Posted by propertyking on March 05, 2006 at 16:09:05:
It is located in Prince George, BC, Canada. What dollar value should I offer to have it work best for me or should I pass?
How would you buy this duplex - Posted by propertyking
Posted by propertyking on March 05, 2006 at 11:06:04:
How would creatively buy this duplex?
Duplex appraised at $220,000 ($110,000 each side)
Total income $2020 per month. One half brings in $1120 and the other $900, but he pays electricity for the $1120 side for $150 per month. So real rental income is $2020-$150=$1870
Here was my analysis.
Rental income $1870
Vacancy (5%) $ 93.50
Total income $ 1776.50
Expenses per month:
Property taxes $225
Insurance $75
Repairs (6%) $106.59
Management (10%)$177.65
reserve (1%) $18.00
yard maintenance$50
utilities $84.00
mortgage $138,000 @6% for 25 years $890.26 (25 yrs max in Canada)
Total expense $1626.50
Cashflow $150
I have calculated it to give $150 cashflow per month by manupulating the mortgage amount I need to pay.
I am required to put down 15% of the selling price (minimun). This means that I need to buy this duplex for$162,352 inorder to cashflow at $150 per month. But the place appraised at $220,000. My downpayment at 15% would be $24,353, I will need to pay a 2% of sale price as an insurance fee since I am not putting down 25%. So I will be out of pocket $24,353 (deposit) + $3,247 (mortgage insurance)+ closing costs at 4% of sale price $6494.08 = $34,094.08 TOTAL.
The seller appears motivated because he wants to move. I asked if he would carry back but he did not respond. The gap between the FMV of the duplex ($220,000 and what I need to buy it for ($162,352) to cashflow to $150 per month is very large.
Can this deal be improved or should I move on to the next one? Any creative financing ideas that could work here?
Re: How would you buy this duplex - Posted by Mike-BC
Posted by Mike-BC on March 05, 2006 at 21:32:39:
Hello propertyking;
By coincidence, I am very familiar with the Prince George market; lived there for off and on for many years; bought and sold several rental properties and still own an apartment building there.
Something to remember, a 5 unit building or more is considered a commercial property and its value is based on the net income it generates. A duplex is considered a residential property and its value is determined by “fair market value” based on comparing its features to similar properties that have recently sold. The upside is that Prince George is an appreciating market, that is prices are on the rise after many years of stagnation and even depreciation.
Firstly, have you done your due diligence, that is have you looked at comps for property type and location? You have identified the cash flow, I would ask for the T-776 Rental Income and Expense form used in tax preparations to confirm numbers. Another part of due diligence is to confirm the condition of the structures - that is a home inspection.
You say the property has been appraised at $220,000 - have you seen the documents to support this, $220,000 in PG seems a little high except for a few areas. What street is it on? Positive cashflow is a problem in many other high priced markets such as Vancouver where rental properties need to be subsidized, yet they are still good investments because property values increase over time.
Now it may be that the property will not produce a positive cashflow, but if it is a premium property, it will appreciate faster than other areas. So the goal here would be hold onto the property for a number of years, let the value continue to grow and cash out for a sizeable capital gain. And if the property can pay for itself, you are doing well.
Are there possibilities for increasing cash flow? Could you have suites in the basement? Are there garages that could be rented separately? Is it near the university of college so that you could rent individual rooms? How about separating the two sides and selling individually - will the value of the individual units be more than the combined duplex? Will you live on one side - there are benefits to this?
Monthly payments have three factors: interest rate, principal amount and length of amortization. To reduce the monthly payment, find a lower interest rate, put more money down to reduce the principal, or extend the amortization. If you can get the owner to carry financing - I have some ideas how to convince an owner to do this - you could go an interest only second mortgage payment.
After all is said and done, you may have to walk away. However, if you explain your rationale for your best offer to the seller, they may come back to you later after it doesn’t sell. Another saying: you make money when you buy, not when you sell. This means you have to buy correctly, not just price, but terms as well.
Contact me directly at mikealan51@yahoo.com. We’ll meet for coffee and a good discussion. There isn’t an REI club here in PG, but maybe we can get something going.
Mike
Re: How would you buy this duplex - Posted by Patrick S. Lawson
Posted by Patrick S. Lawson on March 05, 2006 at 14:45:02:
The numbers don’t look very attractive…where is this property located?