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.





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