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.


    • Asking price: $225,000
    • Purchase price: $218,000
    • Found by a really awesome Real Estate agent 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

      Capital Improvements10,448

      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
      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

      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%

      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. 



      • 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.


      • 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.


      • 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

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