Property Analysis #2: 24 Avalon Place

Be sure to read my first property analysis as it contains detailed explanations of things I only briefly talk about here:
Property Analysis #1: 40 Carrick Avenue

Aah, 24 Spadina Place. It has beautiful potential! A 7 bedroom house, with all bedrooms rented for $400. It has two kitchens, and two bathrooms. It brings in $2800/mo in ideal situations. The house has had an extension added to it which adds 3 large bedrooms to the house, making all of this possible. The house is not yet listed, and it was brought to me privately by my realtor who had a client wanting to list it with her. I essentially had first right of refusal at $230,000. Is this a good deal?

The layout can be a bit tricky, so I’ll try to be clear:
There was the basement, which had a door from the side of the house, and from the main floor. There was one unit in the basement, two storage rooms, as well as a washer and dryer.

On the main floor there were two units, a living room, a kitchen and a bathroom. I like the idea of taking this entire floor for my unit, but that would mean lost rent on that unit. I like my own living space, but I am willing to live with roomates. Ideally I’d like to spend some money fixing this floor up if the numbers allow it. The entrance to this was through the side of the house.

And then there was a second floor, and a third floor. The third floor was pretty small, and it had two rooms rented out as a single unit for $400. The second floor had three units, a kitchen, a living room, and a bathroom. If I took the main floor as my own unit and didn’t want to share a kitchen and bathroom, the basement tenant would have to go to the second floor (which involves going outside to get there!).

Estimating Cashflow

When estimating the income for a property, it is important to include vacancy allowances. As you know from my first analysis, I like to use 10%. Assuming I don’t take the first floor for myself (not viable due to lost rent & bad situation for basement tenant), I will have a basement unit, 2 first floor units, the 3 second floor units, and the third floor unit available. With 7 units, the rent collected would be $2800, with 10% vacancy giving me a monthly rent estimate of $2520. With $2358 ($197/mo) in annual property taxes, $2000 ($167/mo) in annual insurance, and $400 monthly utilties, that leaves $2520-$197-$167-$400 = $1756 to cover the mortgage and all maintenance and repairs. At $230,000, the mortgage alone is $1,111.01. That leaves $644.99 for all of the maintenance, repairs, and cashflow. The property expenses have been very low for the current owner, but due to his neglect, as I understand it. He chose not to put any work into the property during his ownership. Managing the property myself will save me some money, but $644.99 for repairs, maintenance, and cashflow is not enough.

Analyzing this another way, using the 50% rule:
$2800 rent income = $2520 after 10% vacancy.
$2520/2 = $1260 (This is your Net Operating Income) left to cover mortgage and provide cashflow.
$1260 – $1111.01 = $148.99 cashflow for managing 7 units. Frankly, I think I have better paying jobs for my time.

The property would cash flow, if no big surprise expenses came up – but would require lots of management (read: lots of time, and time is more than money). It doesn’t pass the $100 per door rule. Having to tend to seven tenants could be a big headache, and the previous owner had not put any money into the property to keep it well maintaned throughout the past 3 years. To me, this spells nasty surprises during my ownership. The seller didn’t seem at all motivated, and did not want to negotiate on terms or price. I couldn’t get the house below market value (there was a fully renovated duplex on the same street selling for $230,000). All of this, combined with the fact that it is in a part of town I’d ideally like to avoid, has kept my finger off the trigger for this one.

The search continues!