Whether you are a young couple with no children, married with children, or getting ready to downsize – investing in additional properties is one of the very few ways to improve your wealth.
HOW CAN THIS BE?
1. Build up equity in an long-term asset that you literally can touch with your hands i.e. opposed to stocks / GIC’s / ETF’s / Mutual funds etc.
2. Leverage that equity to buy more properties, OR,
3. Sell the asset and fund your children’s education dreams, OR,
4. Hold the property and give your children a head start in regards to a place to live, OR,
5. Choose an ideal location you will want to retire to in decades to come, but you take advantage of present day pricing and long term increase in valuation. At the time of down-sizing, should your preference of area change, you still have an asset that has increased in value and use the proceeds of that sale to fund your plans.
I will walk you through this thought-process below, with REAL numbers.
NOTE:
- red numbers indicate losses or monies paid out, and green numbers indicate gains or monies received.
- Real estate statistics used all come from Toronto Regional Real Estate Board (TRREB).
CONDO Growth Rates & Corresponding Rents found in the G.T.A (5-year period)
- 2021: +18.5% ($1,959.50/month)
- 2020: -4.6%* ($2,016/month)
- 2019: +11.7% ($2,176/month)
- 2018: +9.3% ($2,069/month)
- 2017: +13.9% ($1880.50/month)
*-COVID-19 hits, while the stock market dipped anywhere from 45-65%, this asset dropped just by 5%.
Test Case:
- Property Type: Condo-apt (1-bedroom or 1+1).
- Purchase Price: $650,000.
- 20% down payment: $130,000 (one can put down less, but then the calculations would need to include mortgage insurance + mortgage interest rate).
- Interest rate (variable): 1.75%.
- Amortization: 30-years.
- Mortgage loan: $520,000.
- Monthly mortgage payment: $1,856/month.
Base Assumptions:
- Rental rate (unfurnished unit): $2000/month.
- Property Tax: $208.33/month.
- Maintenance fee’s: $630/month.
- Property Insurance: $100/month.
- Average annual growth rate of: 9.8%*
*-average rate determined from 2017-21 rates.
SUMMARY
- Annual property costs: $33,532.
Annual property gains: $24,000. - ANNUAL LOSS: $9,532; property does not generate positive cash flow.
MONIES PAID & RECEIVED OVER A 5-YEAR PERIOD:
- $130,000 in down payment to acquire property.
- $111,360 in mortgage loan payments.
- $56,300 in property tax, insurance, & maintenance fee’s payment (assuming no increase in these rates).
- $120,000 in rent (assuming no increase or decrease in this rate).
AFTER 5-YEARS, THE PROPERTY IS CASH FLOW NEGATIVE, AND ONE HAS PAID OUT: $177,660.
Given that this property is not cash flow positive, most people would rationalize that it is not a good investment.
HOWEVER, one needs to consider the impact of property valuation over time.
LET’S TAKE A LOOK
- Using the average growth rate of 9.8% per year, by year-5, the value of this condo should be worth approximately: $1,037,350.
TO GOOD TO BE TRUE? OKAY, let’s use a much more conservative growth rate (e.g. 3%).
- Using a 3% per year growth rate, by year-5, the value of this condo should be worth approximately: $753,528.
IT’S “# YEAR’S LATER”…WHAT CAN ONE DO NOW?
1. Hold the property, keep paying down the mortgage, collect rent, and wait ’till it turns cash flow positive.
2. Hold the property, however, refinance the same property at the new valuation and with the gained equity, invest in a new project….and REPEAT!
3. Sell the property.
At year-5 , with a 3% growth rate:
After all costs are paid, one should be left with approx. $335,000-345,000 of GAINS.
Given that the total 5-year spend was $178,000, one has essentially doubled their investment.
Below are real statistics of the valuation changes for the average condo found in Toronto-East.
- Toronto-East is considered to be the area east of the DVP all the way to Scarborough-Pickering Townline & south of Steeles.
- Average price for a condo in January 2017 = $316,757.
- Average price for a condo in December 2021 = $579,065.
- From 2017 to the end of 2021, the average condo located in Toronto-East would have gained a value of: 82.8% ~16.6% a year.
LESSONS LEARNED
1. Long-term investing in real estate is a solid means to build wealth.
2. Planning and sacrifice are required to get into ANY market.
3. The longer one stays out of the market, especially in highly desirable locations like the G.T.A, valuations will continue to increase, making your first investment an even bigger challenge.
Visit my Precon Pipeline page and start the process.
