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4-Plex for sale $640k 8% cap rate... have I entered the Fastlane?

Anything related to investing, including crypto

Would you pursue this investment?


  • Total voters
    14

eribruski

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Purchase includes full tenancy - 4 x 1 year lease
 
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eribruski

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Updated above post as a screenshot of my working excel valuation. Feel free to leave your thoughts and concerns. I will be borrowing from the bank with a 20% downpayment at an interest rate around 3% or better.

Please vote at the top!
 
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fhs8

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Purchase includes full tenancy - 4 x 1 year lease

You're not including property tax. Most places do have property taxes. I just looked up property taxes in Toronto and it goes as high at 1.7% for multi-residential? Also there are other hidden expenses that add up. For example if a tenant has black mold they can sue in the US and most insurance policies don't cover it. Maint., legal, and repairs all for $2,469 is too low for 4 units. How did you come up with that? How did you come up with a 95% occupancy rate? 95% is the high end for big apartment complexes.
 

eribruski

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You're not including property tax. Most places do have property taxes. I just looked up property taxes in Toronto and it goes as high at 1.7% for multi-residential? Also there are other hidden expenses that add up. For example if a tenant has black mold they can sue in the US and most insurance policies don't cover it. Maint., legal, and repairs all for $2,469 is too low for 4 units. How did you come up with that? How did you come up with a 95% occupancy rate? 95% is the high end for big apartment complexes.

Thank you for your feedback. We have tenancy agencies that easily connect renters with landlords. I'm sure you are familiar, they charge a management fee of 5% and take care of the legal aspects up to litigation. The building was fully renovated 4 months ago, pictures look great. If we consider I will be inspecting the property on Monday and getting all the small details such as property tax.

The numbers were provided by the seller from 1 year of operation. I still have to do my due diligence
 
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Runum

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Several things to consider...

Looks like you are buying retail at full price. This will limit possibility of appreciation unless your area experiences a boom of employment or similar.

How does this property compare to competition?

Your maintenance costs will increase each year. If the place was just renovated you have about a 5 year honeymoon of low repairs, then things begin to break.

A mad/dirty/negligent tenant can cause a lot of damage. You have to have good contractors ready to jump in and get your apartments ready to rent.

What is normal vacancy rate in your area?

Are any of the renters related to or beholding to the current owner? Under the table back door agreements can result in immediate vacancies after closing.
 

eribruski

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Several things to consider...

Looks like you are buying retail at full price. This will limit possibility of appreciation unless your area experiences a boom of employment or similar.

How does this property compare to competition?

Your maintenance costs will increase each year. If the place was just renovated you have about a 5 year honeymoon of low repairs, then things begin to break.

A mad/dirty/negligent tenant can cause a lot of damage. You have to have good contractors ready to jump in and get your apartments ready to rent.

What is normal vacancy rate in your area?

Are any of the renters related to or beholding to the current owner? Under the table back door agreements can result in immediate vacancies after closing.

Those are great questions, and I agree, the property is a bit pricey but it appears to be in pristine condition. As we fall into another recession, housing prices will probably not appreciate, but we expect a small but decent return to carry into a better property in 3-4 years time

My business partner owns a GC company so our prices for construction related issues do not include mark up.

This deal just passed by us today - we are considering other deals 1/3rd of the price of this one - I do not have full disclosure of this property present day
 

fhs8

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Thank you for your feedback. We have tenancy agencies that easily connect renters with landlords. I'm sure you are familiar, they charge a management fee of 5% and take care of the legal aspects up to litigation.

I doubt that a tenancy agency would be liable in a civil lawsuit for someone tripping or black mold. Don't most of them just deal with the tenant pre-contract?

The building was fully renovated 4 months ago, pictures look great. If we consider I will be inspecting the property on Monday and getting all the small details such as property tax.

Small details such as property tax? How is it a small detail? 1.7% a year property tax for 30 years amounts to roughly 50% of the value of the property!

http://www1.toronto.ca/wps/portal/contentonly?vgnextoid=6245ff0e43db1410VgnVCM10000071d60f89RCRD

Why don't you do the research and find out the zoning of the property?

The numbers were provided by the seller from 1 year of operation. I still have to do my due diligence

For all we know it could be a historic property that has very high maint. cost.
 
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eribruski

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I also have copies of the lease agreements between the seller and his tenants
 

Runum

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When I research a potential property...

Google the address and find old postings about it. Check Google images also. Google earth may have old images as well.

Google owner and see if there are extenuating circumstances.

Google the tenants and see if anything pops up. Always check FB pages

Google online property records, tax records, etc.

Find local comps for sales price per door, rental rates, vacancy rates.

Check with local Chamber of Commerce regarding demand for housing, trends, and employers downsizing or expanding.

Are there any other apartments under construction in the area?

