Real Estate Income Property - Case Study #4 - Cash Flow Formula

Opportunity Awaits!

Two years into our 50 Doors adventure, we figured that it was much easier to have all our properties close together rather than scattered throughout Ontario. So we focused on Barrie, ON.

We were amazed at the crazy hot market and the speed at which housing prices were going up.

We were hunting for a new property where numbers would work and meet our cash flow requirements.

The idea was to keep repeating the same positive cash flow formula that had worked several times for us already.

It was very exciting that we started to understand the economics of the formula and could tell good deals from bad deals at least within the neighbourhood that we became familiar with.

Rental Income Property

One of the real estate agents who worked with us on a previous deal forwarded this listing. He knew it was a great opportunity and called houses like this "good bones". The structure and concept were great, but the place needed some TLC (aka tender loving care).

An elderly lady who owned the house decided that she no longer needed such a big place and wanted to move into a smaller home.

By the time we were looking at this property, we already owned two similar houses in the neighbourhood. Market was going up like CRAZY.

We got the first property for 185K and now, only two years later, similar homes were selling at 250K - 270K. That's 20% annual appreciation! Very dramatic change in a short time.

Rents went up by a lot as well from $1,200 per month to $1,450 (10% per year).

The increase of $250 in rent, given interest rates of ~3.25%, covered an additional 50K of mortgage. Or, if we put 20% down, it was enough to cover about 60K extra in property price. Meaning, if we got a property at about 240K (185K + 60K), we'd meet our positive cash flow goal.

We instantly saw the opportunity in this property! It was selling under market because it needed some cleaning: the owner smoked inside for three decades. Most local shoppers didn't want to deal with this even at a discount. 

Key features: 

• Freehold town house  
• Parking on driveway plus 1-car garage 
• Main level: 
• Entrance/hall 
• Large living and bright dining room 
• Kitchen including fridge, stove
• Entrance to a nice, deep backyard with a porch
• 1/2 bathroom 
• 2nd Floor: 
• Master bedroom 
• 2nd bedroom 
• 3rd bedroom 
• Full bathroom  
• Partially Finished Basement: 
• Utility room with washer/dryer 
• Family room with exit to backyard
• An old shed takes up most of the backyard. It came with a dead squirrel.

Purchase

• Asking price: $225,000
• Purchase price: $218,000
• Found by a really awesome Real Estate agent Realtor.ca who worked with us on a previous deal
• Owner occupied at purchase
• Expected Rent: $1,450/month
• Expenses:
• Utilities: paid by tenant
• Taxes: $200 / month
• Insurance: $100 / month
• Misc repairs and maintenance: $100 / month 
• Expected NOI: $1,050 / month
• Financing: 80 LTV, 30 year amortization, 5-year term, fixed 2.55% interest
• Expected Cash Flow: ~ $350 / month

Total Investment

This property required a 55K investment. This is in line with the original plan and includes 10.5K in renovation costs.

Investment Summary

Investment	Amount
Downpayment/Closing	45,214
Capital Improvements	10,448
Total	$55,662

Cashflow and ROI 

• Initially cash flow was projected to be $350 / month
• Actual cash flow averaged at about $200 / month. The shortage is primarily due to two month vacancy in 2017 during renovation. 
• Net profit including mortgage pay down is approx. $500 / month or 6K per year
• ROI is ~ 20% over the two years and 10% annually on average

	Year 2014	Year 2015	Year 2016	Year 2017	TOTAL All Years	Average Annualized
Income
Rents (@100%)			17,400	17,463	34,863	17,432
Vacancy			1,800	2,196	3,996	1,998
Total Gross Income			15,600	15,267	30,867	15,434
Expenses
Taxes			2,449	2,864	5,313	2,657
Insurance			1,379	1,480	2,859	1,430
Repairs/Maintenance			743	1,229	1,972	986
Utilities			533	0	533	267
Admin/Advertising			30	0	30	15
Total Expenses			5,134	5,573	10,707	5,354
NOI			10,466	9,694	20,160	10,080
Mortgage - Interest Payment			3,656	4,336	7,992	3,996
Mortgage - Principal Paydown			3,608	4,033	7,641	3,820
Cash Flow			3,202	1,325	4,527	2,264
Net Profit (Loss)			6,810	5,358	12,168	6,084
Cash on Cash Return			5.75%	2.38%	8.13%	4.07%
ROI			12.23%	9.63%	21.86%	10.93%

Appreciation / Equity

Based on MPAC assessments, the value of the property increased by 21K during the last two years. Once we include the equity gain in ROI calculations, return on investment becomes 30% per year:

Total gain including appreciation: $21,000 + $12,168 = $33,168
Total ROI including appreciation: 60% overall and 30% annually.

