# Is This Worth Investing In



## Learner (Jan 28, 2010)

I came across a nice rental property,with 2 suites in a very good area of the city. The purchase price would be around $380,000. Considering this will be a rental property, I would require 20% down payment. I'm going to use my line of credit (interest at prime) for the $76,000 and mortgage the rest at 2.49% for 2 years and possibly consider a variable mortgage after 2 years (unless I can secure a low term rate). Monthly payments with only these loan amounts would come to around $1,400 to $1,500 per month. Property taxes and insurance would add an additional $275- $300 per month. Therefore, the total montly cost would be $1,800. I can rent upstairs for $1,200 and downstairs for $800 per month. Would this be a viable investment? I look forward to your input. Thanks


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## Pigzfly (Dec 2, 2010)

Have you accounted for the interest costs on the credit line down payment?

Not at all an expert, but I would want, at an absolute minimum, to cover ALL of the financial outlays. In addition, I would think you would want cash flow to be larger than the cost including closing costs (sorry if that sentence is poor), as well as some fudge room. You can't count on perfect occupancy and zero maintenance costs.


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## mrcheap (Apr 4, 2009)

Don't forget to add to your calculations:

-Transactions costs (e.g. lawyer fees, inspection or closing costs and real estate agent's commission for when you sell)
-Capital expenditures (large expenses like a furnace or roof repair which WILL occur regularly)
-Maintenance (can be estimated around 1-2.5% of the property value per year)
-Management (your time, which you must value or pay someone for)
-Utilities (if they aren't included in the rents - if you do include them with the rent you won't be able to charge tenants as much)

It's quite rare to find a cash-flow positive property when you honestly include all expenses except in depressed areas (despite what all the gurus insist). People new to real estate run the numbers and think they'll be making easy money but typically find they've overlooked a number of considerations...


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## Cal (Jun 17, 2009)

It looks like at best, youmight break even monthly, assuming no months without a tenant.

Is 380K the asking price or what you placed an offer for? And which city do you live in, and how long has the property been on the market? Do you forsee any repairs in the need future?


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## Bullseye (Apr 5, 2009)

I would consider this quite a bad investment, using my valuation methods for real estate. I use the 50% rule (Google it), meaning assume total costs will be close to 50% of rents (including vacancy provision, repairs, management, etc). That gives you a Cap rate (Google it) of just over 3%. My threshold is 7.5%, for comparison.

My advice would be to focus on retun on the asset first, not what your cashflow will be. Cashflow is a result of variables like downpayments and mortgage rates, not a valuation metric. If the asset itself is decently profitable, then you decide how much leverage to apply and how to manage cashflow.

I also don't factor in capital gains into my valuation.


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## andrewf (Mar 1, 2010)

Gross rental yield on the purchase price is 6.3%. Not good enough. It might be a good investment if you could get the property at $300,000.

You also didn't mention the amount of deferred maintenance. Is the property in a good state of repair?


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## andrewf (Mar 1, 2010)

Your business case also assumes a 2.5% mortgage, which is not sustainable.


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## Learner (Jan 28, 2010)

*Rental investment*

Thanks for your good insights. The property is well maintained: it doesn't require any current maintenance such as electrical, plumbing, furnace, HWT, roof, etc. I've included the interest cost of the intial 20% in my calculations.


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## crazyjackcsa (Aug 8, 2010)

And doesn't allow for taxes on the income. But since you won't be making any money on this plan, that's less of an issue.

It would be okay if you lived in one unit and used the other to offset costs, but that's about it.


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## carverman (Nov 8, 2010)

With the mortgage/taxes vs rent income having only a $200 
difference, that only basically covers the mortages and taxes.
What about any other extraordinary expenses that may occur
with renting to tenants?
Even if the tenants pay for electricity, heating and hot water,
the landlord is generally responsible for the water/sewer charges
and that can eat up another $100 a month for two apartments.

Snow clearing/grass cutting on the property driveway/parking spots
is another maintenace issue..who is responsible and who is going to 
pay for that? 

Even with a lease, if one tenant defaults on the monthly rent, that will
make the mortgage payment vs income go negative until he can recover
the rent owing. Taking the tenant to small claims court or even trying
to kick the tenant out for non-payment after 2-3 months is an involved
process these days..you have to go through proper channels.

There definitely isn't enough income margin to deal with that kind of situation or even have enough left over to acquire a small extradordinary expense fund.

Besides where can you get a LOC at prime? Even a secured LOC is Prime +
at least 1%..no banks is going to give you a personal line of credit at
their prime rate. They are not going to make any money off the LOC that
way, since they "borrow" the LOC money at prime.


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## FrugalTrader (Oct 13, 2008)

To me, the property seems a bit pricey. Along with the other expenses, you need to incorporate vacancy rates.


