Making Conversions Work and Cash Flow

Scott Zandbergen

Laurel: Scott's passionate about real estate investing. And you know what? His investing has allowed him to retire from his nine to five senior leadership shift position. That's really great, but I think that's what a lot of people want to do. And his focus is to buy single family homes and convert them to duplexes.

And which is a proven strategy of raising property value in a short period of time. And while maximizing months like cash flow, which is what we all want to do. Scott now owns and manages many properties. All of which are generating very healthy returns. Scott, I'm going to turn it over to you and talk about how you convert. What you're doing with conversions and how you are maximizing your footprint? Tell us all about it.

Scott: Thank you very much, Laurel. And thanks to the REITE club team for having me and for putting these events on always very useful content. Yeah. As Laurel said, I've been investing in real estate since about 2014 and started out doing the simple approach of buying single family homes and renting them out.

For the past four years, I really shifted my strategy to doing the duplex conversions or adding secondary dwellings in those single-family homes, because I was chasing cash flow and because I want it to lift the value in those properties. For about four years now just exclusively doing that strategy.

And right now, I own duplexes. Hamilton, Welland, Ottawa, and most recently I'm now going into the Bellville Market. And also, just to keep me busy over the last year or so, I did a few fix and flips because it was 2020, the market's been going crazy. That was just for some fun.

Now that I'm retired. I want to talk about duplexing. I'm going to share with you a case study of one that I recently completed and duplexing is, I feel like it was a sexy strategy five years ago. And a lot of people jumped onto it and have had a lot of success doing it.

I'm here to tell you that it still can work as a great strategy. If you're interested in lifting the value of the property and getting good cash flow, it can also be effective because your future could be future-proofing your investment with potentially a coach house on that same lot down the road.
That's the way I'm always looking at properties now is when I'm making an acquisition. I want to see what the lot size is and will there be an opportunity to put a coach house in that backyard? When those are permitted. I'm going to share with you a case study. I'm just going to share my screen for one second here.

There we go. This will go pretty quick. I'm just going to walk you through this is a recent project that I just finished. And as I mentioned, I'm focused on duplexing and this is an example of one of the duplexes that I've recently done. This one's a bit unique because most of my duplexes are bungalows.

This one, as you can tell, is not a bungalow. This is a house that I bought last July. In COVID July 2020, it's on the Hamilton mountain. I paid 530,000 for this house. I bought it on a wholesale deal. Shout out to Luke boy, Ron and team. I got this from them. I paid 530K for the house. It's two and a half story as you can see. And it's got about 2300 square feet of above-grade living space.

When I walked through it back in, I guess it was June or when I first saw it, I knew right away that, wow, this house has a ton of room, a ton of potential. And I knew that there would be different strategies I could deploy including potentially making it a triplex. But the zoning allowed for duplex.

That's the route we went. But we in our back pocket knew that in the future, we could either throw a third unit up in the attic on the loft, or we could do the coach house strategy. There's some good opportunities. We bought it. It was a mess. You can see just some of the photos there.
It had been running as a group home for troubled youth for a number of years. And as a result, it was chopped up into a whole bunch of bedrooms. I think there must've been seven or eight bedrooms in this place, a very small bedroom. I knew that you have to look past that and open it all up and see what you can do to really make it into a nice lovable space.

It also has a nice wide driveway and a deep driveway. You know that check the boxes right away. Those are some of the things you always look for when you're evaluating. If a property is going to work for a duplexing is the room to do it. Is it going to pass the parking regulations?
And this one certainly checked all those boxes. And I was like, it had a deep lot. It's sitting on a pretty deep lot. I know that there's potential to use that backyard as a coach house if we choose. If we fast forward about eight months, this took a little longer than I would've liked, but here it is.

Eight months later, March, 2021. We just finished it up last month. We wrapped it up. Let me speak to what happened first of all. Why did it take a little longer than that? I would've liked it. Normally, I try to budget four or five months for a duplex conversion. This one pushed eight months.