Your exterior picture only has 3 doors? 4 units?

Interior looks clean and simple. Good for rental.
 

lowtek

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I own a 4 plex

I want to get rid of it

I don't want another one.

I would never get anything under 10 units again.

They're simply not worth the hassle, IMHO.
 
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BigBrianC

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Your fastlane is different from my fastlane.

You should check out BiggerPockets if you're into RE investing as well. Some people on TFF are really into RE, but everyone on BP is. But definitely stay on TFF to work on (possibly better) ways of passive income :)
 

LateStarter

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I'm in the GTA and have some smaller multi-units (1-4) in the area. I'm guessing from the price that this isn't in the city boundaries or in any of the neighbouring boroughs. I also didn't see it on MLS. So the question is, how far out is it and what's the current equity build like now for multis in the area?

The biggest problem I see is that you make your money going in on these deals. Paying list for a property that's recently reno'd doesn't really make sense. You're better off buying one that needs some work, preferably under market value if possible, and building equity in the property. With this one, someone has already done the work and is looking to cash out.

What was it listed for prior to this? Have your agent look it up on MLS and get the before pics from the listing. That should give you a sense of what they put into it.

The market is hot in the GTA so everyone is paying list or more...it's a sellers market right now, not a buyers, so I'd be wary of most deals and particularly someone who might be looking to dump a bad flip.

Government and banks are trying to slow the pace of property inflation to avoid bursting the bubble. Make sure you can cover the mortgage if occupancy rate increase and mortgage rate jump.
 

eribruski

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I own a 4 plex

I want to get rid of it

I don't want another one.

I would never get anything under 10 units again.

They're simply not worth the hassle, IMHO.

Why are +10 units better? I don't have the capital or experience to jump into a larger venture ATM. 10-unit apartments in MTL go for $1.1 mill
 
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LateStarter

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If you've never had a rental property before, get your feet wet in a smaller multi, gain experience, build some equity, and network to get contacts in REI. If REI ends up being something you enjoy then you can always dump the smaller multi to get your equity out, or leverage it for other investments.
 

ddall

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If you've never had a rental property before, get your feet wet in a smaller multi, gain experience, build some equity, and network to get contacts in REI. If REI ends up being something you enjoy then you can always dump the smaller multi to get your equity out, or leverage it for other investments.

@LateStarter and @eribruski

For a fellow Torontonin interested in REI, would both of you mind sharing some essential resources (books, podcast, websites, etc) to read and study to assemble some acumen in the area?

Thank you.
 

biophase

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So the 5% vacancy was you're PM fee?

You probably should make the vacancy at least 10%. Then add a 5% PM fee (2which seems really low) in the expenses. Then increase your maintenance by double. Then add real estate taxes.

What are the utilities for?

What's your return now?

The rent prices to asking price looks decent though.
 
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lowtek

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Why are +10 units better? I don't have the capital or experience to jump into a larger venture ATM. 10-unit apartments in MTL go for $1.1 mill

With my 4 plex, I have always had some sort of issues.

Either tenants are slow to pay, or don't pay.

Or they move out and you're left with 3/4 units rented.

Sure, at 75% occupancy it floats itself, but the point is positive cash flow not to float a mortgage / bills.

If you hire a property manager, they are taking 5 - 10% and that just eats into the bottom line.

More units means more cash flow and a bigger buffer against slow paying tenants and vacancies.

I'm certainly not an expert in this area, I'm just relaying my general dissatisfaction with my own experience owning a 4-plex.

Your mileage may vary.
 

lowtek

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If you've never had a rental property before, get your feet wet in a smaller multi, gain experience, build some equity, and network to get contacts in REI. If REI ends up being something you enjoy then you can always dump the smaller multi to get your equity out, or leverage it for other investments.

This is a good counter to my negative position. Owning the 4 plex was indeed a learning experience.

It taught me that I want more units, not less :)
 

jpmartin

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You probably should make the vacancy at least 10%.
Definitely. That was the first thing that caught my attention. Basically give 1month out of a year as vacancy...

@eribruski - I have no idea about this location - but if you think that we're entering a recession, then why don't you consider a possibility that the price could actually go down further? Also, how many properties have you researched before you arrived at this?

Also, your GRM is high... I'd suggest 8.
 
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eribruski

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Interesting feedback from everyone. I have determined that the price of acquisition is too high and I'm continuing down my list of potential properties. This one was damn appealing though!
 

LateStarter

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@LateStarter and @eribruski

For a fellow Torontonin interested in REI, would both of you mind sharing some essential resources (books, podcast, websites, etc) to read and study to assemble some acumen in the area?

Thank you.
Honestly I just learned by being in the space. My wife was a new agent at the time and when McGillvray's 'Income Property' show first came out, I simply said "We can do that!"

