How far can $100,000 get you?

A story of one lonely 1960’s bungalow looking to make it big in Kelowna

So how far can an investor get on $100,000 dollars in today’s changing real estate market? I’m often asked to consult on what is the most profitable move a person can make in spite of limited capital. There are definitely many ways to skin a cat but in my humble opinion the Holy Grail has to be the fixer upper home, with a legal suite, on a good sized Ru6 lot. For those that have no idea what I just said, this is a property with the zoning that allows two residences on the same parcel. For this example we will concentrate on the economics and the steps to take so that you can fully develop this type of property, bringing it to its highest and best use without having to go into your pocket after the down payment is made. Sound interesting?

Let’s start with an example property. I’ll use the one we sold to a first time investor this month. A decent sized, 1644 sq.ft. bungalow in the Capri area. Listed for $319,000 the home is currently 3 bedrooms up and a one-bedroom suite down which could be two if the unfinished area were developed. The house is in serious need of some updating and TLC. It has shown the wear of years from rentals and has a 60’s vibe and smoker smell that would turn 9/10 people around at the front door.

Not our savvy investor though. To her it’s a little golden goose waiting to be polished up. The backyard is large and could easily handle a second residence without sacrificing too much green space. The only trouble with this plan is the client has access to only 100K. The down payment, renovations and eventual build of the carriage home would require closer to 200K. Is the dream dead? Only for the amateurs - this requires a little confidence but will in no way put you at risk thanks to the stellar cash flow potential of the existing home.

Step 1- Strategically purchase the property with the right lending product. Most banks have a Step product, which is a combination of a mortgage and a line of credit. For this program the maximum loan to value is 80%, (65% will be in the form of a mortgage and the other 15% of the value is an interest only line of credit). This line of credit will be instrumental in executing our plan. Since you have the ability to put approximately 35% down on the home you purchased for $300,000 you would simultaneously open up a line of credit for access to the remaining 15% or $45,000.

Step 2- Renovate to add value and boost cash-flow. Our first project as new owners is to immediately bring the cosmetics of the home to a place where we can attract good renters and get the home's value up to match comparable properties in the area. In this example there were 300 sq.ft. of unfinished basement that quickly became an extra room. This room added $250/mo to the cash-flow. The entire 1944 sq.ft. property is getting a $13/sq.ft. make-over for $25,000 (that’s flooring, paint, bathrooms, light fixtures, new doors and hardware throughout). The best part is, the 25K is coming off the line of credit and costs only $80/mo.

So let's take a look at what we have now. A totally refurbished, 5 bed home with legal suite, easily rentable for $1300 up and $1000 down. The new appraisal of the property would be approximately $380,000 based on comps in the neighbourhood. Your 65% mortgage is costing you approximately $800/mo and the 25K on the LOC is costing 80/mo which combined is still less than you get for just your legal basement suite. Either you live upstairs mortgage free or you are elsewhere collecting huge positive cash-flow. Pretty sweet, but we aren’t done yet.

Based on the new appraisal your credit limit on the Step mortgage is now $304,000.

You have a fixed mortgage of $195,000 and have a balance of $25K on the Line. This leaves $84,000 available to you to continue developing this property. Do you know what just happens to be possible for just that amount? A value adding, revenue producing carriage home! This home can be built in three months and will immediately boost your cash flow by $1200/mo and bring the property value up to $500,000 or more.

So now let's step back and see what we’ve done. We started with a tired old 60’s house that might rent for 1600/mo. and worth a modest $300,000. We took some sweet equity and the handy line of credit, and created a half of a million dollar estate, one that rakes in $3500/mo. of cash flow! Your payments after all the renovations are still only $1200/mo. total. To put this into perspective for us, the net monthly income is the equivalent of $14 dollars per hour in passive income. Now this is very impressive, and one could stop there after taking a huge step towards securing their financial future. The only trouble is, now that the place is worth 500K, there’s this pesky 100K left available on your line of credit. Hmm isn’t that what you started with? Do you think there might be other 60’s beaters that would appreciate a make-over?

And now you see my personal problem with real estate, once you start, how the heck do you stop?

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.