Investment Property, wait or buy?

[Flux Capacitor]

I'm thinking of purchasing an investment property. I have a 5yr fixed locked rate at 3.66% ( use or lose by july 10 ). With interest rates on the rise, do you think there will be a price drop? Or should i buy now and start building my equity?

What do you guys think?

 

[daveto]

I'm thinking of purchasing an investment property. I have a 5yr fixed locked rate at 3.66% ( use or lose by july 10 ). With interest rates on the rise, do you think there will be a price drop? Or should i buy now and start building my equity?

What do you guys think?

I think you should do the math on a spreadsheet, and then if you want opinions post it on the internet. Consider the variables of interest rates in 5 years, taxes and maintenance, transaction costs and expected length of ownership, opportunity costs from deposit not invested elsewhere, vacancy rate (3%? 5%? 10%?), gross price change (and time frame).

 

[EXgeMMy]

also note investment properties now require 20% down.

 

[Catapult]

Everyone seems to have a different view of where the "market" will be in a few years and even less certainty over a longer period. You always need to keep in mind that you should not have all your eggs in one basket. I would hope that you already have about $100k + in other investments before putting $50-60k minimum into an investment ppty. Also make sure you are maxing out your RRSPs before doing this kind of investment!!

If you are looking at ppty, you should look at what your carrying costs are likely to be (eg mortgage, taxes, maintenance etc) compared with the income you will likely generate (mainly rent). If the ppty will carry itself then the risk to you is low. You also need to consider whether you have the time and patience to be a landlord. You could get a tenant from hell.

In terms of thinking of your return on investment, rememeber that your investment is your downpayment plus closing costs plus your net monthly carrying costs. So if you but a place for $300k, sell it for $350 after 4 years and your costs were say $80k ($60k downpayt, $10k closing costs, $10k carrying costs) you would have made $50k on $80k. Don't forget tax is payable on that.

 

[urbandreamer]

OTOH, if you bought $60k worth of a potash company for say .55-.60 and sold it next year for $1-2+, then you could afford to buy 3 condos!

 

[ponyboy]

who knows. As we have seen, governments can prop up housing markets long after a fundamentals analysis would suggest a correction. I would build equity in your future investment by staying on the sidelines, saving up, and waiting for a 10-15% price discount in a couple of years. Renting is not throwing your money away. If you think it is, then you should do a more careful analysis.

I've learned that it takes about 1% of purchase price per month gross rent to make an income property a good investment (so if you own a property that generates 3000 per month in rent, you should pay no more than 300K). You are unlikely to find that now, especially in single-unit (i.e. condos). All bets are off about whether you can count on real growth in the value of your investment property for the next few years, so don't put much emphasis on appreciation. Betting on income generation is much safer because it is a more stable and consistent, and the way to analyze your choices today.

 

[Oroner]

Investment properties used to return 1% per month?? That's crazy. What era was that in? Too bad I didn't have money to inveset back then... that would be like a total arbitrage situation, because borrowing terms used to be much looser too. 1% rent a month is like 12% return a year! What did borrowing costs used to be? like 8%?

What would stop someone from putting zero percent down on a mortgage, and using the rent to more than pay out the mortgage? You would pay 8% interest of the 12% rent collected, and still have 4% left over. That's like $12,000 profit on a $300k house without putting anything up front. And that's not counting the capital appreciation of the house! Were things really that great back then??

I'm saving my money if there's even a chance it'll go back to that amount...

 

[ponyboy]

remember that the 1% I mentioned is gross monthly rent, so you have to factor expenses in order to calculate a yearly return. It depends, but often 30-40% of gross rents are wiped out with expenses.

True, it isn't easy to find properties like this in the current market. The most likely property in Toronto to provide this kind of income generation relative to price is a subdivided house (e.g. three units in one house). I love condos and high-rise building construction, but they are generally not good income properties for the individual investor. Over the past 10-12 years, it hasn't mattered so much because people have made money off of appreciation, and condos have done well in that regard. good luck.

 

[cabbagetowner]

if the property is able to generate approx 10% of its price in gross revenues per year then i would look at it. this is less than ponyboy's standard, but i think it still is a safe bet. using the same example, a $3000/month property should be valued at approx 360k.

i have never seen a condo that would produce those fundamentals. you need to look at multiunit res or mixed res commercial.

condo's are not great for investment properties. i think you will have to search pretty hard in toronto for an income property that fits this bill, might be better to wait a bit.

best of luck

 

[Wrk_InProgress]

Without getting into specifics, I've had/have properties that returned less than 1% gross rent, but were cash flow positive in terms of carrying costs. So there was a profit of a few hundred dollars after the monthly carrying costs. These were not condos however but single unit homes.

 

[daveto]

Without getting into specifics, I've had/have properties that returned less than 1% gross rent, but were cash flow positive in terms of carrying costs. So there was a profit of a few hundred dollars after the monthly carrying costs. These were not condos however but single unit homes.

Cash flow positive does not mean they were profitable. To assess profitability you need to include the opportunity cost of the deposit, transaction costs, expected vacancy rate, etc.

 

[cdr108]

Without getting into specifics, I've had/have properties that returned less than 1% gross rent, but were cash flow positive in terms of carrying costs. So there was a profit of a few hundred dollars after the monthly carrying costs. These were not condos however but single unit homes.

that scenario doesn't make any sense unless you're only holding a 10% mortgage of the original purchase price; or you're calculating the 1% gross rent based on CMV but bought it at a lower price.

 

[daveto]

that scenario doesn't make any sense unless you're only holding a 10% mortgage of the original purchase price; or you're calculating the 1% gross rent based on CMV but bought it at a lower price.

I think they meant 1% gross monthly, not annual

 

[Wrk_InProgress]

that scenario doesn't make any sense unless you're only holding a 10% mortgage of the original purchase price; or you're calculating the 1% gross rent based on CMV but bought it at a lower price.

As daveto mentioned, I meant less than 1% gross monthly and it is not based on CMV. I usually lean towards 20% downpayment.

Cash flow positive does not mean they were profitable. To assess profitability you need to include the opportunity cost of the deposit, transaction costs, expected vacancy rate, etc.

Sorry. Yes you are right. In my case my statement remains true because I include all of the factors your mentioned in the monthly carrying costs, therefore making the term "carrying cost" a bit of a misnomer. The only thing I have historically neglected to include is vacancy rate because I have never had any issues with vacancy. Mind you, I am but a small fish in this game and I deal mainly with 905 area semis and townhomes.

 

[Catapult]

Cash flow positive does not mean they were profitable. To assess profitability you need to include the opportunity cost of the deposit, transaction costs, expected vacancy rate, etc.

You don't factor lost opportunity cost or expected vacancy rate into the calculation of profit for accounting purposes. Profit for accounting purposes is the difference between revenue minus costs of goods sold and operating expenses. You're not going to ultimately know this until you sell the place. If you're smart you would however factor in some vacant time. For tax purposes, your taxed on your profit (basically speaking) annually so if you're making a few $100 on the place each month chances are pretty high that you'll make a profit (net income) for the year that'll you'll be taxed on.

I suspect if the place is vacant for couple of months you might be more concerned about cash flow or your lack of it. A good idea is to make sure you can carry the place with no revenue for a couple of months.