Case Study: Good Investments Often Made, Not Found!

The Buildings: Two “Duplex Buildings”, with a total of 4 three level (including full basement) townhouse units. Each of the units is totally self contained with its own hydro and gas meters, hot water tank, furnace and laundry hook-up. The units are just over 1600 sq.ft., for a total building area of 6500 sq.ft. The buildings are very plain and about 60 years old, but are in reasonable condition with no pressing maintenance issues. The basements are mostly unfinished and have further development potential.

The Land: is a 66’x115’, RM-4 (Multifamily) zoned, corner lot in the Kitsilano neighbourhood of Vancouver. The RM-4 zoning allows for redevelopment of the property to a multifamily building of 8 to 14 units, and up to 10,800 sq.ft. of floor area. The neighbouring properties had recently sold (for $135 PSF) and a large condo development has been built.

Replacement Cost: Land prices for similar types of property in the area had ranged from about $110 PSF to $135 PSF. Building costs under current City code would be about $100 PSF. Total replacement cost would be about $220 PSF or ($220 x 6,500 sq.ft.) = $1,430,000.

The Revenue: 2 of the units were rented at an “undermarket” rate of $1,100/month, while the other 2 units had been brought to “market rents”of $1,400 and $1,500 for a total monthly income of $5,100, or $61,200/yr. The units are fully self contained, there is no common area maintenance and the tenants pay all utility costs. So expenses are quite low - after taxes, gardening, garbage removal and maintenance, yearly expenses are about $12,500/yr.

The Sale: The property was listed for $875,000 and sold for $780,000. Offers were received from developers planning to build a new multifamily project, at a higher price than the eventual sale price. These offers were marred by the requirement for lengthy “tie-up” periods, and other conditions unattractive to the seller. The successful buyer is an investor who plans to hold the property.

The Financing: The buyer received a mortgage for 75% of the sale price ($585,000), at 6.5% interest with a payment of $3918/month or $47,000/yr. The Setup:

Gross Yearly Income: $61,200

Less Expenses & Reserves: (12,500)

Cash Flow From Operations (CFO): $48,700

Less Financing Costs (FC): (47,000)

Cash Flow After Financing (CFAF): $ 1,700

- Return on Assets (ROA): $48,700/$780,000 = 6.25%

- Financing Cost (FC): $47,000/$585,000 = 8.03%

- Return on Equity (ROE): $1,700/195,000 = 0.87%

The “Upside”: The buyer purchased an “easy care” property in good condition at a price close to “land value”. The property was “under rented” and the units contained “unimproved” space in the basements, allowing the buyer to add value immediately. By renovating the basement areas and adding a bathroom and bedroom at an estimated cost of $10,000/unit, he should be able to increase rents to a total of $1,700/unit. If he finances these reno’s at the same rate as his purchase, his “New Setup” looks like this:

Gross Yearly Income: $81,600

Less Expenses & Reserves: (12,500)

Cash Flow From Operations (CFO): $69,100

Less FC ($625,000 @ 6.5%): (50,240)

Cash Flow After Financing (CFAF): $18,860

- Return on Assets (ROA): $69,100/$820,000 = 8.43%

- FC: $50,240/($585,000+$30,000) = 8.17%

- ROE: $18,860/$205,000 = 9.20%

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