Ever wonder what really goes on at those “Get Rich in Real Estate seminars”? You could sign up for a course and pay hundreds of dollars for the information given to you below. You could also shoot me an email and I’ll give you straight answers for FREE!
A few months back I met with an investment group who were considering pooling their money together to start buying investment properties so I did a mini presentation on how it works and how you can take advantage of the banks money.
Here’s a scenario, laying out things out in simple terms.
Purchase Price: $375,000
Down Payment Required: $75,000 (20% of the purchase price to avoid CMHC and since it’s an investment property)
Closing Costs: $5625 (estimated at 1.5% of the purchase price)
Closing costs covers lawyers fees and land transfer tax if the property is bought outside of Toronto as Toronto’s land transfer tax is double.
Total initial investment: $80,625
Carrying Costs:
5 year mortgage at today’s rate is 2.3% amortized over 25 years = $1313 per month
Property Taxes approximately $305 monthly
Total monthly carrying costs excluding maintenance: $1618.
Heat, Gas, Water $200 (approximately) but tenant usually pays these.
Average Rent per month: $1700.
Cash flow positive by $82 per month.
Appreciation
Let’s assume the house is increasing in value at a very, very conservative 3% per year and project 5 years
|
End of Year |
House Value |
Net Gain |
Principal paid off per year (approx) |
|
1 |
$386,250 |
$11,250 |
$9000 |
|
2 |
$397,838 |
$22,838 |
$9000 |
|
3 |
$409,773 |
$34,773 |
$9000 |
|
4 |
$422,066 |
$47,066 |
$9000 |
|
5 |
$434,728 |
$59,728 |
$9000 |
In 5 years the house is worth $435,000 approximately and has gone up by almost $60,000. The $82 per month goes towards regular maintenance.
The new value of your investment is now approximately $185,625. This is a return of around 18.25% annually!!
Basement apartment option
Cost to build out basement income suite: $20,000
Rent for main level and basement: $ 2400 per month
Cash flow positive of around $600 per month or $7200 per year.
|
End of Year |
House Value |
Net Gain |
Principal paid off (approx) |
Cash Flow |
|
1 |
$396,250 |
$21,250 |
$9000 |
$7200 |
|
2 |
$407,838 |
$32,838 |
$9000 |
$7200 |
|
3 |
$419,773 |
$44,773 |
$9000 |
$7200 |
|
4 |
$432,066 |
$57,066 |
$9000 |
$7200 |
|
5 |
$444,728 |
$69,728 |
$9000 |
$7200 |
House has appreciated a bit more due to the basement apartment. After 5 years, initial investment of $100,625 has grown to $251,000. This is an annual return of 20%.
Keep in mind, basement income suites vary geographically. In some areas you’ll actually depreciate the homes value by putting in an income suite. It’s rare but it can happen.
Real Case Scenario
Clients bought a house on Pettigrew Trail in Milton in 2012 for $368,500. The house is now valued at $560,000 (October 2016) so they’ve made almost $200,000 on appreciation alone. They put 20% down so in 4 years they’ve tripled their original investment, not including the equity in the home, paid off by the tenants.
In 2014 they bought another property through me on Cartmer Way in Milton for $406,000. It’s currently valued at $540,000 (October 2016). That’s an increase of $136,000. They put 20% down on this property as well.
Total investment of around $160,000 and in 4 years that investment is worth almost $500,000.
If we were to take today’s value, both properties are worth over $600,000 each so there net gains are astronomical.
BUT…property values have skyrocketed over the past year so in my opinion these increases are unsustainable. Although, in certain areas there will be higher gains (Hamilton) as opposed to other areas – Mississauga, Milton etc.
Check out my next Post on my market prediction….stay tuned!