This property is performing well and as expected. Knocking on wood... spitting three times over  my left shoulder. 

History

2018

• January - tenant is fully caught up on all payments. YAY! 😀  
• January -  notice to end tenancy for non-payment sent (N4). We agree to a catch-up plan.

2017

• December - no rent and still not fully caught up with previous shortfall.
• October - tenant renews lease for a year! Hurray! Rent increase of 1.5% by $21/month. 👊
• September to November - Several fixes needed at the house. The biggest one being installation of a fan in the bathroom to eliminate moisture and potential mold problem. I pre-paid a contractor who never got the work done. Read full story here. The good news is that this led to me finding a great new contractor who finished the job brilliantly and now helps us regularly on various tenant requests. 
• August - notice to end tenancy for non-payment sent (N4). We agree to a catch-up plan.
• July - tenants is short on rent due to change in career and taking on study courses. 
• June - dryer dies. Got new dryer.

2016 

• October - Washer breaks. Got new washer.
• September - New awesome tenants move in. Rent $1,450. 💪
• September - New roof & new floors in bedrooms. Replaced carpet with laminate. Unit looks and feels gorgeous!
• August - A tenant has been recommended by one of the neighbours. Very nice family! They agreed to wait until renovation is done and helped us picking colours for their new home. 
• August - Painting throughout, cleaning throughout, minor fixes throughout. Power washed fridge door. Purchased and installed a dishwasher. 
• July - One of the roommates finds a job in another city, the tenants move out a month early. Lots of garbage left in the garage and throughout the house. We discover a picture of a XL male organ on the fridge... in permanent marker. 👿
• May - Young professionals and the student duct-taped an old window air conditioner to a 2nd floor window above the front door entrance. This was a disaster waiting to happen! Luckily, we mounted the AC unit properly before anything bad happened.
• March - Two young professionals and a student move in. Six months term @ $1,350 rent. This was a discount of $100 from the $1,450 rent we aimed for. The reason this was good for us was because the tenants could move in right away on the 1st, so we wouldn't lose a month of rent. We planned to increase rent at the end of their term.
• February - Major cleaning - 30 years of smoking - and minor fixes. This was when I discovered that if you try to wash smoked ceilings, you get rained on with brown nicotine drops. Cost < $500. 
• February - Purchased the property

Real Estate Income Property - Case Study #3 - Bad Tenant

Everyone makes mistakes. Unfortunately, this case study shows how my bad judgement and a poor choice of tenant resulted in two years of stress and big losses. The lesson I learned is - if you make a mistake, find the courage to fix it fast. I dragged my feet with the eviction for too long and, literally, paid for it.

Rental Income Property

Beautiful Home

This beautiful semi-detached home is located in Barrie, ON.

We were lucky to have met the seller, as she stayed at the house for a couple of months being our first tenant while finalizing the closing of her new home.

The seller shared that she got the house at 20 and lived in it for 28 years while raising two amazing children.

Based on her words, the schools and neighborhood were amazing. Neighbours were great and supporting: a lovely retired couple on one side, a professional woman and her son on the other side; and a couple with a sweet little girl across the street.

The owner was certain that whoever would move in here next, would be happy. 

Key features: 

• Semi-detached house  
• Parking on driveway plus 1-car garage 
• Main level: 
• Entrance/hall 
• Large living and bright dining room 
• Kitchen including fridge, stove, microwave and dishwasher 
• Entrance to a nice, deep backyard with a porch 
• 2nd Floor: 
• Master bedroom 
• 2nd bedroom 
• 3rd bedroom 
• Full bathroom 
• Extra storage 
• Finished Basement: 
• Utility room with washer/dryer 
• Family/exercise room 
• Bathroom 

Purchase

• Asking price: $239,900
• Purchase price: $231,000
• Found on Realtor.ca
• Owner occupied at purchase
• Expected Rent: $1,450/month
• Expenses:
• Utilities: paid by tenant
• Taxes: $200 / month
• Insurance: $100 / month
• Misc repairs and maintenance: $100 / month 
• Expected NOI: $1,050 / month
• Financing: 80 LTV, 30 year amortization, 5-year term, variable 3.25% interest
• Expected Cash Flow: ~ $250 / month

Total Investment

This property required a 95K investment, of which a big chunk of 40K was spent on renovation.

Initial expectation for renovation cost was 10-15K. Unfortunately, we made lots of mistakes choosing the right tenant and sub-contractors, which led to a much higher spending than planned.

