Garage Construction & Rental

We have a massive lot where there is a duplexed home and the majority of the lot is empty unproductive land... undeveloped unproductive land is extra land on which we pay property tax on. That sucks.

I went to the city to ask for this particular lot to be considered zoned to allow at the very least a triplex or a fourplex, realizing that this empty land isn't maximizing it's "highest and best use" of that part of the property.

But the city won't grant anything more than a duplex. They went on to basically say I'd be wasting my time filling out the paperwork to try & make it happen.

It is for Property SIX. It is zoned a duplex and it is actively used as a duplex so I've fully maximized it's potential.

Or have I?

Property SIX does not have a garage. The city said that I could add a garage, which made me consider the following:

1. In trying to make the highest & best use of the property, I could add a garage and rent it out.
2. In adding a garage, I could use my concrete workers connection that has been used to create the concrete steps at Property SIX to extend to the end of the large lot and construct the foundation (more concrete) from there.
3. The garage can then be constructed for total costs of about $40,000 I'm thinkin'. This would be borrowed funds leveraged from one of the other recently renovated properties via private investor. At 10% interest rate this equates to monthly payments of $333.
4. The $40,000 would be used to create a ranch like house (er, *ahem* "garage") with a main floor kitchen, bathroom & living room, then two additional rooms upstairs. Landscaping & parking in front.
5. Advertise "cute & unique 2 bedroom private home for rent $850 a month". Instant positive cash flow of $500 a month to be applied to other investments.
6. Rent the property using a warehouse garage lease, NOT a residential lease.

Lots more to consider of course, this is just rough idea of plan...

Why do this?

Why not just use that $40,000 as a down payment on another property? Good question to consider...

For one, just using it as a DP on another property would likely result in breakeven cashflow at best. And legal fees. And mortgage set-up fees. New property taxes, new ownership change fees, blah, blah, blah.

In this case, the $40,000 would generate approx $500 a month in positive cashflow right off the bat, even more if I go through a bank at 5% interest rate instead of a private investor.

And at this point I have net-worth trending in the right direction and set-up to continue going in the right direction. I don't have any freedom right now.

Paying all cash from our $40,000 savings to construct this, and then renting the place for $850 a month means that we would get our $40,000 back in 47 months, or approx 4 years. Thus, after 4 years we would have our $40k money completely back and would be collecting $850 a month for free (minus tenant headaches, maintenance, hassles etc...).

Freedom is the name of the game and $500 is a step in the right direction in the plan to replace existing emplyment income...

PROPERTY SIX RENOVATIONS - The Plan Part One

The upper unit of Property SIX is (finally) about to be significantly overhauled via extensive renovations!

We have approx $24,000.00 budget set aside... but we do also have a significant cushion in case of contractor 'overages'.

Mandatory renovation requirements are as follows:

1. Those who did the concrete work at the front of the home offered to replace the side of the driveway... We will now take them up on this offer as we now must correct the structural deficiencies such as the foundation by the driveway. Water is sloped towards the home, this needs to be rectified to avoid further basement water damage. Find out quote from grant, then ask concrete contractor to see if they can do everything including full stamped driveway and concrete side platform for the grant estimation... Throw in extra work for lower cost too (Property SEVEN). Depending on the cost, we may be able to have the stamped concrete continue into a full driveway.
2. The upper unit warped hardwood flooring must be replaced. Must use a light colour hardwood flooring as light coloured flooring makes the place look more spacious as opposed to dark flooring.
3. New bathroom MUST be gutted and new shower installed that doesn't leak.
4. New plumbing must be done properly and to code.
5. Toilet must be lowered & ceiling on main floor must be lowered slightly to make the upper unit toilet level with new floor.
6. A gutter-like trench must be dug at side of home with all the weeds removed.

Great ROI Bang-for-the-Buck renovations to be completed with remaining funds:

1. We will be buying two brand new beautiful front doors. New top-of-the-line door handles to be installed.
2. New light fixtures to be installed in upper unit throughout & new ceiling fan. Costco has semi-flush lights on sale for $30.00 each...
3. Brand new windows throughout the entire property to replace old nonfunctional windows. Installed by the person who previously installed the three kitchen windows? Bay window to be converted to three new windows at front.
4. Ikea kitchen in upper unit to be added for cheap. Labour provided by our reliable and very experienced handyman who charges roughly $25 an hour. Ikea Island to be added in new flooring for extra cupboard space for tenant.
5. New backyard sliding door to be added.
6. Property to be significantly weeded and trimmed while taking out some unnecessary bushes which are trapping moisture against the structure, where canal is to be dug.
7. Take down sides of side deck & remove precast concrete rails, or just remove the concrete steps and build wooden matching steps and stain them.... Or just take it all down and create a concrete platform like the front (see mandatory renovation requirement repairs point one above).
   