It was a bigger project. Number one, there was more square footage to deal with. But secondly, for those of you that were working with building departments over the last 12 months, there were some challenges with city staff not responding as quickly as they might have in the past.
They're all working remotely. It seems like every back and forth in the city, sometimes a week or two weeks would go by. We waited two and a half months to get our permits on this house from the time we submitted. At the time we were officially allowed to go. We lost a fair bit of time there, but those are just the things that happen and you just have to roll with those punches.

What we ended up creating here was two big units. If you can see on the picture, on the outside of the house where the front door is, that's the entrance to the top unit. The top unit consists of the second floor of the house plus the loft upstairs. This is a three-bedroom, two-bathroom unit.
Okay. And then the main floor which you enter from the side of the driveway here is a two-bedroom, two-bathroom unit, and it stands on the main floor of the house, plus a portion of the basement. When we bought the house, the basement was unfinished and it was a mess. But there was a section of it where there was pretty decent head height, about 6, 9, 6, 10, if I remember.

We knew we could work within that section of the basement, but a whole other section we didn't touch, but we had enough space down there to create a bedroom and a bathroom. It's pretty big. As of April 1st, both of them have been rented out and I'll share with you the numbers in just a second here, but you can just see the finishing that we do.
All of our duplexes have a similar look and feel in terms of that style of kitchen. We do all brand-new stainless-steel appliances, vinyl, plank flooring, agreeable gray paint, just like the standard touches that are very neutral and tenants like them. And of course, as you can see here, we split the hydro. The tenants can keep the hydro in their own names.

The last slide I'm going to share with you is the numbers. People always want to see how this all kind of shakes out in terms of what we spent and so on. This was a big project, as I said, we spent 530,000, but 539, by the time you include legal costs, land transfer tax, that kind of stuff.

Renovations were 190,000, roughly holding costs 45,000. You can tell that's a pretty big expense just for holding costs and that's because we used private money to acquire and private money to borrow the funds to renovate. Now, if we had done this project in four months or five months, obviously that number would have been cut way back.

But it is what it is. We just like again, you have to roll with the punches. And when you look at the appraisal will come in, we're in that process right now. I don't have the appraisal done. It's going to be within the next two weeks. I think when we're going to get that back, I'm anticipating about an $850,000 appraisal value.

That's probably on the conservative side, because we know we're already starting to see some bungalows on the Hamilton mountain with about a thousand square feet upstairs and 800 square feet downstairs appraising for eight hundred and twenty-five, eight hundred and thirty. This is a much bigger property.

I'm conservatively putting 850 buckets quite honestly, I could see that going up a little bit. If we did get 850, that would mean we're going to leave about $94,000 locked up in the deal after the refinance. That's a little more than I would want to do because I'm always looking to extract as much money out as we can, but at the end of the day, if I own an $850,000 asset or a $900,000 asset you have to leave 90K or so left in the deal. That's not such a bad investment at the end of the day cash flow perspective. 

Upper unit, we rented it for $2,200 plus all utilities, lower unit rented for $2,000 plus all utilities. Gross rents of 4,200 after refi. Again, assuming we refi it at an $850,000 valuation, that would be a $2,500 mortgage. 355 tax property taxes and insurance is 194. All of that taken into consideration cash flow before factoring in vacancy and any contingents for maintenance. 1141 is roughly where we're looking. I manage my own properties. I don't necessarily build that in. When I'm pitching properties to two partners, I always build the cost of the management end.

But this is just the raw way that I look at my numbers, knowing that after all kinds of core expenses, my bank account is going to grow roughly $1,100 per month. When all was said and done. That is in a nutshell. As I said, I still am a big fan of the duplex strategy.
This is one of the bigger ones I've ever done. The other one I'm working on right now in parallel is when I paid 350,000 for, and I expect it'll refi for about five and a quarter. That's in Bellville. I think it's still an awesome strategy if you're looking to create cash flow and yeah. Happy to answer questions through the chat or reach out.

Laurel: Thanks, Scott. Those numbers are amazing.