Investment Summary

Investment	Amount
Downpayment	$47,687
Closing Costs	$8,857
Capital Improvements	$39,121
Total	$95,665

Cashflow and ROI 

• Initially cash flow was projected to be $250 / month
• Property has been barely cash positive over the first three years because of continuous tenant issues. 
• Cash flow averaged $43 / month or 518K per year
• Thanks to mortgage pay down, net profit is approx. $300 / month or 3.5K per year
• Cash on cash return is practically 0% so far 
• ROI is 4% over the four years and 11% annually on average

	Year 2015	Year 2016	Year 2017	TOTAL All Years	Average Annualized
Income
Rents (@100%)	2,900	17,400	20,000	40,300	13,433
Vacancy/Non-Payment		1,365	2,250	3,615	1,205
Total Gross Income	2,900	16,035	17,750	36,685	12,228
Expenses
Taxes	585	2,395	3,003	5,983	1,994
Insurance	311	1,512	1,406	3,229	1,076
Repairs/Maintenance	446	170	3,745	4,361	1,454
Utilities	373	287	1,641	2,301	767
Admin/Advertising	45	0	0	45	15
Total Expenses	1,760	4,364	9,795	15,919	5,306
NOI	1,140	11,671	7,955	20,766	6,922
Mortgage - Interest Payment	796	4,712	4,594	10,102	3,367
Mortgage - Principal Paydown	683	4,160	4,268	9,111	3,037
Cash Flow	-339	2,799	-907	1,553	518
Net Profit (Loss)	344	6,959	3,361	10,664	3,555
Cash on Cash Return	-0.35%	2.93%	-0.95%	1.62%	0.54%
ROI	0.36%	7.27%	3.51%	11.15%	3.72%

Appreciation / Equity

Based on MPAC assessments, the value of the property increased by 33K during the last four years. Once we include the equity gain in ROI calculations, return on investment becomes 15% per year:

Total gain including appreciation: $33,000 + $10,664 = $43,664
Total ROI including appreciation: 46% overall and 15% annually.

15% ROI per year is pretty good! This shows you that even in an absolutely horrible situation tenant-wise and after a streak of bad decisions, overall return can be fairly OK thanks to mortgage pay down and market appreciation. I got lucky!

Appreciation is like lottery. Hence, we can't bet on it. Therefore, selecting a good tenant is a MUST going forward.

History

2017

• Spring 2018 - Tenant is behind on rent. Got an eviction court order and agreed to a payment ctach up plan with the family. Yay! They are fully caught up on past rent now. Hooray!! 👍
• December - Hired a great snow removal company after avoiding a fraud contractor
• September - all pipes updated. New tenants move in. Gross rent up to $2,100 inlcuding utilities 😁
• August - Pipe bursts 20 minutes before the appointment with the new tenants 😡
• August - New contractor found and finishes the job brilliantly 😁
• July - False Bed bugs issue
• July - Contractor disappears, floors not finished.
• June - New AMAZING tenants found. They will wait until all work on the unit is done. 😁
• June - Cleaning, Paining, and more cleaning
• June - Tenant evicted. Total cost 30K as outlined in this post
• May - Eviction confirmation sent to Sheriff/Enforcement office
• May - Eviction requested at Sheriff/Enforcement office
• April - Plumbing issue resolved at $950. Water leaked from upstairs bathroom, ceiling damaged on the first floor. 💦
• March - Notice to end tenancy served (N8)
• February - LTB court hearing. Mutually agreed to a rent catch-up schedule. Shook hands with tenant agreeing that this was her last chance.
• February - Water bill payment late. Balance $232
• January - Application to evict submitted (L1). 
• January - Rent paid consistently late notice sent (N8)
• January - Rent non-payment notice sent (N4). Balance $2,900

2016 

• November - Water shut-off for non-payment. Balance per city $397. 
• November - Rent non-payment notice sent (N4). Balance $2,200
• October - Rent past due. Balance $750
• August and September - Tenant caught up with rent as agreed.
• June - Landlord and Tenant Board Hearing. Mutually agreed to a rent catch-up schedule.
• May - Application to evict submitted (L1). Balance $2,470
• May - Rent non-payment notice sent (N4). Balance $2,300
• February through April - Partial or late rent
• January - Rent on time 💪

2015 

• December - real tenants moved it: a couple with two young children. Rent $1,450.
• October to end of November - Previous owner stayed as our first tenant for two months while she was looking for a new home. We agreed to a discounted rent of $900. At the time, we had several other projects under way and we were running around like headless chicken, so getting partial rent immediately after closing was very helpful.
• Purchased in October.

Real Estate Income Property - Case Study #2

If you ever wonder what it is like to own a rental property, read on! This post will tell you how we got a triplex, what the numbers look like and what sort of property management adventures we ran into over the past few years.

Rental Income Property

This beautiful century home is located near down town of Guelph, ON.

