Investment property

[timdog]

there is absolutely risk involved right now, as there always is. but that could be what makes it a good time. if most people are telling you to run in the other direction, that's usually a good time to do it. BUT, be prepared to go cashflow negative for a year or two, and if the market turns around, you'll be in a good place. Most people buy investment properties when times are great and the market is hot. That is the worst time to buy. find a place that's been on the market for 90+ days, make a low ball offer and do a lipstick job on it and make it really nice. there will be some tough times but in 5-10 years you'll be very happy you did it. Unless calgary becomes the next Detroit then we're all fucked.

[Buster]

Originally posted by The BMW Guy
Here's my take on it.

I bought an investment property back in 2013. Put down 20% on it with a low interest rate.

This was during the boom times so it was very easy to get wonderful tenants (I didn't even have to show the place to my first tenant, that's how good of a candidate he was). During 2013-2014 the property actually cash flowed positive $300 a month (this is after paying condo fees, property tax, mortgage, HOA, insurance, etc.).

With the current rental market/interest rates, the property is just breaking even ($0 cash flow after paying the items mentioned previously).

If you account for the mortgage principal as a return on the 20% down, I've averaged about 15% annually over the last 4 years on the property. About 10% right now during bleak times, and as high as 20% during the good times.

I’ve been lucky to have wonderful tenants and minimal maintenance on the property (newer townhouse). The property is also near a new development, so I’m hoping its value will pick up as the area gets more amenities (5-10 years time).

My only advice is buy a place you would live in if you couldn't rent it out. That is my only regret currently. Either than that, it's not as much doom and gloom if you do your due diligence.

Good luck in whatever you decide. Only commit if the numbers work out.

I'm not sure I'd calculate return like that. To properly calculate the "return" you would need to determine the liquidation value of the house. Your debt repayment is just de-leveraging. Be careful comparing ROE to ROI directly.

But most importantly, you can't compare the return of a leveraged investment directly to, say, the return of an S&P index return without adjusting for the risk and volatility associated with the leverage.

The game is about 'risk adjusted' returns.

[88CRX]

I just ran some really rough numbers on my townhouse rental property. I purchased 10 years ago, took over a year to built, lived in it for 5 years and have been renting it for roughly 4 years.

30 years mortgage with 10% down payment.

I figure all or most of the monthly positive cash flow has been eaten up by upkeep (painting, hot water tank replacement, etc) and income tax. It isn’t positive monthly cash flow right now (it was previous by $150-$300/month) but is earning decent mortgage equity on a monthly basis now that the mortgage had been paid down for 9 years.

With all that in mind if I could sell for what I bought it for 10 years ago (I think that’s realistic) after paying realtor fee’s my ROI would be a whopping 5%!

Same calc’s/values and hold on to it for another year (more mortgage paid down) and the ROI jumps to 5.8%. Again assuming no increase in property value.

Unless you’re property is appreciating in value the ROI is not huge!

[Buster]

Don't forget that paying down the mortgage is not a "cash flow". If you are precisely breaking even every month, and then sell at the 10 year mark, then your "cash flow" for the purposes of a return calculation need to reflect the entire ten year project.

[88CRX]

Originally posted by Buster
Don't forget that paying down the mortgage is not a "cash flow". If you are precisely breaking even every month, and then sell at the 10 year mark, then your "cash flow" for the purposes of a return calculation need to reflect the entire ten year project.

Yup.

And after paying income tax annually on your mortgage equity earned your monthly cash flow is negative in a slow market.

Moral of the story. Put your money elsewhere haha.

[msommers]

If I was to do this all over again, I would have bought a townhouse in Aspen. Problem was as a single buyer at 425K, it was a lot more than I could afford as a first house and plus I never thought I'd be renting out my place.

Given how things have gone now and what I know now, a townhouse in a nicer area is what I'd stretch for. You get a younger family in there who is looking to live for 2+ years at a time and unless something major goes wrong, it's little stress. Right now dealing with negative cashflow and 6 month leases living in a different city, it definitely has stress attached. Fortunately all the tenants have been as good as I expected - I'm thankful for that.

I would never buy a rental by the University. Maybe one of those new condo units pre-build and then flip it before anyone gets keys transferred.

[mzdspd]

Originally posted by msommers

Given how things have gone now and what I know now, a townhouse in a nicer area is what I'd stretch for. You get a younger family in there who is looking to live for 2+ years at a time and unless something major goes wrong, it's little stress. Right now dealing with negative cashflow and 6 month leases living in a different city, it definitely has stress attached. Fortunately all the tenants have been as good as I expected - I'm thankful for that..

This sounds like a good idea but even then it doesn't always work.. I owned a new townhome in a nice area (Edmonton area). My neighbor bought the whole building (4 units) beside me and was renting them all out. When times were good he was getting 2000 -2200 a month for a townhouse worth 325k but he was getting a new tenant every year. People wouldn't stay longer then that. After the first year, he complained to me that people were causing damage. Well then it slowed down and he was getting shittier and shitier tenants for around 1500 a month. Last time I had talked to him he was complaining because people were trashing the places and leaving partway thru their leases.

[R-Audi]

Ive had a rental condo in the beltline for ~10 years now. While I havent had any issues with tenants, there has only been 2 years where I have had positive cash flow and the condo has generally been a pain in my ass. (Post flood when rents were high, condo fees are fairly high, a few assesments) I was able to take out 75k when I renewed the mortgage a few years back, but thats been my only positive experience. Id be thrilled to walk away today breaking even for the current mortgage amount.

