This is a house I want to buy, maybe. It’s a side-by-side duplex with two 2-bedroom, 1 bathroom units and listed on the MLS for $120,000. Long-term tenants currently live there and pay $700 and $750 including utilities.
Another member from Bigger Pockets recently bought a side by side duplex in this same city, probably in the same neighbourhood, for $104,000 and spent $23,000 renovating it. I would also aim for $104,000, since that is hard comp for the area. While I’m at it, may as well use his $23K reno cost too!
5% closing: $5,200
Total house cost: $132,200
Monthly gross income
Unit #1: $700
Unit #2: $750
Total monthly income: $1,450 (Annual gross income: $17,400)
Vaccancy @ 3.2%: $50 (low vacancies for this city published by CMHC)
CapEx: $250 (numbers taken from this article)
Property manager: $140
Property taxes: $150
Total monthly expenses: $1000 (Annual expenses: $12,000)
Total monthly net income: $450 (Annual / NOI: $5,400)
Net operating income (NOI): $5,400
Cap rate: NOI/$132200 = 4.08%
Good investment or not?
So it appears that this house could be cash flow positive but at these numbers, it really isn’t a great investment. Cap rate should be 7% or higher to be a good investment, and this one is at 4%. 🙁 The ROI (not shown) is also extremely low because I’ll likely have to buy all-cash on my first purchase, since I don’t want to get a job to get a loan. But eventually I plan to refinance to pull out money for a second property. It’s not the most productive way of using money but is what is available to me at this time.
Tenants are paying too little
The tenants are paying below market rent by at least $100. It would be fine if they paid their own utilities, but to receive below market rent AND have to subsidize their utilities really irks me. So if I were serious about buying, I would want to raise rent to $850 each and having them pay their own utilities. Not sure if that is possible or if I’d have to honour their current lease agreement until it’s over. The answer is in the Ontario Landlord and Tenant Act which I haven’t read yet but will soon enough.
Raising rents and long term tenants
Let’s say it’s possible to raise rents upon assuming the tenants. It will boost my cash flow from $450 to $900 per month, and I wouldn’t need to include the $23K reno since I can’t renovate when it’s tenanted. There’s probably a fat chance of this happening though, and as a first time RE investor and landlord, I’m quite nervous about inheriting tenants to begin with, especially long term ones.
Scared of professional tenants
I’m super nervous about inheriting a professional tenant like this guy or this guy. They jump from place to place without paying rent, tying the owners up in court, and damaging property. What a nightmare! The first guy is from Ontario, where I’m thinking of investing and which has very tenant friendly laws. So I would do everything in this article to try to mitigate the risks, and prefer to select the tenants myself rather than inheriting them from the purchase.
Living in the property ourselves and cash flowing
Martin and I need a place to live, and my intention of investing in real estate is to house hack (at first). So ideally I’d want a fresh slate with no tenants inside, so we could live in one side while renovating the other. After installing a new kitchen, stainless appliances, updated bathroom on the rental side, I would try to list it at $1000 + utilities to see if anyone bites. Maybe adjusting down if $1000 is too much of a dream number.
If we get $1000 in rent, it will mean we’re cash flowing $560 while living there for ‘free’ (subtracting half utilities and property management from expenses). That’s obviously not hitting the jackpot or anything but will totally cover our $200 per month vegan grocery bill while eating 3000 calories per day!
Then we could slowly renovate our side of the house while looking for a second property.
More pictures of the property
The listing has pictures of the inside of one unit. They appear to be taken before it was tenanted, so not sure of the actual condition of the property now. But aside from a bad kitchen layout (the oven range blocks the stairs!), it seems pretty okay.