Wednesday, February 7, 2018

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


      InvestmentAmount
      Downpayment/Closing45,214
      Capital Improvements10,448
      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 YearsAverage Annualized
      Income
      Rents (@100%)17,400 17,463 34,863 17,432
      Vacancy1,800 2,196 3,996 1,998
      Total Gross Income15,600 15,267 30,867 15,434


      Expenses
      Taxes2,449 2,864 5,313 2,657
      Insurance1,379 1,480 2,859 1,430
      Repairs/Maintenance743 1,229 1,972 986
      Utilities533 0 533 267
      Admin/Advertising30 0 30 15
      Total Expenses5,134 5,573 10,707 5,354


      NOI10,466 9,694 20,160 10,080
      Mortgage - Interest Payment3,656 4,336 7,992 3,996
      Mortgage - Principal Paydown3,608 4,033 7,641 3,820
      Cash Flow3,202 1,325 4,527 2,264
      Net Profit (Loss)6,810 5,358 12,168 6,084
      Cash on Cash Return5.75%2.38%8.13%4.07%
      ROI12.23%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 duck 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 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





        Monday, February 5, 2018

        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


          InvestmentAmount
          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 YearsAverage Annualized
          Income
          Rents (@100%)2,900 17,400 20,000 40,300 13,433
          Vacancy/Non-Payment1,365 2,250 3,615 1,205
          Total Gross Income2,900 16,035 17,750 36,685 12,228
          Expenses
          Taxes585 2,395 3,003 5,983 1,994
          Insurance311 1,512 1,406 3,229 1,076
          Repairs/Maintenance446 170 3,745 4,361 1,454
          Utilities373 287 1,641 2,301 767
          Admin/Advertising45 0 0 45 15
          Total Expenses1,760 4,364 9,795 15,919 5,306
          NOI1,140 11,671 7,955 20,766 6,922
          Mortgage - Interest Payment796 4,712 4,594 10,102 3,367
          Mortgage - Principal Paydown683 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%
          ROI0.36%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

          • 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.





          Thursday, February 1, 2018

          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



            InvestmentAmount
            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 YearsAverage Annualized
            Income
            Rents (@100%)18,335 31,750 34,200 35,200 119,485 29,871
            Vacancy1,300 300 1,600 400
            Total Gross Income18,335 31,750 32,900 34,900 117,885 29,471
            Expenses
            Taxes3,824 3,768 4,319 3,858 15,769 3,942
            Insurance1,217 2,148 1,961 1,926 7,252 1,813
            Repairs/Maintenance1,157 1,997 1,463 5,109 9,726 2,432
            Utilities1,946 2,201 5,616 5,496 15,259 3,815
            Admin/Advertising34 45 30 0 109 27
            Total Expenses8,178 10,159 13,389 16,389 48,115 12,029
            NOI10,157 21,591 19,511 18,511 69,770 17,443
            Mortgage - Interest Payment4,364 6,145 5,670 6,105 22,284 5,571
            Mortgage - Principal Paydown4,147 6,347 6,502 6,661 23,656 5,914
            Cash Flow1,647 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 Return2.01%11.11%8.96%7.02%29.10%7.28%
            ROI7.07%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.