# Investment property plan



## gerogesin (Jan 3, 2014)

I'm thinking of investing in a property in the Ottawa area and I believe I have done my homework, but I'd like to get some third party critiques. I am looking to buy a freehold townhouse/village home and keeping it for at least 5 years or perhaps keeping it as part of my retirement plan. 

Purchase price 287000
Downpayment 80000
Insurance 900/yr
Prop. Tax 2400/yr
3yr at 2.5% variable over 30yr

Basically the numbers work out to be:
Mortgage monthly: 818.80
Mortgage monthly + insurance + prop. tax: 1102.14
I'm thinking of renting it for 1350 which means my cash flow would be approx. 247.86/month or 2974.32/yr. If I factor in 10% vacancy then basically one month of rent which would be 2726.46/yr.

I have not factored in repairs as this is a new unit but at the same time, I have no factored in any rent increases either to keep things more simplified.
Thanks ahead for the comment.


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## nobleea (Oct 11, 2013)

That's a 0.9% cap rate, which is atrocious.
Your downpayment is way too high for a rental, you want the lowest amount possible (57,400 in this case).
Property taxes and home insurance seems to go up every year. What about maintenance costs? It's brand new, but things need to be fixed eventually. You should be saving a bit every month to account for this, even if you plan on selling before it needs to be replaced.
Basing your rent on a 2.5% mortgage rate (in a variable mortgage no less), is a bit risky. How do the numbers look at 4-6% mortgage rates?
What about taxes? Only the interest portion of your mortgage payment is tax deductible. The principal repayment part is not. You could be paying up to $1500/year in taxes on this unit.

If you took your 80K downpayment and invested in REITs instead, you'd be getting 5-7% every year, which is far more than you'll net out of this. Plus the added bonus of not being underwater on your mortgage, no calls at midnight, no trying to evict bad tenants, no cleaning, advertising, etc.


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## CanadianCapitalist (Mar 31, 2009)

gerogesin said:


> I have not factored in repairs as this is a new unit but at the same time, I have no factored in any rent increases either to keep things more simplified.
> Thanks ahead for the comment.


I don't see why this rental unit is attractive. You are basically earning 5.6 percent gross (1350*12/287000). Your net will probably be half that while taking on a lot of risk. Now, if real estate were depressed, the rental may still be attractive but we are now more than a decade into the housing bull market, so chances of big capital gains are slim. Just my 2 cents.


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## gerogesin (Jan 3, 2014)

^^ are some valid points that I have thought about.
I am trying to avoid stocks and investment portfolios since my RRSP is already in that field. Since 2008, I feel much better investing in a property where I can actually see and own rather than numbers and papers. 

If say I kept the unit for 10years at 3% annual appreciation, it would be worth $373100. After a 5% realtor commission, I'm left with $354,445. So $354,445 - $287,000 = $67,445. I pay capital gain on 50% which would be $33,722.50. At a 40% tax bracket, I'd owe the CRA $13,489. 

If I went with a 5year fixed @ 3.3% over 30yr, after 10years my mortgage would be $159,300.
At the 10 year mark:
$373100 (house sale price)
-$18,655 to realtor fees
-$13,489 to CRA
-$159,300 to pay off the mortgage
=$181,656 + $18,600 (from positive cashflow of $155/month x 12month x 10yr)
=$200,256

Total cost of investing:
$80,000 (initial down payment 10years)
$5000 (cost of closing 10years ago)
$13500 (vacancy calc. at 10%; $1350 x 10)
$10000 (misc. repairs over 10yr on a new build)
$500 (advertising\credit checks on tenants)
$1000 (lawyer fee after selling at 10yr mark)
=$110,000

So this means at the 10year mark, I would have put $110,000 of my own money and would have $200,256 in return (keeping in mind this is based on a 3.3% interest over the 10years). 

Some facts that are beneficial:
-Historically, house prices have gone up in prices much more than 3% per year
-Rent cost should also have gone up

Some facts that are not beneficial:
-increase property tax
-increase in home insurance

If I keep the home as part of my retirement plan, then I would have it paid off by the time I am 59 provided I don't help pay down the principle. So retired at 59, I would have a property generating income whilst being in a lowered tax bracket.


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## gerogesin (Jan 3, 2014)

nobleea said:


> What about taxes? Only the interest portion of your mortgage payment is tax deductible. The principal repayment part is not. You could be paying up to $1500/year in taxes on this unit.


Actually the insurance is also tax deductible as well as property taxes paid.


