Ask the Mentors

Sunday, May 10, 2009

Bob:
Re 22 multi-family units.
I am attaching details and photos on this property, which in my opinion, is exceptional.
It is one minute from a Hwy 401 interchange, with a TTC bus stop at the door.
There are 2 buildings of 11 units each. The Vendor is the second owner (he bought them from the builder), and has owned them for 28 years. He does everything himself and it shows! I have rarely seen multi-family buildings so well maintained.
The owner tells me that the Gross is $216,000, and the Net $138,000, or a Cap Rate on the $1,966,000 asking price of close to 7%.
A neighbour of his sold his identical 11 units for $983,000, 1 1/2 years ago. He would like the same = $1,966,000.
You should insure the mortgage with CMHC. I believe they will go to 85%, and the premium should be 2.9%, which will be added to the mortgage amount.
The interest rate should be between 4 and 5%.

Normally, you are supposed to be scared at the idea of buying $2,000,000 of properties for your first Real Estate foray. In this case, you should not be, because the risk is very minimal. I believe that you should be able to acquire that with $300,000 down.
Remember: At the appreciation rate of 7% per year, your indirect return will be $140,000!

Pierre

May 11, 2009

Pierre

I ran some numbers last night.  By my calculations, there would be a positive cash flow but minimal as a % of the size of the building.  My concerns would be funding vacancies and capital/repair/maintenance costs going forward.  My view has been to have the properties generate enough cash to fund the costs involved in managing a building and not to fund through my personal funds.  Your comments are welcome. Thanks

Bob

May 11, 2009

Bob:

You are correct, but only partially. Let me elaborate.

Possible sources of funds: Your own; tenants’ last month deposits ($17,600?); VTB; postponing paying property taxes.

Remember that your mortgage interest rate may be lower than 5%, and that you can count on an average legal yearly increase in rentals of 2%.

I know that it is reaching high, but with such buildings and 22 tenants, I do not see any risk. If you can do this deal, you will be laughing for the rest of your life.

Pierre

A. They are usually comprised of a whole office building floor, or a large part of it. The space is divided into individual offices, frequently of various sizes, that are usually rented on a monthly basis and frequently to new small businesses, which do not want to commit to a long term lease.

There are common areas comprising a lobby, secretarial area, mailing/copying room, one or more conference rooms and often a kitchenette.

Tenants are charged for their individual offices, which include the use of common areas, telephone systems and answering service and pay also for individual services such as typing, copying, etc.

There are two main types of executives office landlords:

– Companies that made it a business and have usually offices in several cities.

– Landlords who found themselves having difficulty renting their office space in a difficult market and turned a floor of their building into this kind of use.

A. Yes, it will cost between $15 and $20 per square feet.

However, it depends by how much you need to raise the roof. If it is up to four to six feet, it is all right. If you want more, as for example, go from 12’ to 24’ there will be more serious points to consider:

– All the columns will be too weak and will need to be reinforced.

– Lighting fixtures, heating units will need to be replaced, or new ones added, including piping and wiring.

– Additional shipping doors will probably be required.

A: I will assume that you have either

A Manufacturing Plant

You should buy a box of push pins and a fold up map of the area in which you are presently located. Pin it up on a wall, then put a pin where each of your key employees live. Then, pick a pin of a different color to show where you live. This last pin is the most important one for most businesses because it is the leader that makes a business succeed or fail.

From the above exercise you will be able to pick the ideal location.
Draw a circle of a few kilometers around this centre point and look within this area for your new plant.

Google Maps offers a digital version of this exercise.

Go to http://maps.google.ca, click the “My Maps” tab just below the “Search the map” field.
Click the “Create new map” button, and follow the instructions.
This is a handy way to consider several locations, and save each map so you can go back to it.

A Retail Store

First, you must answer a few questions:

– Do you want to keep the same clientele, type of merchandise, price levels, merchandising mix, phone number, employees?
– Is your business type an impulse purchase one or a destination one?
– Do you want more or less store area?
– How much storage space do you need?
– Do you want to get way from a major competitor that makes your life difficult?
– If you could stay in your present space (renew your lease), have you considered selling the business and moving away to a non-competing distance?

In both of the above instances:

– Look at the total of your occupancy cost (base rental, plus additional rental (TMI/CAM). A low rental rate is not a bargain if the additional rental is very high.

– Talk to your potential future neighbours regarding the location, the building and the landlord.

– Try to find out which other buildings the landlord owns. If he does, talk to some of these tenants.

– Find out the utility costs. If, for example, the building is poorly insulated, has single pane windows, your HVAC costs will be huge. If the lighting has not been retrofitted, before you move in ask the landlord to do it as part of his landlord’s work.