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Discussion Starter #1 (Edited)
I went to a landlord forum yesterday in Toronto. It was set up by the people from the Landlord Self Help Association. There were a few things that were interesting that I thought I might mention.

1) The Canadian Mortgage and Housing Corp has a bunch of programs where you can get forgiveable loans for upgrading your rental, in certain situations. In general, it seems if you're renting to lower income people, you can get quite a bit of money for renovations. (http://www.cmhc-schl.gc.ca/en/co/prfinas/index.cfm)

2) Scott McGillivray, host of Income Property gave a talk. It was one of the most useful talks I've ever heard. He rents mostly to students, so some of his advice was around that. However there were a few interesting comments.

a) he mentioned that if he is renting to someone who wants to stay past a year, and is willing to sign another lease, he'll not raise the rent. He says that he tried to rent his properties at a little above market rates anyway, so even if people stay he's ok. He said he has one tenant whose been there for five years, and he still hasn't raised her rent. His thought was that he does not have to think about that apartment, so that's worth the few hundred dollars a year.

b) He isn't worried about the economic / real estate market. He explained how he figures out cash flow. He adds up all his income, subtracts all his expenses + he subtracts one month for vacancy and one month's worth of rent for repairs. If at that point he is making even $100 a year, he doesn't have to worry about prices going up or down because he's making a profit. He also stated that by subtracting the month for vacency and for repairs he has a built in cushion. He described himself as pretty conservative.

This isn't an unusual way of determining cash flow profit (grade 1 math, according to him) but it's an interesting and easy way to try and figure out the variables (vacancy and repairs).

c) When a tenant says they are moving out, he goes over to check out the space and if it's a huge mess, he will often tell them "I'm going to rent you a garbage bin, just fill it up". He says it costs $200 to rent one of those bins, and he finds people are more likely to throw stuff out, if they can do it easily. For that $200 it saves him from having to do anything.

There were other tips, but I need to get to work! Thanks to the Toronto Landlord Self Help for putting it on.
 

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Sure you could taxsaver :)

Looking at property is not very exciting, it's more like peering under rocks looking for gold nuggets. You have to look under a lot of rocks.

This time I was looking at an industrial building for 73$ per square foot when everything else is over 100$ Looks ok from the front but the building is full of huge laundry machines. And the building has a weird shape.
 

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Discussion Starter #6
Sure you could taxsaver :)

Looking at property is not very exciting, it's more like peering under rocks looking for gold nuggets. You have to look under a lot of rocks.

This time I was looking at an industrial building for 73$ per square foot when everything else is over 100$ Looks ok from the front but the building is full of huge laundry machines. And the building has a weird shape.
If you ever want to teach a bit of a seminar and do a walk through on some properties count me in.
 

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Sure you could taxsaver :)

Looking at property is not very exciting, it's more like peering under rocks looking for gold nuggets. You have to look under a lot of rocks.

Talking about nuggets, that is one right there! Thank you Berubeland.
That is worth making a poster of and taping to your wall.
It applies to so many things in life, stocks,partners etc.lol.

Best quote of the year!
m
 

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b) He isn't worried about the economic / real estate market. He explained how he figures out cash flow. He adds up all his income, subtracts all his expenses + he subtracts one month for vacancy and one month's worth of rent for repairs. If at that point he is making even $100 a year, he doesn't have to worry about prices going up or down because he's making a profit. He also stated that by subtracting the month for vacency and for repairs he has a built in cushion. He described himself as pretty conservative.

This isn't an unusual way of determining cash flow profit (grade 1 math, according to him) but it's an interesting and easy way to try and figure out the variables (vacancy and repairs).
Very nice. He's putting a margin of safety into his purchases/valuatio of an income property.
 

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I wonder how many properties he finds in the GTA that satisfy that criteria. Seems hard to find cashflow positive properties in this market.
 

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I wonder how many properties he finds in the GTA that satisfy that criteria. Seems hard to find cashflow positive properties in this market.
Yeah they are basically impossible to find but you could find a deal.

In Ottawa it is nearly impossible to find cash flow properties, I have a cash neutral property I bought last year and that is nearly impossible to find now.

Looking at smaller towns though there are many cash flowing properties although they are also getting more difficult to find.
 

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I entirely disagree with both of you about the cash flow negative comment. It is entirely untrue.

You need to go bigger and see more stuff.

You need to reverse engineer your numbers and make sensible offers.

You need to think out of the box and look for underperforming, undermanaged properties.

It drives me crazy when people say this. I found a 12 cap property this year. I brought about 15-20 people to see it and none even made an offer.

It sold for 1.2 million it was 12000 square feet and net income after renting the vacancies would have been $140,000 minimum.

Why? because it had a lot of vacancy.

Well in a tight market like the one we are in no one is going to hand you a 10 cap property in perfect condition in a perfect location. It doesn't come gift wrapped and it's a lot a work but the profits are there if you can be openminded.
 

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Well yes if one had millions to invest...

There are many tri-plexes that cash flow in my area and a few for sale. The problem? 20% down on a $500,000 property that's my problem. I'm looking at properties in the $100-$200k range and they do not rent for more than $1000 a month for a $200k property.

These would also be condos so it is difficult.