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## arie (Mar 13, 2011)

*purchase*

you guys will never find a property to meet your criteria ; good luck

if it carries with all costs and an amount left over for contingencies such as maitainance issues that will arise -- a vacancy contingency ?? then that's about the best he can expect with nil down from his own pocket 

it depends on where the property is ; if it becomes vacant will it be hard to rent 
are you handy to fix things or will you have to call in someone

do you have sufficient time to deal with issues such as busted pipes in the middle of the winter or some other maitenance issue 

its a responsibilty but over the long haul based on past evidence real estate generally has been a good idea as part of anyone's investment portfolio if its long term


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## marina628 (Dec 14, 2010)

I may be unpopular here but I really believe when you buy an investment property if you have to borrow that 20% you can't afford it in the first place.


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## andrewf (Mar 1, 2010)

arie said:


> you guys will never find a property to meet your criteria ; good luck
> 
> if it carries with all costs and an amount left over for contingencies such as maitainance issues that will arise -- a vacancy contingency ?? then that's about the best he can expect with nil down from his own pocket
> 
> ...


Well arie, if you are happy to buy a rental property with a high probability of making a lower return than putting the money in a savings account, you are welcome to it.


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## andrewf (Mar 1, 2010)

arie said:


> you guys will never find a property to meet your criteria ; good luck
> 
> if it carries with all costs and an amount left over for contingencies such as maitainance issues that will arise -- a vacancy contingency ?? then that's about the best he can expect with nil down from his own pocket
> 
> ...


Well arie, if you are happy to buy a rental property with a high probability of making a lower return than putting the money in a savings account, you are welcome to it.

And when thinking about real estate, I always benchmark against something like XRE. With XRE you get a cash flow of 5%. It is much safer and more profitable than borrowing 100% LTV on a single investment property that doesn't even cash flow at 2.5% mortgage. That is just plain crazy.


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## Learner (Jan 28, 2010)

Thanks for all your inputs on this property. The property is located in a very easy rentable area: very close to public transit, University, public schools, and easily accessible to downtown. Going through a list of recent comparables of sold houses in the area shows that this house is lower than all others. In regards to borrowing the down payment, I have sufficient funds to purchase this house without borrowing any, but why should I use my own money if I can borrow and have someone else pay for it? Is my logic correct?


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## the-royal-mail (Dec 11, 2009)

It seems you've already decided to do this.


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## hboy43 (May 10, 2009)

Hi:

I've been a landlord, never going back there. Nothing ever went disastourously wrong for me, but that is just a matter of luck. Friends of my parents had 10 houses at one point and one was trashed near the end. Garbage and bashed drywall and literally **** on the walls. Can you afford a $30,000 bill for bad luck on the first tenant?

Why do people want to buy RE when essentially the whole country is saying RE is way expensive. Plus some stocks have been fairly cheap of late. Buy what is on sale.

hboy43


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## crazyjackcsa (Aug 8, 2010)

Learner said:


> Thanks for all your inputs on this property. The property is located in a very easy rentable area: very close to public transit, University, public schools, and easily accessible to downtown. Going through a list of recent comparables of sold houses in the area shows that this house is lower than all others. In regards to borrowing the down payment, I have sufficient funds to purchase this house without borrowing any, but why should I use my own money if I can borrow and have someone else pay for it? Is my logic correct?


No. It isn't. 

You're out of your mind. 

Everybody has laid out plenty of reasons why you shouldn't do this, the best one is that there is no way you're going to remain cash flow positive.

But have at.


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## marina628 (Dec 14, 2010)

How old is the building?Have you looked into when the big ticket items were replaced?We always use 5% as our interest rate when we work out numbers for perspective purchases.We are at 3.49% fixed for 5 years now but better to over estimate expenses.Are tenants willing to stay?Have you viewed the property at various times of the week?If it is truly priced under market why hasn't anyone else snapped it up?


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## arie (Mar 13, 2011)

andrew what are you talking about return on his investment??? for god's sakes he's putting nothing down and it still carries with a little amount left over

over time rents go up and if he has bought well so will the value of the property; meantime his principal under the mortgage is beint paid down mire each year

only cavet is --- unexpected repairs and terrible tenants ( the tenant from hell) 
you must vet the tenant very carefully or life can be miserable and it will be an expensive lesson


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## andrewf (Mar 1, 2010)

It doesn't cash flow after maintenance. He also assumes 2.5% interest, which is not sustainable. In two years when that mortgage is up for renewal, there is a good chance he will be a significantly cash flow negative position.


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## Bullseye (Apr 5, 2009)

If the property is making 6.4% gross, it will be less than 4% net (before taxes), even with optimistic estimates of vacancy and repairs. Why the hell bother? If I had the cash to pay for it up front, it would be a bad investment compared to alternatives. Mortgaging any portion of it only adds interest rate risk to the equation.


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## andrewf (Mar 1, 2010)

^ Exactly. I would say it is a reasonable investment with a gross yield of 9 or 10%. To yield that, you would need to pick it up between $216k - $240k. Rents do not support current real estate valuations, hence smart real estate investors are cashing in.


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