People constantly ask me about making a first purchase of an investment property, or income producing property.
A couple of nights ago a client e-mailed me the following as a query.
I have posted both his e-mail and my response so that you can begin to get an idea of how investing in income producing real estate would work.
Hi Aeriol,
Hope you are doing well.
I was approached by a friend of mine to invest in a property in Guelph. It’s a townhouse, the property is in fair condition.
The following are the numbers:
Purchase Price ( 2 Bedroom Electric) $ 140,900
Down Payment (20%) 28,180
1st Mortgage (80%) 30yr am 112,720
Total Mortgage Amount $ 112,720
Monthly Annually
Average Rent Collected $ 925 $11,100
Mortgage 1st @ 2.4% variable ($439) ($5,268)
Condominium Fees ($150) ($1,800)
Property Taxes ($140) ($1,680)
Total Expenses ($729) ($8,748)
Cash Flow $196 $2,352
After 1 yr Principal Paid off $ 2,603
Profit (cash flow+principal paid off) $ 4,955
5% Vacancy Rate ($46.25) ($555)
Repairs and Maintenance ($62.50) ($750)
Net estimated return $3,650
ROI 13%
ROI with 2% appreciation 23%
What do you think?
Simran
My Response:
Simran Guelph is a good place to buy because it is a university town… therefore rental is all but assured.
Having said that, there are a few things to think about.
A big one is location.
You want to be in a location where there is a hope of a good increase in value.
A house pays you in two ways… 1. Is the net income. 2. Is the increase in value.
So you want to vet this and go out and look at it yourself.
It needs to be on the bus route to the university or somewhere close to an area where people will be looking to rent it.
My only grievance with the chart below would be that I don’t look at equity paydown on the mortgage personally.
I am not saying you shouldn’t or that it is a bad thing, but it will not pay your bills. Net cash flow will.
On a rental property I want to look at two things.
Net cash flow .
Increase in value.
I want to own my home.
I don’t want to own my income property because I can use my expenses as a tax right off.
The other issue would be there is no allowance for repairs or renovations.
Also if the house is in fair condition then it could be coming up for 10-$20,00o in work.
Nothing wrong with that but it does take away the $196.00 per month of cash flow so you have to consider how that impacts things.
Also if rates increase your payment could increase. This is easy to solve. I can get up to 40 yr. amortization…. Despite what the gov’t says is available.
If the property and you qualify.
Since Guelph is a University Town both the purchase price and the rent sound low to me. So you do need to look at this aspect of things carefully.
Usually a 3 bedroom place can be rented to 3 students for $450.00 per month each in one lease done ” all and several” so they are responsible for the property for the year.
I guess the only other thing you would need to work out is your arrangement with your friend ….. who would do what in this relationship.
So you do have a few points to consider here.
Let me know how it goes and if you want to go ahead with this or any other transaction in Ontario I would appreciate it if you would use me as your mortgage broker,
or real estate broker if it is in the Greater Toronto area.
I hope you don’t mind if I use this as a case study on my blog… I will remove all names…
Let me know how it goes.
Best Aeriol.