Case Studies

Many of these Case Studies were originally published years ago, but we believe that the points and principles presented in them are relevant and apply today.  We have updated them in terms of their subsequent sales history and current values.


 

Case Study: Big Deals Don't Always Require Big Money.

There is a common perception that only those with large net worths and high incomes may buy significant real estate assets. The following case study defies that logic, and illustrates that the most important factors can be the investors’ will to work with what they have, and their patience to look past the surface of a situation to realize value.

The Property: A 4 level, 13 suite apartment block on a 75’ x 120” RM-4 lot near Yew Street and 1st Avenue, 2 blocks to the beach in the Kitsilano area of Vancouver. The suites are large, with nine 1 bedrooms over 750 sq.ft each, and four 2 bedrooms over 1,100 sq.ft. Four of the suites have ocean and City views with the 2 large penthouses having fantastic, unobstructed views from their private, large roof decks. The building had been neglected, with obvious deferred maintenance, especially in a vacant, 2 bedroom suite, and in the owner’s 1,300 sq. ft. penthouse unit.

The Revenue: At the time of listing, the “pro-forma” revenue was stated as $158,500/year, which included the vacant suite factored in at $1,100/month and the owner’s penthouse suite at $2,000/month. The yearly expenses were shown at about 33% of gross income, or just over $52,000/year, for a net income of just over $106,000/year. This provided a Capitalization Rate of 6.4% on list price, considered better than the average for Kitsilano “North of 4th” market.

The Buyers: A mother and son, both school teachers, were immediately interested in the property. Both persons lived modest lifestyles and had a total, combined yearly income of approximately $90,000. They own, jointly, 2 houses in Kitsilano - one as a family home, and one as a rental. The houses are about 1912 vintage, and sit on 25’ x 120’ lots. One of the houses is clear title, the other is encumbered by a mortgage.

The Sale: The property was listed at $1,650,000, and it was assessed at $1,733,000. Because of the location and income, there were many showings to qualified buyers. Two factors, however, caused these persons not to purchase the property. First was the shabby appearance of the building and the 2 suites mentioned above, which caused the fear that a large budget would be required to “fix” the building. The second concern was that the seller, as a condition of sale, insisted on remaining as a resident in the building. Because the seller had 2 large dogs, and because of the condition of his suite and building, most buyers considered this requirement as too large of a risk. The successful buyers, however, were patient, and able to look and work past these obstacles. After a very long negotiation, and a number of options explored, a simple contract was achieved at a price of $1,550,000. The agreement included the provision that the seller would remain as a tenant (paying market rent), and move into the vacant suite once the Buyers had renovated it.

The Financing: Except for an initial deposit of $5,000, the Buyers were able to 100% finance the purchase! Their mortgage brokerage team structured the financing in 2 stages: A CMHC insured 1st mortgage of approximately 74% of the value, at a rate of 6.65% was secured by the property. The balance of monies required, including downpayment, property purchase tax, closing costs, plus a “renovation fund” to begin building repair immediately, was achieved by a conventional refinancing of the 2 Kitsilano houses.

Summary: The Buyers were extremely pleased with the purchase. Upon inspection, they discovered that the repair requirements of the building were not as onerous as indicated at 1st glance, with much of the work being cosmetic, or within the scope of their own abilities. They also identified savings of several thousand dollars in the expense schedule of the building, and an updated rent roll delivered to them just before closing indicated that the adjusted yearly rental would be closer to $164,000 - approx. $5,000 more than the original pro-forma! The owner remained in the penthouse suite at $2,000/mo, and they were able to rent the renovated suite for $1,350/mo, or $3,000/year more than planned. The combination of savings and increased rent pushed their net income projections above $120,000, giving a Capitalization Rate in the 1st year of ownership of almost 8% - an exceptional return for this 1st class area!

Give me a call, Bob Bracken at 604-263-2823 if you would like to discuss this case study further or have any other questions.

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