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## MorningCoffee (May 8, 2013)

gerogesin said:


> I'm thinking of renting it for 1350 which means my cash flow would be approx. 247.86/month or 2974.32/yr. If I factor in 10% vacancy then basically one month of rent which would be 2726.46/yr.


If you factor in 10% for vacancy, that brings you to $1354 per year, not $2726. You can't just subtract the positive cash flow for the month. You still have to pay your mortgage and expenses if the unit is empty.

Even with a new build, things happen and you need to set some aside for maintenance. Any condo fees? What about property management? If you DYI it, there's advertising, credit and background checks, cleaning, painting, showings, etc. Other costs to consider are land transfer tax, lawn care and snow removal, home inspection, lawyer fees... and the list goes on. 

The reason you have some positive cash flow in your above calculations is due to missing expenses and a big down payment. Add those in and it's not a good rental. I would need about $2900 per month in rent to consider that property at that price. I live in Ottawa and won't buy here since the math doesn't work (for me). Others may have different strategies, but I'm not interested in being out of pocket every month for years hoping the property will appreciate in value. Selling costs can also be expensive.

Real estate can be a great investment. Please take the time to learn more about it before jumping in. There will always be another property.


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## OptsyEagle (Nov 29, 2009)

Are you sure about those property taxes. Seem a little low to me.


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## the-royal-mail (Dec 11, 2009)

It sure seems like a lot of liability and obligation of time and money for a max profit of $200 a month. That can easily be wiped out with even the most minute interest rate increase. Better off to learn about investing in stocks. Please re-read nobleea's post.


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## Just a Guy (Mar 27, 2012)

I don't think you can get a 2.5% mortgage anymore...it's higher than 3% now which should eat up all your profits... In 5 years when you renew, you'll be underwater.


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## Chris L (Nov 16, 2011)

Run away, fast. Don't walk and don't look back.


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## nobleea (Oct 11, 2013)

gerogesin said:


> If say I kept the unit for 10years at 3% annual appreciation, it would be worth $373100. After a 5% realtor commission, I'm left with $354,445. So $354,445 - $287,000 = $67,445. I pay capital gain on 50% which would be $33,722.50. At a 40% tax bracket, I'd owe the CRA $13,489.
> 
> If I went with a 5year fixed @ 3.3% over 30yr, after 10years my mortgage would be $159,300.
> At the 10 year mark:
> ...


You have assumed a 3.3% mortgage rate for the full 10 years, which is unrealistic. You'll have to renew in 5 years at a higher rate, or take the 10yr fixed rate today, which is about 4.3%.
Over a VERY long term, houses appreciate at inflation, yes. However, we've just gone through about 10 years of extremely high appreciation. That can't continue forever, so a reversion to mean usually implies that we're in for a while of below average returns. Say 1%/year or so. Do a full matrix on how much money you'll have after 10 years based on housing increasing in value by 4%, 3%, 2%.....-2%. Assume you take the fixed 10 yr rate. Try some other conditional scenarios, like insurance rising by 5%/yr, property taxes increasing 5%/yr. Rents increasing at 5%/yr and also staying flat. In a 10 yr period, even assuming a brand new place, you will have about 5K worth of repairs. Could be the furnace board, the hot water heater, a front door, a couple appliances, who knows. Who knows how much longer you'll be able to get a 30yr mortgage, particularly for an investor-owned place.

Over a 30 yr period, you will have to replace:
Furnace (once or twice)
Hot water heater (2x or 3x)
All exterior doors
All windows
Roof (twice)
Appliances (once or twice)
Siding (possibly once)
Fencing (once)
Exterior walkways (maybe once, maybe not)
Flooring (once, depending if it's carpet or not).
That's about $50K of repairs in todays dollars. Spread that over 30 years and that's 6K a year you should be saving up. If you wanted to push things off as long as possible, maybe you could chop that in half. That's still 3K a year.


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## Quotealex (Aug 1, 2010)

I got a 2.88% fixed for 2 years mortgage at BMO less than a month I think the trick is ask the mortgage rep their rate for each and every term from one year to ten years. They'll often have a special rate for a particular term. In my case, their 2-year term was lower than all of their other terms including their variable rare. 




Just a Guy said:


> I don't think you can get a 2.5% mortgage anymore...it's higher than 3% now which should eat up all your profits... In 5 years when you renew, you'll be underwater.


