simuls
Senior Member
The notional house price increase does not equate to return on capital.
In your defence I was just about to say that!
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Purchase price vs. rental income
- Thread starter simuls
- Start date
In your defence I was just about to say that!
vultur09
Banned
leverage works both ways friend. Buy a house with 5% equity and sell it at cost 5 years later through the wrong part of the cycle and with all transactional costs you've lost 100% of your capital.
I know all the little tricks that distort the risk associated with this kind of investment. It can be great if you time it right but there is absolutely no guarantee of profit as you suggest.
I know all the little tricks that distort the risk associated with this kind of investment. It can be great if you time it right but there is absolutely no guarantee of profit as you suggest.
DarnDirtyApe
Active Member
Another problem that people forget about are the lumpy costs that come up every once in awhile, such as appliance replacement or special assessments. That's why you need to have sufficient positive cashflow (based on 100% financing as an apples to apples comparison) to cover expenses as they come up. If you're renting out a place you will eventually need to replace the carpets, hire painters, etc. and that must also be taken into account.
It's also important to remember that condo fees have a nasty habit of rising at a rate faster that inflation, and the increase will come right off the top of your cashflow.
It's also important to remember that condo fees have a nasty habit of rising at a rate faster that inflation, and the increase will come right off the top of your cashflow.
confused5o1
New Member
Hello,
I am currently looking into a newly built 2 bedroom condo @ 868 sq. ft. $204,900.00 at Weston/Sheppard. I believe I can rent out the condo for approximately $1200/month.
I am thinking on putting 10% down @ $22,000 and my numbers are as follows:
$193 mortgage @ 4% @ 35 years. = $850.75
Main. cost = $200
Vacancies = $50
Heating/Elec = $50
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$1151 total per month
Would this be a better investment then throwing the $22,000 in stocks at 5% return per year in a 5 year time frame?
I am currently looking into a newly built 2 bedroom condo @ 868 sq. ft. $204,900.00 at Weston/Sheppard. I believe I can rent out the condo for approximately $1200/month.
I am thinking on putting 10% down @ $22,000 and my numbers are as follows:
$193 mortgage @ 4% @ 35 years. = $850.75
Main. cost = $200
Vacancies = $50
Heating/Elec = $50
------------------
$1151 total per month
Would this be a better investment then throwing the $22,000 in stocks at 5% return per year in a 5 year time frame?
Ric
Active Member
How did u come up with maintenance cost of $200 ($0.23/sq.ft.). That seems grossly underestimated. Should be in the $0.35-$0.45/sq.ft range.
Also, what about property taxes (about $128/mth minimum)?
cdr108
Senior Member
Don't forget insurance ...
Also, after 5 years, your outstanding mortgage will be $178,900 and mortgage rates will have likely risen and your new payments @ 5% = $955; @ 6% = $1,064; @ 7% = $1,178; @ 8% = $1,297.
What stocks are you investing that guarantees you 5% return per year for 5 years? i'd be wary of any investment that 'guarantees' anything.
ALWAYS read the prospectus for complete details; and ASK ASK ASK questions of your financial advisor if you don't understand.
vultur09
Banned
Based on the comments that followed your post it appears that you will have to feed this monster. Try to remember- investments pay you, not vice versa. Clinging to the false hope of 'guaranteed' price appreciation is in my opinion a faulty strategy.
confused5o1
New Member
confused5o1
New Member
Don't forget insurance ...
Also, after 5 years, your outstanding mortgage will be $178,900 and mortgage rates will have likely risen and your new payments @ 5% = $955; @ 6% = $1,064; @ 7% = $1,178; @ 8% = $1,297.
What stocks are you investing that guarantees you 5% return per year for 5 years? i'd be wary of any investment that 'guarantees' anything.
ALWAYS read the prospectus for complete details; and ASK ASK ASK questions of your financial advisor if you don't understand.
5%... bank pref shares? i'll be going to the Index ETF route too
confused5o1
New Member
If i were to break even, would this still be a great investment? I mean, your having someone pay off the house and you could only be paying for contingent costs such as repairs/maintenance however it should be relatively minimal providing that great tenants are found and that the property is brand new.
cdr108
Senior Member
too much uncertainty with your capital invested, plus what about the realtor commissions and associated costs you pay when you sell (i'm not sure if you plan to keep it more than 5 years or not since you brought up the time frame with the stock market.
at least with bank pref shares your capital doesn't sway too much from the $25 but keep in mind that you're paying a premium now at $27+.
with $22K, you can get about 800 shares and they are much more liquid (same day you decide to buy/sell) and cheaper commissions than RE ($20-100 vs. $10,000+ associated costs for commission, lawyers, LTT, etc.)
Index ETFs are good too since it takes the guess work out of picking specific stocks and also provides diversification.
Johnzz
Active Member
So, some quick “back of the envelope†calculations:
Interest (at 4%) = $615
Main. cost = $200
Vacancies = $50
Heating/Elec = $50
Municiple Tax = $175
Total Expense= $1,090 vs Rent = $1,200
So you’re clearing $110 per month, or $1,320 per year which yields 6.4% (assuming $20,500 invested) in income.
Note: You will also have to “invest†an additional $235 per month for the mortgage principle payment.
As you’re likely to see, most everyone on this forum will have a valid but different way of viewing your scenario.
For me, the way I look at it, you’ve passed the first step (i.e. rental income > total expense).
However, the second step (capital appreciation) is by far the most important variable in my opinion. Is this property well located? Close to public transport? Are shops within walking distance? Other favourable amenities? Etc… Unfortunately, I’m unfamiliar with this area and can’t answer these questions for you.
Broadly speaking though, the GTA has great long term fundamentals working in your favour.
simuls
Senior Member
Isn't municipal tax roughly double for income properties? What about the cost of insurance/repairs?
DZ2007
New Member
You're missing a key point here ... home buyers do not earn 6% the way an investor in the stock market normally does. That's because it's 6% of the total value of the home, which includes the debt AND equity. If someone puts down $50,000 on a $200,000 home, and in one year it's worth $212,000 and he decides to sell it, well guess what? He makes $12,000 profit on a $50,000 investment, due to the leverage - a 24% return.
MAU
New Member
Don't forget CMHC insurance (10% down = 2% insurance = $4000) and other closing costs. You'd better be prepared to hold your condo for a long time to cover your transaction costs.
Also, keep in mind that the long term average for interest rates is 8%. Rising interest rates have the double effect of increasing your payments and holding down, or even decreasing, prices. Be careful!