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Discussion Starter #1
http://www.icx.ca/propertyDetails.aspx?propertyid=9636550

List price is 899,900 Address is 1528 King Street.

Hi Rachel,

Current Seller has owned property since 1964.All units are currently vacant. Seller has not rented units for the last 15 years. Owner occupies one unit on mainfloor. Electrical needs updated. Currently running on 100Amps Fuses. Basement unfinished. Approx 6.5 Feet in height.

Property has great potential but is outdated. 3rd floor - 2 bachelors and storage area. 2nd floor - 1 bachelor, 2 bedrooms with common kitchen and washroom. 1st floor - 1 bachelor, 2 bedroom.

All 6 kitchens and 6 washrooms will probably need renovating. All Windows will probably need replacing.

Approx Renovation cost: $150k-$200k Having said that, Seller wants no condition offer and doesn't have much room to negotiate..

This is the information I received today. How do you like them apples?

So how would you go about figuring out what to offer on this property? Well it's almost impossible but I'll have a go at it.

There are six apartments in the building. 4 Bachelors and 2 2bedrooms. The area is sucky but it's close to the city so I'd say a rent of $750 all inclusive for the bachelors and $1200 for the two bedrooms all inclusive would ambitious.

So your Monthly Income would be $5400 and $64,800 annual. Then you'll have the property taxes, hydro and all the deferred maintenance of $200K

I don't have any of these numbers so I'll just steal them from a four plex and divide by 4 and multiply by six :) Thanks real estate agent.

Hydro $5305 Gas $6822 Water $3414 Insurance $2163 Taxes $8400

So you minus all of these expenses from your income plus take out 5% for vacancy and 10% for maintenance and 7% for property management for a total of 22% for these costs.

64,800 - 22% = $50,544 less expenses of $26,104 for Net Operating Income of $24,440

Wow that sucks you thought you were going to get rich haha! If you paid the asking price you better get a second or third job.

So lets say we get all generous and we will offer a price based on a 5% cap rate for the NOI of $24,440

$24,440/.05 = $488,800.

What about the deferred renovations? We have to minus those $200 K so we end up with a very fair offer based on the numbers of $288,800

That's what the math says...
 

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I'm not a real estate investor, I'm an analyst :)

Couldn't someone aggregate this type of analysis for a sample of 10+ representative properties, including actual selling price, to derive an estimate of the frothiness of the real estate market in general?

Suppose this property eventually sells for $650k. Let's assume it was representative of the multiresidential real estate market. And let's be conservative and assume $150k maintenance instead of $200k. So a rational investor can only support a valuation of some $300-350k based on cash flow earnings potential. Ergo, the remaining 50% is a speculative bet which will pay off if the market continues to increase at a risk-adjusted rate of return on the additional capital of some 7-10% per annum (i.e. 4-5% on the full value of the property), but could evaporate in case of a real estate downturn....

Alternatively, at $650k selling (hypothetical) plus $150k repairs = $800k capital, the NOI is about 3%. So a rational investor is betting that to reach a reasonable risk-adjusted return on capital of 7-8% property values need to continue to speculatively increase at 4-5% per annum...

(BTW I don't have numbers to back up the target return on capital of 7-8%. But with through-the-cycle mortgage rates being 5-6%, the return needs to be a few percent higher for the equity investor to cover for the higher risk they carry.)
 

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A couple of thoughts: I would have thought you could rent a recently renovated building in Toronto for much more, utilities aside.

Notwithstanding, as I've said in the real-estate bubble thread, rents are way out of proportion to purchase prices in major centers, which is the main indication that we are in a bubble: http://patrick.net/housing/crash.html

Ergo, you are going to have a hard time, if not impossible time, mortgaging a property in Toronto and making any money from the rent. Basically, the play is that prices go up, which becomes the greater fools game, and somebody gets burned, badly.

If you save your dollars for when real-estate prices drop 20%, then you should be able to make some money.
 

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From patrick.net:

The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you'll know it's safe to buy for yourself because then rent could cover the mortgage and all expenses if necessary, eliminating most of your risk. The basic buying safety rule is to divide annual rent by the purchase price for the house:

annual rent / purchase price = 3% means do not buy
annual rent / purchase price = 6% means borderline
annual rent / purchase price = 9% means ok to buy
 

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Discussion Starter #6
I can't help but think that this real estate agent would like to sell this house to people who want to turn it back into a glorious family home.

@ dagman, I was going by higher prices than you see in the neighborhood. Parkdale is a den of low income buildings. If you did manage to get more (of course I would try it) you should keep that profit for you. It doesn't justify a higher price for the property.

Houska I think that a lot of the frothiness is because of inexperience on the part of investors. They have heard that real estate is the path to riches. Appreciation has made people forget the fundamental. Without appreciation you have crap. The other thing about appreciation...you can't use it to pay the bills and maintain the building. If you don't have cash flow you end up with deferred maintenance.
 

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When my wife saw this home, we seriously were wondering if we could buy it and rent it out, but decided it was in to seedy a neighbourhood ..., and that we couldn't get enough rent to make it worthwhile.

It's near the lake, so we were thinking, maybe it'd work. But then we looked around, and saw it was probably the best house in a bad neighbourhood. Generally, not a great suggestion to buy. Also, it's on a busy road (King St.), so we probably wouldn't want to live there.
 

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Discussion Starter #8
Frugal Trader - Thank you :)

Cap Rate does not include the mortgage payment. So you'd have to look at what the cash flow looks like at the rate you can get for your mortgage. For instance If you buy a commercial building usually you are paying 5%ish or so. The math on that ends up looking extremely grim at a 5% cap rate. If your mortgage payment can be lower great

Building = $1,000,000
- 300,000
Balance $ 700,000 @ 5% = $ 4071 monthly

At a 5% Cap Rate your NOI is $50,000 or $4166.66 per month.

So after having invested $300,000 your return is less than $100 per month. Still you'd be doing better than 80% of people who are buying right now. The rest of increased income would come from increased rents or by some other method of increasing the use of the property.
 

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Discussion Starter #9
A thought did cross my mind... the other day. I also received a listing that said that the owner had vacated the units to "prepare for the sale"

This is the most idiotic I have ever heard for a purpose built 6 plex. Income properties are alwayssold full.

In the above stated example in fact the building is worth exactly $0 because it is an income property that produces $0 income. In it's current state it's worth about the same as my CUX.TO delisted stocks :cool:

So if perchance your real estate agent tells you this... fire them immediately. I don't care if it's inconvenient for them to have to advise tenants 24 hours before. Any investor will be well aware of this requirement.

I worked for a couple that was divorcing and who were selling all their income properties. I went there and rented every empty unit. I pulled the real estate sign off the front lawn and showed the place then put it back when I left. No joke.

A seller of an income property that is empty is highly motivated by the extremely expensive mortgage payments, property taxes, utilities that don't stop for one second even though the place is empty. Do not let this be you!

Genius Boy what was it like inside?
 

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Berubeland:

The place needed a fair bit of work. The place was run down, by tenants that didn't take care of the place. But the overall bones of the place actually look good. Did require electrical, furnance, and some reworking with insulation to be useful. I think there was also asbestos, which we would have gotten rid of.
 
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