PROPERTY SEVEN RENOVATIONS - The Plan Part One

The time has come to significantly improve Property SEVEN via extensive renovations.

We have approx $24,000.00 budget set aside.

Mandatory renovation requirements are as follows:

1. We must correct the structural deficiencies such as the foundation by the driveway. This may or may not become very complicated & possibly very expensive as they will need to dig around and then determine the extent of the work that needs to be completed.
2. We must also re-point the exterior brick as the concrete between bricks is 'soft' and if scraped it crumples into dust and falls to the ground.
3. The warped hardwood flooring must be replaced, especially the bubble that formed once the basement joyce was raised. this must be lowered & levelled. Will use oak hardwood flooring, the place will look fantastic.
4. Chimney to become redundant and to be taken down

Great ROI Bang for the buck renovations to be completed with remainding funds:

1. We will be buying a new beautiful front door for Property EIGHT - OUR HOME. Then, we walk over the existing front door, which is a very, very nice one as well, over to Property SEVEN to install that one there. Both properties benefit significantly for the price of one door. New top-of-the-line door handles to be installed.
2. New light fixtures to be installed in ALL the bedrooms replacing the existing 1920's original light fixtures. Costco has semi-flush lights on sale for $30.00 each...
3. Brand new windows to replace old unfunctional windows. Installed by the person who installed Property SIX windows?
4. Ikea kitchen to be added for cheap. Labour provided by our reliable and very experienced handyman who charges roughly $25 an hour. New flooring to be added as well.
5. Brand new interior doors to be added.
6. Property to be significantly weeded and trimmed while taking out some unnecessary bushes which are trapping moisture against the structure.

Goals & Aspirations for 2008

Our number one goal for the remainder of 2008 is to take advantage of the depressed property market south of the border (USA).

Specifically, our goal is as follows:

1. Take advantage of the strong Canadian dollar by making large property purchase in USA
2. Take advantage of the strong Canadian Real Estate market by renovating properties SIX & SEVEN via Gov't grant & then refinancing properties for the down payment on a revenue/recreation property purchase in depressed USA market.
3. We are concentrating our area of purchase in Orlando Florida for short term rentals so the property can be effectively used as a revenue generator, as well as recreation property for ourselves (not to mention great capital gain potential).
4. This opens the door to USA expansion. When the market in the USA rebounds (which it should shortly) then we are in position to refinance and buy another revenue property with the USA contacts & experience established from this experience.

How will we do it?

Firstly our goal is to extensively renovating both the above properties (SIX & SEVEN) including new windows, flooring, new kitchens & new bathroom as well as curb appeal. This is accomplished by the funding approved by our grant, as well as some dollars we contribute ourselves.

Secondly, we then we send in an appraiser to appraise them.

Thirdly, we believe given the work involved, that property SIX after renos can be appraised as much as $245,000 which at 80% LTV via regular cheap interest bank refinancing would give us $40,000 as a down payment for a Florida 5 bedroom home valued between $200,000 and $300,000. We believe that property SEVEN after renos can be appraised for as much as $235,000 which could give us as much as $8,000 in regular cheap interest bank funding. The remainder to be financed via private lender from Property EIGHT OUR HOME.

Given the Canadian Dollar being at par, and given the fact that Canadian properties are strong while American properties are significantly depressed, we feel this is a rare opportunity and one to take advantage of.

These combined factors create an opportunity that may be once in a lifetime for our generation and one that represents tremendous upside potential.

Updated Property Info and Cashflow

Here is the updated Cashflow situation for all properties.

Click on the side links for details on each property for more information. I'll start with the total cashflow situation:Here is the cashflow breakdown according to each property: Here are more property breakdowns: Cashflow is still negative but much improved from before...

Net Worth & Debt to Equity - One year later.

It's been well over a year since my last post so time for an update.

Net-worth is trending in the right direction.

Current Net Worth now stands at $807,961:

Assets continue to pull away from mortgage and other debts. Assets are currently valued at $2,869,736. Liabilities at $2,061,775:Area diversifcation is roughly unchanged, save for an addition of a couple more properties in London.

The time has now come now, however, to refinance some London, Ontario properties to invest into the struggling USA market... more on that in a bit....

Interesting Perspective on Negative Cashflow Properties

As I own property in BC, I like to keep an eye on the real estate developments out there.

Actually to be far more accurate I'm more addicted & fascinated with the real estate statistics out there as the market is absolutely fascinating. Why/how do property prices keep increasing when the rent fundamentals are so poor? It now takes something like 65-75% of your household income to service your home's mortgage payments. When the average house price is $715,000 (in Vancouver), that makes sense.