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## gerogesin (Jan 3, 2014)

All great points. At what point is it worth investing in real estate? There are many real estate investors that do well and I'm wondering what their strategies are. My wife and I have a decent chunk of cash saved and we're looking for a long term investment with it. We only have a mortgage of 210k with 90k in liquid savings. We are in our late 20's and have a gross income of 170k. I suppose our only option would be to pay down our mortgage with the money we've saved since real estate investment doesn't seem like such a great idea.
I just thought that with a large downpayment, great credit, great discipline, that I could get an affordable place with minimal maintenance and maintenance-free property. We're looking at buying in Ottawa which statistically is still quite affordable vs Toronto/Vancouver especially when you factor in that the average household income is higher in Ottawa then in Toronto or Vancouver.

Or I could buy a new BMW but that would be the worst financial decision I could make. :smiley_simmons:


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## wendi1 (Oct 2, 2013)

Real Estate Investors know that they make money when they buy at a good price.

They run the numbers, and they don't make sentimental or wistful decisions.

One of the regular posters here runs a blog that I have found useful - http://www.landlordrescue.ca

Especially this one about cash-flow positive properties. http://landlordrescue.ca/cash-flow-positive-properties/


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## Chris L (Nov 16, 2011)

Use the extra money to pay down your current debt. That's an investment in RE and a wiser one then buying an overpriced rental. The world looks entirely different being mortgage free.

You can always borrow it back if you really want to. But I'd save up a separate downpayment for that after you paid off your current place when you can make a reasonable amount of money for your time and effort. That's personal, but it's gotta at least be a paycheck a month IMO.


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## Just a Guy (Mar 27, 2012)

Quotealex said:


> I got a 2.88% fixed for 2 years mortgage at BMO less than a month I think the trick is ask the mortgage rep their rate for each and every term from one year to ten years. They'll often have a special rate for a particular term. In my case, their 2-year term was lower than all of their other terms including their variable rare.


Yeah, and how high will it be in 2 years? My bet is you'll average higher than 3% over 5 years either way...and significantly higher over 30 years.


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## doctrine (Sep 30, 2011)

Investing your $90k in a 6% REIT would immediately double your cash flow and there would be still opportunity for capital gains. You would also have to deal with approximately zero repairs, vacancies, late night calls or problem tenants. You could also look at borrowing to buy REITs as well if you really want to increase your exposure to the sector, i.e. leveraging REITs instead of a rental property. Or you could focus on reinvesting the distributions in more REIT shares and also adding through regular contributions to grow that income over time.


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## gerogesin (Jan 3, 2014)

What CAP rate is recommended for investment properties? 8-10%? If you exclude condos with high maintenance fees; is it even possible to find something with a CAP rate of 8-10% with real estate being 'over valued'? 

I've looked into REIT and reviewed it with my wife and she doesn't seem thrilled nor do I to be honest. We rather have something we can be in full control despite the liquidity of REIT.


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## nobleea (Oct 11, 2013)

gerogesin said:


> What CAP rate is recommended for investment properties? 8-10%? If you exclude condos with high maintenance fees; is it even possible to find something with a CAP rate of 8-10% with real estate being 'over valued'?
> 
> I've looked into REIT and reviewed it with my wife and she doesn't seem thrilled nor do I to be honest. We rather have something we can be in full control despite the liquidity of REIT.


For people starting out in landlording, it's generally the rental that is in control of you, not the other way around. For people who have never done it before there seems to be a cachet involved when the truth is anything but.
There are some pockets of the country where you can still make good investments as a landlord, but not in the main cities.


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## Just a Guy (Mar 27, 2012)

There are deals in every city...just not a lot of them. There are always people who need to sell for some reason (the last one I bought was an estate sale where the kids just wanted the money ASAP). If you've got a good realtor, and everything lined up and ready to go, you may pick something up. Of course, as long as others doubt you, you will have less competition. I bought 5 in major cities last year, though Ontario is harder I'll admit.

I gave my realtors a list of criteria for properties I want (city, price, type, etc). He enters it into MLS, each time a property matches, I get an email. Usually, you need to act quickly. I tend to look at them within a day or so, and submit an unconditional offer (no pending financing, no inspections, etc). I've been doing this a long time, so I know what I'm looking at. In this market, you can't be indecisive...You'll also probably need to do something to the place (usually paint and flooring at least, but once you know what you're doing you can do this relatively cheaply)...you need to see the diamond in the rough...the messier the original, the better, as it means less buyers and a lower price. Most of the places I buy cost an extra 5k to renovate.


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## Quotealex (Aug 1, 2010)

Just a Guy said:


> Yeah, and how high will it be in 2 years? My bet is you'll average higher than 3% over 5 years either way...and significantly higher over 30 years.