The GTA market is going up and has been for years. It's highly unlikely that you'd lose money on the sale if you had to unload it. So the risk was relatively low when I looked at it in practical terms. Worst case scenario, you'd break even. So instead of worrying about calculating any inflationary equity build, I took that as a given and just focused on the cash flow. Even with no inflationary equity build, someone was paying down the mortgage for me, which was free money. I didn't think there was much of a downside.

I created a spreadsheet that wasn't very technical. I looked at monthly credits and debits and created something like a balance sheet. I started analyzing properties with it that popped up on MLS. In another spreadsheet I logged each property, I entered all the property details, and neighbourhood notes along with what they sold for and how long they lingered on the market. I'd get current financials from the listing agent and from there go back to my cash-flow spreadsheet and see what the potential net income was for the person that bought it. This gave me a sense of what people thought it was worth and how good a deal each was. It also gave me a sense of rents for various areas and property conditions.

I started educating myself on the lingo. This was important since all of the financials from the listing agent used terms I didn't understand. I'd also google things like "how investors determine good deals" and researched all I could. I stayed away from Bigger Pockets because it just had too much American influence for me and there weren't many Canadians actively posting there.

Caveat: A lot of the US stuff you'll find purely looks at cashflow too since equity build is painfully slow in a lot of markets. Still, those single family home deals they reference will only squeak out $100/mo if you're lucky but they also sell for $100-200k.

A couple of months later I pulled the trigger and bought my first property.

When I first started looking in the GTA most of the smaller duplexes would clear ~$200-$500/mo. I guess that's reasonable but for the amount you're investing in this market it's not enough return in my view. I look for each unit to clear a minimum of $500/mo. I reinvest all that I can back into the property and pay down the mortgage or improve the property. Some people disagree with this approach but I view it as simply holding more equity in the property until I need to pull it out for down payment on another.

Anyway, my view is that the Toronto market and many of the burbs are too hot right now and are over-inflated. Rents haven't kept up with house prices so buying one now means significantly less cash-flow (if any). Some areas like Oshawa and Barrie are still somewhat reasonable while places like KW are catching up to Toronto prices. Hamilton is reasonable too but you have renters that can be difficult.

So while I'm building equity in the small number of properties I have, I'm researching apartments and reading recommendations from @SteveO and waiting for the market to change. I'm not taking my eye off the market though...you never know when deals can pop up...historically over Christmas/New Years has been a good time for those in desperate situations but this year the pickings were very slim.
 

eribruski

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Anyway, my view is that the Toronto market and many of the burbs are too hot right now and are over-inflated. Rents haven't kept up with house prices so buying one now means significantly less cash-flow (if any). Some areas like Oshawa and Barrie are still somewhat reasonable while places like KW are catching up to Toronto prices. Hamilton is reasonable too but you have renters that can be difficult.

Thanks for the awesome post (I only quoted part of it) this information will be very useful to a bunch of us here just starting out. I agree, Toronto is very inflated - I don't see the market simmering down anytime soon, or ever in fact. It's one of those things that are seemingly "recession-proof".

In a few months there will be opportunity in Alberta to pick up foreclosed properties. The catch is, will there be anyone around to rent it?

Montreal is a soon-to-be-hot market but it has barriers to entry such as language and their lame tax laws that don't make any sense (their neighbourhoods don't make much sense either - everything is mixed density and mixed income, hard to predict future value)

I'll be making a move somewhere this year and I'll post it all up here!
 
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LateStarter

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Just be careful looking at properties outside of areas you live. You need to be intimately familiar with what's going on in the local market. It's a challenge to do this remotely. If you don't live in the market you're looking to buy, then take an extended trip there and talk to a bunch of locals and learn what's going on in the local economy and community. Get in touch with local agents too and discuss properties that sold recently, who's buying them (foreign investors, families, etc) and what the local rental market is like.

If you insist on buying in a hot market, be prepared to submit an offer sight unseen just to lock out others from scooping it. Keep a condition in the offer so you can walk away if it's not as it appears.
 

daivey

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Just be careful looking at properties outside of areas you live. You need to be intimately familiar with what's going on in the local market. It's a challenge to do this remotely. If you don't live in the market you're looking to buy, then take an extended trip there and talk to a bunch of locals and learn what's going on in the local economy and community. Get in touch with local agents too and discuss properties that sold recently, who's buying them (foreign investors, families, etc) and what the local rental market is like.

If you insist on buying in a hot market, be prepared to submit an offer sight unseen just to lock out others from scooping it. Keep a condition in the offer so you can walk away if it's not as it appears.

I agree.

Toronto is nutso. Rents HAVE NOT kept up at all. It makes no sense to buy in Toronto.
London, Guelph, Hamilton, Barrie, are better options for rental properties.
 

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