Last year I found one though $130k rented at $1050 a month, it's at least neutral and will be profitable after the $1400 a year special assessement is lifted in 2 years.
 

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Jamesbe: I would not even waste my time looking at condos as investments. The condo fees squeeze out your profit - you will find better luck looking at older houses you can partition into triplexes - an apartment on each floor plus one in the basement.

I am sure that there are way better deals out there for those with the cash flow to buy bigger units, but we are just not there yet...

In our experience, you have to put a lot of time and effort into finding your investment properties. These are just my recollections, but for the last investment house we bought, we looked at hundreds (yes hundreds) of properties online, visited about 50 where the numbers looked viable, made offers on about 10, all to buy a single house.

We tend to offer 15% - 20% below asking, and negotiate from there. We look for places in disrepair (but fixable), places that have been listed for a long time, places that are not currently sub-divided but can be easily converted, or other such gems.

No, these places don't fall into your lap - you have to do a lot of leg-work to make them happen, but they are out there.

My two cents... ;-)
 

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Alexandra that is pretty much my strategy as well.

Although I too at first didn't want to consider condos there are some advantages to them.

1) property management
2) Upgrades

The place I bought was built in the 80's has old windows etc etc. They are rebuilding all these things right now so I get the advantage of new updates without having had paid the condo fees for very long.

Most of the time you are correct though the condo fees are eating your cash flow for very little benefit.
 

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Discussion Starter #16
I entirely disagree with both of you about the cash flow negative comment. It is entirely untrue.

You need to go bigger and see more stuff.

You need to reverse engineer your numbers and make sensible offers.

You need to think out of the box and look for underperforming, undermanaged properties.

It drives me crazy when people say this. I found a 12 cap property this year. I brought about 15-20 people to see it and none even made an offer.

It sold for 1.2 million it was 12000 square feet and net income after renting the vacancies would have been $140,000 minimum.

Why? because it had a lot of vacancy.

Well in a tight market like the one we are in no one is going to hand you a 10 cap property in perfect condition in a perfect location. It doesn't come gift wrapped and it's a lot a work but the profits are there if you can be openminded.
What's a 10 cap and 12 cap property?
 

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Cap rate refers to Capitalization Rate

It is an industry measurement for how much cash flow a property generates in ratio to it's purchase price. The higher the Cap rate the better it is. Currently in Toronto it is pretty standard to have a 5% Cap Rate at sale. Properties in good areas such as Yonge Street may be even less.

It is represented by the following formula.

Net Operating Income/Purchase price = Capitalization Rate

Net Operating Income is the income left after paying all expenses except the mortgage. You must also remove an allowance for Vacancy, Management, Maintenance as a Percentage of the Gross Income (this includes rents collected, parking charges, laundry money etc.)

So how a sample building might look like...

Gross income from all sources

Rents per year = $150,000
Laundry Income = $2400
Sign on top of the Building = $12,000

Total Gross Income $164,400
Less Property Taxes = $30,000
Less Common Area Utilities = $ 3600
Less Property Management 10 % = $16,400
Less Maintenance 10 % = $ 16,400
Less Vacancy Allowance of 5% =$8,200

Net Operating Income = $89,800

So if the purchase price were $1,000,000 then

$89,800/1,000,000 = 8.9% Cap rate

To find out what would be the expected purchase price of this property in Toronto you can reverse the equation.

Net Operating Income($89,800)/5% cap Rate = $1,796,000 (purchase price)

Now to purchase this building you would be required to put 30% down($538,800) and have to service a mortgage of 70% or $1,257,200 at a pretty standard rate of 5%

Your monthly mortgage payment would be $7,311.94 with a 25 year term at 5% and your monthly income would be $7483.00 which leaves you with a whole $100 or so a month to spend however you like after investing half a million bucks in a 5 cap building in Toronto.

So clearly people buying nice clean buildings with no vacancy in Toronto don't make any money. They are speculating on area appreciation and rent increases to make money. Plus owners are lying their faces off about the real expenses of the building. Putting in ESTIMATED number for utilities which is pretty stupid I mean who can't manage to add up 12 bills. Leaving out management or vacancy numbers or maintenance numbers.
 

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Question:

Is there any opportunities to take a 10 cap property and turn it into a 5 cap property, then make the sale (i.e. buy the 10 cap, get the property well managed and low vancacy, do some minor renos to the common areas)?
 

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Uhmmm higher is better so you'll want to turn your 5 cap into a 10 cap.

Yes indeed you can do that and you should do that.

I just saw a 16 plex on St Clair vastly underented at $750 per month and under for rent.

I estimate that you could get at least $1000 per month per suite. An increase of $300 per month per suite would result in $48,000 per year in additional cash flow which is worth about $960,000 increase in building value. Of course that would mean improving the units and stuff but you could do that with your cash flow from the building. (Your maintenance and property management amounts) Of course you may just want to refinance the building according to the new numbers and take your initial down payment out and then have a "free" building.

But again like I said even though this is great strategy, most people do not have the stomach for it. Everyone wants the Blue chip stocks rather than do the work to find great little companies that will have much more significant returns.

There's a lot more money in getting a building from 50% to 90% than getting it from 90% to 95%
 
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