AMA - Triple Pain

Today's question comes from Zoe who asks:

I purchased my first investment property, a mix-use triplex (commercial main floor and two 2bed/1bath residential above) downtown Hamilton on October 1, 2021 - At the time, we paid $1,100,000, put 25% down, and started a $825,000 mortgage at 2% for 1 year fixed rate.

Prior to closing, my lawyer hadn't received the zoning verification back from the City in time for the requisition date.  He told me, the zoning should be fine for the barber, they've been there for 2 years.  He didn't advise me to ask for an extension, or to not move forward without having the verification.  After closing, the verification came back, indicating that indeed, personal services were not allowed due to the number of residential units in the building (less than three).  We figured, since the barber was already in place, and had just renewed her lease, that we would cross our fingers and hope for the best, not sure what else to do.

Initially we were generating $1200 a month in positive cash flow.

In February of 2022, the barber in our commercial unit stopped paying.  We ultimately evicted the barber.

We put the unit up for lease, however, due to the zoning, we could only advertise for office space, which during the pandemic was not in demand and rents were extremely depressed and they continue to be depressed even to this day.

An idea to convert the commercial unit to a 2 bed/2bath residential unit was investigated, and it seemed like a value add option to increase rents and value of the property.  There would be a tax consequence to the change of use, but

In October 2022, the mortgage renewed.  We thought we were pivoting to a residential loan once the project was completed, so we did not take a lower fixed rate option.  The open variable rate increased the rate to 8.2% and we are now experiencing extremely high negative cash flow.

Now, 6 months later, at the end of February 2023, the permit for the residential conversion is finally in hand, New quotes for the conversion are now double the original quote.

At this time, my question to you is:  What do you recommend in this situation?

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Host: Victor Menasce

email: podcast@victorjm.com