Well, we went down to the 11th hour, but we decided to take a pass on the Palms. Our due diligence revealed much higher renovation costs going in than we had originally anticipated – over $1M on the high side, $600k if we just did the basics. Add to that a higher down payment than the original $250k that we had been led to believe we would have, all in we would have had to have about $1,500,000 on cash to purchase this property, and that’s just too much. If you allow for the fact that our plan had us reducing the number of units to 50 (thereby eliminating the bachelor suites), we would have needed at least $20k/unit in cash, and perhaps as much as $30k/unit. Our business model is not set to thrive on these kinds of numbers. 

I’m disappointed. I really loved that building, and can certainly see the potential. Yet one of the biggest dangers is falling in love with an asset. That’s when very bad decisions are often made.

We are continuing our negotiations with the owners (and bankers) of the property in Chatham, Ontario. The mortgage is @$1,250,000, has about $200k in arrears and needs about $250k of repairs/upgrades. We have been through the property thoroughly and have received a detailed engineering report. Ashish Garg, our VP of Asset Management has also identified a number of other acquisition candidates in Detroit and Cleveland that we have made offers on and which we anticipate closing on within the next couple of months. 

 

190 Thames, Chatham, On

 

 

Patience is called for in this market. The bargains are there, and are making themselves know, but we are more cautious than ever and wary of the wolves in sheep’s clothing. Many “cheap” properties end up being very expensive once they are purchased. Right now we are looking to purchase income at a cheap price, not “projects”. The Chatham property is a bit of a hybrid, as substantial upgrades will have to be made, but because there is a high level of vacancies in the building there is significant revenue upside. In Ontario, because of the way that the rent controls are administered, vacant suites are preferable, as they can be rented out at the market rate. 

Suffice to say we’ll keep you posted. in the meantime, take a look at the pictures of the property in Chatham (190 Thames). The pictures are here: http://picasaweb.google.ca/kngalobar/190ThamesChatham#

There is quite a bit of work to be done. The windows need replacing. 20 suites need renovating in order to be rent ready (all at various levels of disrepair). But our cash in will be under $10k/door and when we’re done it will be the nicest rental property in Chatham. We’re hiring the old property manager, who had a waiting list for renters when he managed this building, and is renowned in the area for apartment building turnarounds. We will probably try to furnish a few suites and add some amenities like concierge services and a small pool of rental vehicles (rent them by the hour – plug in hybrids that we lease). We’ll establish a summer deck on the roof (with a great view of the river, not evident on the pictures owing to a poor photographer – your humble scribe). Within 3 years we’ll be able to re-finance at a much higher loan to value of sell, perhaps as condos.