Who knows where the rate will be in 2 years. When we cross that bridge, I'll still take the lowest rate they have to offer me, it could be a variable rate or a fixed 5-year term.


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## Just a Guy (Mar 27, 2012)

In real estate, if you don't think long term, you're unlikely to succeed.


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## bflannel (Apr 21, 2013)

I must say many comments in this thread have helped me in my own investment property decision making. For me at this point I think it's almost more work than necessary for minimal profits… and that's under current conditions. Paying a mortgage value higher than the property value doesn't sound appealing and especially not at some of the possible future rates! To make it happen now I would need to find a tenant at least able to pay $1300 a month for 3br, garage, hot tub, new kitchen blah blah blah. I just can't see anyone renting the same place for $1500 if and when the time arrives that it is required to ask that (New Brunswick). Very tough to pull the trigger even when the property seems like such a steal relative to British Columbia!

With the margin you must put above your mortgage to not only cover your expenses/taxes/maintenance current and future… there isn't much wiggle room! 

Do any of you have an opinion on the maritime market relative to the rest of Canada? It seems slightly sheltered and if anything less risky as the numbers are substantially reduced. I just see 5br homes in metropolitans such as Moncton for less than 250k and I can't find that anywhere else.

Not to highjack the thread but what do you fine folks think of leveraging a REIT that deals primarily in residential property? Is that not going to perform at least as well as the average mortgaged-out investment property? With so much less stress.

I've never been very into RE so this is quite a learning process. I'm not even sure about REITS! :hopelessness:


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## Just a Guy (Mar 27, 2012)

You can't compare different parts of the country to find value in real estate. You have to look much more locally. Even within a city or town prices vary. A place priced at $100k may be a steal, or completely overpriced depending on the neighbourhood within the same city or town. While it's true you need to work at real estate, and can't just buy anything and make money, I think that's true of anything. The difference is, real estate moves a lot slower than other types of investing. Things change a lot faster in business and the stock market I've found (and I'm invested in all three).

As for finding people who can afford the rents, you're thinking of this all backwards. You don't buy a place and then find people who will pay what you need, you find places that you can rent for the prices people can afford (preferably in a down market at that and not the current one). It's the same in business, you must produce and price your products at what the market can afford, not what you want to price it at due to the costs. If it costs too much, you'll go out of business.

I also wouldn't buy a rental that has things like a hot tub, expensive kitchen, etc. I buy places that are nice and functional. Renters tend to be transitionary, they also don't tend to care for them as if they owned the place (there are exceptions of course). Remember you're providing a service, and this is a business.

There is a lot of money to be made in real estate if you do it properly. That's why I personally don't like REITs. What they pay you is only a fraction of the money they can make through leverage. Real estate is the one place where you can literally make money out of nothing if you know what you are doing, so REITs returning 10% means they're making a killing on your money.

It's not easy to find the right properties, and it takes work, but they do exist, you can leverage them 100% and you can generate cash flows significantly higher than expenses. My best purchase last year was a place I picked up outside a technical college for $73k, put about 5k of renos into it, got it appraised at over 100k, mortgaged it for 80k, and rented it for $1600/month. It was a weird place (two suites on one title), needed new flooring, paint, etc. (so it looked ugly) and I admit it was highly unusual to find something like this (most of the places I bought last year cost about 75k and generate about 1k/month in rent), but it did happen, in a major city, and in this market. The city had accessed it at 200k for 2013 taxes, but the owner had died and the estate wanted the money. 

Having been in business for years, I know what paint and flooring can do to make things look better. I knew the area and city well. I was also able of make an unconditional offer right away. My two tenants are quiet and I haven't had any issues with them. 

It's easy to talk about how things can't be done, how much work it is, etc. Most of this is coming from people who don't treat it like a business…"gee, I bought a 500k place and couldn't make payments…then the tenants trashed it and it cost me even more…I lost my shirt, there's no way you can make money in real estate." 

People accept that not everyone can run a company (9/10 businesses fail within 3 years), but no one accepts that not everyone can be a real estate investor (which is running a business). Sorry, not everyone has the ability to run a company, the owner isn't smart enough…not everyone can be successful in real estate either. A successful business is very profitable, so is a successful real estate investor…

Most people were destined to be employees though, and are all experts on how to run the company. The ones I like are the ones who get promoted and realize that there's a lot more to it than they thought (Think managers who used to be union for example, man does their attitude change). I don't know anyone who ever got rich from a paycheque.


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