Like many other homes on this quiet old street, the house has a gorgeous flower garden around it. You can sit down on a wooden porch and listen to the church bells ringing on the hour in the distance not too far. I love the peace and tranquility.

Key features: 

• Triplex: 
• 1 bedroom in a side wing comes with a small back yard
• 2 bedroom on the main floor comes with a nice back yard, washer/dryer/dishwasher, and lots of storage room in the basement
• 2 bedroom on the second floor has an incredible feel to it, thanks to mezzanine like ceilings
• 1 car attached garage
• Corner lot

Purchase

This home is our very first investment. Stars aligned in a special way when we got it. You can read the full story at Our First Rental Income Property.

• Asking price: $344,900
• Purchase price: $340,000
• Found by: Real Estate Broker on MLS
• Zoning: Legal nonconforming triplex (sigh... I didn't know zoning could be an issue at the time)
• Rent: $850 + $895 + $750 = $2,495/month
• Expenses:
• Utilities: ~$410/month
• Taxes: ~ $280/month
• Insurance: ~ $200 / month
• Misc: ~$100 / month
• Expected NOI: $1,505 / month
• Financing: 80 LTV, 30 year amortization, 5-year term, variable 2.98% interest
• Expected Cash Flow: ~ $400 / month

Total Investment

This property required a 82K investment.

The biggest capital improvement so far was installing a new flat roof on the garage in 2017.

This was an expected investment as problems with the original flat roof were brought up during pre-purchase inspection. We did not know at the time that flat roof installation can get pretty pricey.

Investment Summary

Investment	Amount
Downpayment	$68,000
Closing Costs	$5,500
Capital Improvements	$8,389
Total	$81,889

Cashflow and ROI 

• Property has been cash positive from the get go
• Cash flow averages $500 / month or 6K per year
• Net profit is approx. $900 / month or 11.9K per year
• Cash on cash return is 7.3% 
• ROI is 58% over the four years and 14.5% annually on average

	Year 2014	Year 2015	Year 2016	Year 2017	TOTAL All Years	Average Annualized
Income
Rents (@100%)	18,335	31,750	34,200	35,200	119,485	29,871
Vacancy			1,300	300	1,600	400
Total Gross Income	18,335	31,750	32,900	34,900	117,885	29,471
Expenses
Taxes	3,824	3,768	4,319	3,858	15,769	3,942
Insurance	1,217	2,148	1,961	1,926	7,252	1,813
Repairs/Maintenance	1,157	1,997	1,463	5,109	9,726	2,432
Utilities	1,946	2,201	5,616	5,496	15,259	3,815
Admin/Advertising	34	45	30	0	109	27
Total Expenses	8,178	10,159	13,389	16,389	48,115	12,029
NOI	10,157	21,591	19,511	18,511	69,770	17,443
Mortgage - Interest Payment	4,364	6,145	5,670	6,105	22,284	5,571
Mortgage - Principal Paydown	4,147	6,347	6,502	6,661	23,656	5,914
Cash Flow	1,647	9,099	7,339	5,745	23,830	5,957
Net Profit (Loss)	5,793	15,446	13,841	12,406	47,486	11,872
Cash on Cash Return	2.01%	11.11%	8.96%	7.02%	29.10%	7.28%
ROI	7.07%	18.86%	16.90%	15.15%	57.99%	14.50%

Appreciation / Equity

Based on MPAC assessments, the value of the property increased by 33K during the last four years. Once we include the equity gain in ROI calculations, return on investment becomes 25% per year:

Total gain including appreciation: $33,000 + $47,486 = $80,468
Total ROI including appreciation: 98% overall and 25% annually.

History

2017

• December - Two great tenants renewed leases. Hurray!
• Nov - Dec - Fixed stucco 
• September - New garage roof and eaves repairs
• August - New super-awesome tenants moved in. Rent up by $200 💪
• June - Tenants moved out. They'd like a bigger place with parking.

2016

• December - Two awesome tenants renewed leases. Yay!
• September - new washer 
• July - New tenants! Rent is already at market, no change
• June - One of the great tenants moved out. He is relocating to the West coast

2015 

• November - Fixed a garage light. Turned out wiring issue. Cost $700. I couldn't believe it!
• October - Found new great tenant! Rent up by $200 💪
• October - Old furnace suddenly died. New furnace installed as a rental
• September - Another good tenant moved out because he found lower rent closer to university.
• September - Found a new awesome tenant via referral. Rent up by $200 💪
• August - Amazing tenant moved out - engagement 💕
• February - Pipe broke! 💦

2014 

• October - New amazing tenant moved in. Rent up by $50 per month 💪
• September - Tenant got engaged and moved out  💕
• September - new dryer
• June - First ever tenant request: clogged sink 💦 
• Purchased in May - Our First Rental Income Property.