Cash not working for you? Why not try a rental property?

Rental property

As you may have noticed in my Q1 2015 Net worth summary, I had a lot of cash sitting around not working for me.  With the Alberta housing market looking like it was on a downward spiral, I didn’t want to buy there just yet. So I decided to look into a rental property.

In February 2015 I was looking at like I normally do.  I have the tendency to surf MLS at least once a month looking at the prices of homes in all of the areas I’ve lived in. It’s only 4 different areas so it doesn’t take that much time.  I don’t know why exactly I do this, mostly just from to feed my interest in homes I think.

This one particular time I was looking at places in Cape Breton, Nova Scotia. It’s where I’m from and where a lot of friends and family still live.  If there were opportunities like there are in Alberta, I would think about moving back, but until that time, it doesn’t fit into my financial plans. Or at least that’s what I thought.

When I was looking I started to search for investment properties to let my father know about since he owns a couple of rentals himself. I came across one house that was a side by side duplex with a third rental in the basement in the Sydney area.  This 3 unit house was listed for $249,000 and according to it was listed on the market for 90 days last year around the same time for $290,000 so it probably wasn’t getting much interest.  Intrigued, I sent the selling realtor an email with a few questions asking if she could share the cost details and revenue for the units.

She replied quickly and gave me a lot of information on the unit, the 3 bedroom units are renting for $1000/month each and the basement is $650/month and the tenants pay all utilities.  She also gave me the insurance, taxes and maintenance costs of this house. My interest was now peaked so I threw together a quick summary of what the yearly costs would look like if someone were to purchase this unit as an investment property.

Rental property

The first Sydney rental property cash flow analysis


Now this obviously isn’t the be all end all of number crunching but with a possible net cash flow of almost $7500/year, it’s definitely something to look into further.  Even if the maintenance is more like 1-2% of the total cost of the house, it’s still a positive cash flow. On paper this is a much better rental property then my Fort McMurray townhouse(link), since I’m basically just covering my bills with that one.

With this new information I started to look a little more seriously. After speaking to my father, it was clear that he wasn’t ready to purchase another one just yet but he offered to help me in my search. So I started looking for other multi-unit houses for sale. I came across several others, but the high level cash flow check only worked out on two others.

One was also in Sydney and a 3-unit house for a much cheaper asking price of $149,000.  I managed to get a bit of information from the realtor about the costs and such so I put them into a chart like the above building.

Rental property

The second Sydney rental property analysis

This one has a lot less cash flow and an unknown on the power bill as the tenants don’t cover that. This is looking more like a break even rental property which isn’t appealing so I removed it from my list.

The third unit I found with possible cash flow was in the town of Glace Bay. It was the cheapest of the three with a list price of $120,000. It was also only a duplex so it was lacking the third unit the other two had.  I didn’t have to do much research through the realtor for this one. There is another house next door to it that was built at the same time and is identical in size and layout and I know the owner. After speaking to the owner of the complementary unit I put together a table of the costs like the two above.

Rental property

The Glace Bay property quick analysis


Not as good as the first unit, but definitely better than the second.

Now to see if I can get my father to look at them and see if there are any major issues the pictures left out.  He’s a carpenter by trade and has a couple of rentals himself so he has an abundance of knowledge on what to look for and where potential problems or costs might arise.

So did your father look at them? What one did you buy?

After speaking to my father he was able to take a look at the houses with his realtor the following week. This narrowed my search down very quickly as the Triplex in Sydney with the great cash flow turned out to have a lot more problems than expected.  The basement unit was an illegal suite with no secondary means of egress. The house still had its 40 year old bathrooms in the 2 upper units and they were in disrepair. One tenant mentioned how the neighboring tenant hasn’t had their fuel tank filled up in months and it was one of the worse winters Cape Breton had seen in about a decade or more. This made me worrisome as there could have been some additional damage hidden if the tenants were careless in the care and maintenance of the unit.

All said and done, he estimated a rough cost of about $80,000 to get it up to code and to a point where you’d attract a quality tenant. The extent of these renovations would have not only cost money for repairs they would have contributed to a loss in revenue because the units would not be ready for renters for a few months. Not a risk I wanted to take on a rental property on the other side of the country.

The duplex in Glace Bay however was mostly just cosmetic repairs that were required.  The basements needed a little bit of work to bring them up to code and the floors and trim needed to be finished in some rooms. A bedroom in one unit didn’t have flooring on one side of the bed and several windows were missing their trim.  The only other issues were the outside doors on one unit needed to be replaced and it was recommended that I replace the kitchen cupboards in the same unit.  Overall this unit was under $10,000 dollars in renovations to get it to a quality rental. It also came with a renter already in the unit that didn’t require any work, so that’s a nice bonus!

The much larger upfront cost on the Sydney unit made it much less appealing and less profitable. I decided to put in an offer on the Glace Bay unit.

I’ll write a follow up article to the negotiation process and the differences between my mortgage approval this time around compared to getting my first mortgage. Keep an eye out for them!


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