Rob Chipman is a realtor who runs a blog out there with great stats & great debates. I thought I would add it here as it has an interesting - some may say extremely dangerous - perspective on negative cash flow scenarios for the real estate investor. Here's what Rob says:

• I think Jeff (Brown) is saying that a cash flow neg property becomes, in effect, cash flow positive by applying interest expense, maintenance and depreciation deductions to your earned income. You change income tax paid today into capital gains tax deferred until you’re in a lower tax bracket (or never, if you don’t sell). While you may not find cash flow + properties in Vancouver for 10% down, they did exist in Greater Vancouver in the not too distant past (it was a challenge for some investors to get neg/neutral cash flow with past mortgage restrictions), and you can still get them today in other markets.
• Most property investors that I know do assume some sort of appreciation in the long term. Its not critical (you could buy in other areas, and tweak the numbers), but without growth leverage becomes moot.Is that speculation? I don’t think I’d go that far. I assume 5% long term around here. We generally do better than that. But, it is an assumption.
• The broad brush stroke idea is as follows: I pay out $1000 per month on the property (pit, maintenance, mgt, etc). I take in $750. I’m down $250. I write off interest, maintenance, management, taxes, and depreciation. That’s most of the $1000 (a little goes to principal repayment). So, I pay $250/month to my PM (property manager), who uses it to pay whatever shortfall I have. That’s my net loss. I add depreciation to increase it. I reduce my taxable income as a result. Given the right numbers and the right tax bracket, I could come out paying less tax by more than the $250 I’m losing on the property. That doesn’t take into account the potential capital gain, which most assume becomes more assured the longer you hold the property.
• (This is not an argument justifying purchasing a bad, money losing property so that you can write expenses off; rather, buy a good property, and finance it so that you incur expenses).
• I don’t have actual numbers handy, but many of my clients have done this, long term. They re-mortgage the property when interest expense gets too low, and use the borrowed money for other investments. It does work.
• You can even mortgage your revenue properties and use the funds on a principal residence (result of a court case between a lawyer and Rev Can - the judge sided with the lawyer).
• At some point in time you have to either pay tax on free cash flow (you probably don’t want 10 highly leveraged properties with a huge interest expense when you’re 80) or pay some capital gains on sale.
• One solution is to leverage several properties and then, when you approach retirement, sell individual properties and pay off other outstanding mortgages. You go from 10 leveraged properties to 5 free and clear properties and collect, say, $7,000 per month. Not bad if you don't have an indexed pension.

To be honest, this is something I've thought about since I'm quite young and have many years I can hold.

I've found great properties that I couldn't have afforded at the time without incurring neg cash flow. I watched them escape me and rise in value tremendously over the years. I missed the boat because I found that when it came down to making an offer, one simple question arose that I always seemed to ask myself. The question I tell myself: "Since I'm in for the long haul to have a safe & steady investment plan, how safe and steady is this plan if I'm tampering with the idea of paying money out of my pocket each month? Is this not putting my whole plan in jeopardy?". I guess Rob points out that the neg cash flow plan better take a good hard look at the positive offsetting tax consequences.

Did you notice the part about Rev Can allowing you to mortgage your investment properties then applying those funds to your principle residence? It caused quite a stir and some heated exchanges. I'll paste what Rob adds here:

1. It is, or at least was, legal. Its common. (I don’t think its changed, but maybe Rev Can changed the rules last week). Its not a case of incurring interest expense on your home and deducting it from your income. Its a case of borrowing money for some kind of investment, and deducting the interest incurred.
2. Court case example was a lawyer borrowing money from his partnership account, and using it to buy a house free and clear. He then mortgaged the house to replenish the partnership account. He called that a business expense and wrote it off. Rev Can said no way, he took them to court and he won.
3. In real estate what happens is you say “I have rental property with equity in it. It breaks even. I want to buy a house, or reno my existing house. I’ll increase the mortgage on my rental props and use the money to pay for my principal residence. The interest expense is incurred because it allows me to hold the revenue properties. The alternative was to sell them. I borrowed the money to hold them. Therefore the deduction is fair.
4. People sometimes say “Hold it, you’re really using the money for your principal residence”. That’s confusing doing one thing with doing another, and letting an unrelated activity deflect your focus. To hold the investment properties you have to borrow money. The interest is tax deductible. The fact that you are using other money to do other things is immaterial. Do a google search on principal residence interest deduction Canada and you’ll find lots of info on this. Its common.
5. CRA was never happy with losing that case, so your point is well taken. That said, you can still write off interest and run the investment at neg cash flow. People have been doing it for years.
6. And, as you rightly point out, tax advice should come from up to speed professionals.
   Also, I differentiate between investors and flippers.