If anything, Id look towards something without condo/HO fees.. ie. house.

[The BMW Guy]

Originally posted by Buster


I'm not sure I'd calculate return like that. To properly calculate the "return" you would need to determine the liquidation value of the house. Your debt repayment is just de-leveraging. Be careful comparing ROE to ROI directly.

But most importantly, you can't compare the return of a leveraged investment directly to, say, the return of an S&P index return without adjusting for the risk and volatility associated with the leverage.

The game is about 'risk adjusted' returns.

Can you elaborate more on what you mean when comparing the return of a leveraged investment to returns of the S&P? How should I adjust for the leverage?

[Buster]

Originally posted by The BMW Guy


Can you elaborate more on what you mean when comparing the return of a leveraged investment to returns of the S&P? How should I adjust for the leverage?

Well, if you borrowed to buy the house at 4 to 1 (ie 20% down), then calculate your actual cash return.

Then borrow money 4 to 1, and invest in an S&P index, then compare your return.

I haven't done the numbers...but my point is that when calculating the return, you can't ignore the implications of the fact that you are leveraged and that that creates risk. When people see a good ROI on a home, they think it's a feature of RE real estate that "creates" that return. Really what they are seeing is the increased return as a result of leverage. But if you want to take on more risk (often in the form of leverage), the I think there are more useful tools to do so. You can also avoid all the insidious risk and sucking sounds created by a residential RE investment: liquidity risk, massive transaction costs, long exits horizons, labour intensive, capital tax implication...I could go on.

As I said before, I find i pretty depressing that the one market where there is relatively easy access to the Leverage Bomb for the average Joe, is also the one where we all shelter our families. Throw in some recency bias, and yuck.

[Tenkara Way]

Don't listen to these losers, smart money, Vu techniques and a time machine are the keys to your empire.

[oster]

Thanks all for the input.

Where I'm seeing the benefit is the appreciation in property value not the rental income, however, if I only decide to stay in it short term I don't want to be losing money every month renting. Tough call. Looking at the time, fees, and stress involved

Like some said, house may be the better option, it'll just be at the top end of my budget.

Tips on investible communities w/ starter homes? Maybe a shitty inner city place that could be reno'd?

[ercchry]

Originally posted by oster
Thanks all for the input.

Where I'm seeing the benefit is the appreciation in property value not the rental income, however, if I only decide to stay in it short term I don't want to be losing money every month renting. Tough call. Looking at the time, fees, and stress involved

Like some said, house may be the better option, it'll just be at the top end of my budget.

Tips on investible communities w/ starter homes? Maybe a shitty inner city place that could be reno'd?

For the south I'd look at bridalwood, shawnessy, cedarbrie, queensland, or maybe if you're lucky woodbine/woodlands

You'd get a smaller home on a decent sized lot in those areas... with reno potential for increased value. You can also get extra money added to your mortgage for "home improvements" so if you find something on the lower end that needs love keep that in mind

[mazdavirgin]

Originally posted by oster
Where I'm seeing the benefit is the appreciation in property value not the rental income, however, if I only decide to stay in it short term I don't want to be losing money every month renting. Tough call. Looking at the time, fees, and stress involved

You're counting on appreciation in property value in the current market and economy?

[roopi]

Originally posted by mazdavirgin


You're counting on appreciation in property value in the current market and economy?

Sure why not? Real estate values do increase over time.

If you are looking for appreciation and under 400k I would look in the Tuxedo area for something that is still rentable. Area is close to downtown and is getting infills. Hold onto it for a few years and see what happens.

[jwslam]

C4095286

[mazdavirgin]

Originally posted by roopi


Sure why not? Real estate values do increase over time.

If you are looking for appreciation and under 400k I would look in the Tuxedo area for something that is still rentable. Area is close to downtown and is getting infills. Hold onto it for a few years and see what happens.

1980-1990 almost ten years of stagnation/no appreciation, inflation adjust those values and it's a loss until almost 1999. Do you think that will never happen again seeing that graph? Or do you just want to pick the recent history which by any means seems abnormal.

[Buster]

As an asset class, RE generally just follows inflation, over a long enough timeline.

[roopi]

Originally posted by mazdavirgin


1980-1990 almost ten years of stagnation/no appreciation, inflation adjust those values and it's a loss until almost 1999. Do you think that will never happen again seeing that graph? Or do you just want to pick the recent history which by any means seems abnormal.

Originally posted by Buster
As an asset class, RE generally just follows inflation, over a long enough timeline.

I'm not going to argue/derail the thread in relation to inflation. Just wanted to state that prices will appreciate. The reason for those increases is due to many different factors (which you guys have mentioned).

[ercchry]

Originally posted by mazdavirgin


1980-1990 almost ten years of stagnation/no appreciation, inflation adjust those values and it's a loss until almost 1999. Do you think that will never happen again seeing that graph? Or do you just want to pick the recent history which by any means seems abnormal.

Rule changes, cmhc, low interest rates, etc... plus the economical aspects makes it hard to compare the current real estate environment to the past... just look at the major events of the 80s and the effect on prices vs the 08 and 15 versions of those events and the changes