estimated property value after renovations: 425,000-435,000
forecasted neighbourhood appreciation 2.5%/year next 3 years
area: #2nd best neighborhood 85000 population
revenue 2800/monthly
mortgage 1641
utilities 350
taxes 386
insurance 145
Add 10% reserve for renovations, then you need to add 10% for vacancies, you then have deferred maintenance, you have lawn care, snow removal in some areas, legal fees, clean up cost, etc.
Also after rehab you have little equity (if you can not rent and want to sell), you are expecting a 2.5% appreciation per year which means your speculating on a downward market in most areas of the country.
Your cashflow is $274 based on rental income of $1400 per unit. That can easily be eaten up with extra cost. You need to get rents closer to $3500 a month
I already did add a reserve for renovations. My actual estimate is 50,000 added an additional 10,000.
I will be doing the outside work myself with my carpenter & landscaper friends.
I am located in Canada and we are in a very strong market. I am also a local realtor and have a good understanding of the market.
The average price of a similar home in decent condition is 400,000. The average price of a similar home with a 2nd kitchen legal bsmt apartment is 430-450k.
I am not doing the project to cashflow but rather to pay off as much equity into the home as possible. (hence the 20 Year ammortization period).
At the end of the year I will put any positive cash flow (minus a small reserve fund) directly into the mortgage.
Once the renovations are complete I am confident I can get the bank to appraise the property at 440-450 thousand. I know the project is risky… but I am attracted to owning a large beautiful lot in the 2nd best neighbourhood in the city.
also the rents are 1800 for the upper unit and 1000 for the lower unit.
The renovation costs include: new windows, new furnace, new kitchen, and new airconditioner.
These renovations should also dramatically reduce utility costs - so there may be some opportunity to increase cashflow by reducing expenses.
Taylor
That is a LOT of debt and levered risk for as little as 200 dollars of fcf/ month. Also, you’re tying up at least 60k dollars of your own money for as little as almost no return per month. I’d personally pass.
I went ahead with this deal despite your warnings.
I ended up doing 10% down @ 1.75% over 20 years.
After purchasing the property for 343,000 (Canadian) the appraisal from my bank came back at 370,000 and the independent appraisal came back at 374.000.
So I was able to get the property 8% below market value. I would like to have paid 335,000 however there were over 30 offers made on the property and I truly desired the location.
The renovation costs should be able to stay under 50,000 and this includes a brand new kitchen and washroom in the basement as well as new windows, furnace and flooring.
Most of the renovations I am completing myself or with friends and family - however all the electrical/plumbing/and hvac work will be completed by professionals.
I was able to secure a tenant for the upstairs @ 1800 + 60% of utilities. The basement will rent out for a minimum of 1000.
My mortgage payment (which includes property taxes) is 1621.
Gross Rent 2800 + 60% of utilities
-1621 mortgage and taxes
-77 insurance
-200/monthly (40% of the utilities)
+902/monthly
I will probably have 60-90 days of vacancy depending on how long the renovations take however I have set aside 4 months carrying costs - just in case.
Do you guys still think this was a bad project?
Please keep in mind that the average price for a home is 300,000 (semi’s/towns etc) in my market and the average price of a detached home is 400,000.
Posted by: TaylorSugar Posted on: May 24, 2010, 09:06:52 AM
So I was able to get the property 8% below market value. I would like to have paid 335,000 however there were over 30 offers made on the property and I truly desired the location.
There were over 30 offers made on this property? What city was this in? How close is it to Toronto?
The numbers are very revealing and should answer your questions.
278 x 12 = 3,336/90,000=.04 That is 4% ROI. If you would have invested that money with me I would pay 8% and your risk would be drastically reduced.
In my view your risk is higher than I would be willing to take because of the vacancy factor alone. one month of vacancy higher than you projected and ROI is down to 0%.
My rule is that if you cannot make 30 % ROI then I am not interested in the deal. I try for 50% or more.
Redhawk
In my honest opinion, you’re treating this as a boat or some kind of hobby possession not a business transaction. You have emotion in it. You also seem to be having to convince yourself of it.
I appreciate the honest feedback. You are 100% correct that I want this house.
In the future I will invest in a different market (45 minutes drive) where I can pick up detached homes for <150,000.
This will allow me to reach the 30-40% ROI range.