earner looking to stay up to 3 years.
Could you explain a bit more about that? Are you talking about electrical/ heated floors in the basements?
Thank you

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alaas

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#20
I second that.

With 3 legally suited homes, it’s clear they are winners.

One secret sauce I discovered after living in and testing out some basement suites was to pay particularly close to heat source as well as insulation.

I found I, and nearly every other tenant, that runs into the $600 electric bill from radiant bad board heaters on cheap manual dials wants to move out in a hurry... go figure...

I also noticed that standing on direct concrete even in a brand new built legal suite was severely uncomfortable.... sweating from the heaters constantly throwing off heat in a 1 ft radio us while chilled to the bone from cold feet.

My vacancy rate has been 0% since I started in 2009 and it’s because I go to great lengths to provide a superior experience.

My churn rate is quite low.. 12-24+ months, and I charge a premium... vacancy in the city is pushing 7% and every other Basement is vacant, and that’s after talking to some of the larger owners of suites homes.

My solution to get these numbers, aside from ruthless marketing, is dri-core+ insulated sub floor paired up with ouellete forced fan heaters on digital thermostats if you don’t have options for natural gas.

Relatively inexpensive for the results it’s yeilded. Tested on one property then seen how well it did so replicated across all.

Proud to say, it does wonders and even on the one suite I have an upper middle to high income earner looking to stay up to 3 years.
Hello, which models of the Ouellete forced heaters are you using?
ouellete forced fan heaters on digital thermostats if you don’t have options for natural gas.