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This email engendered about thirty replies with everyone adamant that the writer should NOT go through with the purchase fo the townhouse complex.
Ross McDonald of Lighthouse Realty in Abbotsford (and also proprietor of a CEN-TA tax office in Abbotsford) has commented further.
----- Original Message -----
From: David Ingram
To: Davidingram@shaw. ca
Sent: Monday, March 15, 2004 8:58 PM
Subject: FW: single mom looking to get ahead for her children'sfuture
-----Original Message-----
From: Ross McDonald [mailto:[email protected]]
Sent: Sunday, March 14, 2004 9:22 AM
To: [email protected]
Subject: RE: single mom looking to get ahead for her children'sfuture
Dear David,
As one of those ex-400 Robron Rd partners, I would have to say that this lady is:
a) way younger than you or I - her risk tolerance level hasn't been beaten down by age yet and;
b) is about to break a couple of Cardinal Rules:
i) The 1% rule. The rent should be 1% of the purchase price or as close to it as possible. Based on the asking price, the rent should be $1500 - almost double what it actually is. Although hard to find I saw some condos last week that are asking $64,900 and rent for $600. She should sell the townhouse (it also breaks this law) and buy 4 units at $65,000.
ii) When a Seller offers to take back a mortgage you can bet you are paying too much for the property - that's usually the trade off - especially in today's market.
iii) The Roof-over-your-head rule. If she lives in the 10 plex and loses it she's out on the street with her kids. If, after 5 years, her mortgage rates go up 2% from 4.5% to 6.5% her mortgage payment jumps 29%! Pretty tough to cover that on a $500 per month job.
iv) Diversify. Don't put all your real estate eggs in one basket. Own 10 little properties scattered around - it's easier to sell off 1 or 2 if in trouble - they are probably not all going to need roof repairs at the same time - and if there is a murder in one of the suites, it does not affect the rentability of her other suites (this happened to us at Robron).
These are generalizations, and like you pointed out, to do a proper analysis there would have to be a ton of due diligence performed first, from market analysis, to building inspection, to environmental issues, to zoning issues, crime assessment, etc etc.
Ross
-----Original Message-----
From: [email protected] [mailto:[email protected]] On Behalf Of [email protected]
Sent: Sunday, March 14, 2004 8:11 AM
To: CENTAPEDE
Subject: single mom looking to get ahead for her children's future
Hi David, I am a single mom with 2 kids. I am working part time avg about
$500-600. a month. I get 450 on child tax benefits. I receive about 950.00
in child support. Which I don't think I have to claim on my income tax. Last
year I received my settlement and I bought a residential home for 153,000.
in Feb I put about 40,000 into fixing it up.
In October I got a tenant living in the downstairs suite while my kids and I
live upstairs. 2 weeks after he moved in I got the home appraised for
300,000 and I used the equity to buy a townhouse. I bought it in October and
now I rent it out for 875 a month. I have a 90,000 mortgage on the townhouse
and a mortgage of 180,000 on my residential home. I collect 700.00 for my
downstairs tenants and 875 for the townhouse. I have strata of 125.00 and
land tax of 100 a month. Now I am considering in doing something crazy. I
want to purchase a 10 townhouse complex. It has not been stratified yet.The
seller would consider helping me with some sort of financing( which I don't
on what) the property now is asking 1.5 million. it's cap rate is .04 abd
expense rario is 23.60. Gross income of 87,0000 and expenses of 20,000.
Owners have put 100,000 in reno some of the rents are going up as old
contracts . He collects anywhere from 700 to 900. 900 is of course the new
recent tenants. If all were rented out at 900. Gross income would go up to
108,000. It does not make a lot of income now even if I purchased it at 1.2
mill as I know that. I see it as a holding property Interm Use .
There is new mall being developed next door or stratifying it and making at
a potential income of 40,000 a piece . That's a potential 400,000 plus
profit. Or wait for a developer to buy me out. The seller said he would
consider helping with the financing . Should I trade in my 2 properties as a
down payment and would I get less property tax? Is there any benefits in
doing it this way? Or should I just trade of my townhouse? What types of
creative financing are there in this type of situation? Should I buy knowing
it is a risk but knowing that I could make a nice chunk of money. I even
know atleast 3 people that would like to buy a townhouse individually.
Should I live in one of the units and would I get exempt from Capital gains.
Would it be consider my residential home then even though I rent out the 9
other units. Should I forget it all and live my normal part-time job of 500
dollars a month. Funny thing is I have I have more money now being single
than being married. I just don't have any more of his debts. lol. I just
have a very simple life. Living in a 1/2 of house of 650 sq ft which my
kids. I have a junky car and hardly anything new in it. But I do have my own
roof over our heads. It would be nice to provide something more down the
road for my kids. I would greatly appreciate any advice you can give me
David. Look forward to your response. Take Care. Ps.Sorry to hear about your
marriage breakup. Life does go on. Easier said than done.
Please email me back
Thanks
_________________________________________________________________
david ingram replies:
Nobody can answer this without more information.
You would need cash flow projections made, building inspections, estimates of legal fees for stratification, and two or three dozen other factors taken into consideration.
Three partners and I bought 49 townhouses at 400 Robron in Campbell River in 1981. The market turned down about thre months later, 24 of the 49 tenants moved out and the place was costing us $2,000 a month each out of our pocket overnight.
We tried to sell them for nothing down to the tenants but no one was interested for another 7 years. We reduced the rents 20% to fill it up and keep the existing tenants.
I can tell you that we eventually broke even with time and inflation but I did not get my last break-even cheque until July, 2002, 21 years later.
It sounds to me like you would be taking everything you own and risking it in a super heated market that I do not feel can sustain itself at the moment.
Tread softly - pretend there is a rattlesnake everywhere you want to step.
Does anyone else have an opinion here?
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