It was Valentine’s Day and my wife and I drove to scope out investment properties just East of Toronto. We joked about how deep down, that is our favourite thing to do (something we have been doing together even before we were married.) Investing together as a couple has been an amazing thing for us – but not without challenges (like anything in life).
I scope out the deals (and often take some calculated risks) – I can definitely see beyond the ugly paint colours and smelly carpets. I do the renovations and make the projects come together.
My wife – well she does everything else! (Or as she likes to say – everything I don’t want to do!) She handles our financing, makes sure the books are in order and most importantly the property management (including leasing out our properties and managing the day to day)
Together we’re a pretty incredible team – yes we butt heads (on the regular) but we are working towards the same goal, one property at a time.
So let’s talk about this ultra hot real estate market we are experiencing and how this is affecting investors.
I read an article today that stated “For January, the benchmark price of a Greater Toronto Area home was up 22.6 per cent from a year ago, according to the latest reading of the Canadian Real Estate Association’s home price index.” Source
The article was suggesting we are in a housing bubble (but that is another topic all together!)
I can tell you that for now, the prices are definitely on the rise. There is simply way more demand than supply of homes available for sale. What this means is that it is getting more and more difficult to cash flow – not impossible but difficult.
Let’s go through some number to make this easier to understand.
You buy an average single family home in a market like Hamilton or Oshawa – for say $450,000
Purchase price: $450,000
Down Payment @ 20% – $90,000
Rent: $1800 + utilities
Monthly Mortgage Payments – $1422 (Assume 2.5% rate with 30 years amortization)
Property taxes – $275/m
Home Insurance – $70/m
Well – you do the math. You have pretty much broken even. I wrote a blog post a few weeks ago comparing real estate investing to a 3 course meal, and discussing how mortgage pay down is still the main course!
But some folks want cash flow (and positive cash flow is what allows us to sleep soundly at night – bearing in mind that changes in the market or in interest rates won’t affect us too much)
So how do we increase cash flow?
1 ) Higher down payment & Longer Amortizations
So we if we go back to our example above, putting down 25% would amount to about $100 less in monthly mortgage payments (hence an increase in cashflow of about $100). Topping up your downpayment to 30% would further increase it to about $200/month.
Another way to decrease your monthly payments is to increase your amortizations. On a $360,000 loan, the monthly payment on a 30 year amortization would be $1422 vs $1615 with a 25 year amortization. That is an increase of approximately $200/month in cashflow!
2) Buying a multi family home (duplex/ secondary suite)
This has been my favourite way to increase my cash flow. I add basement apartments in my units, and am able to get premium rents. It is much more labour intensive, but can definitely add to your cashflow. After the renovation, I will refinance to get my renovation money back. So back to the numbers.
Purchase price: $400,000 (buy for less money as they usually require work)
Addition of a basement apartment & main floor upgrades: $60,000 (approx.)
Total cost – $460,000
Down payment – $92,000
Monthly mortgage payments – $1500
But the rents – this is the best part. If you have a beautiful product, you can charge $2700 + hydro ($1500 + $1200). You are left with much higher numbers in cash flow even after deducting all the same expenses.
3) Cosmetic Upgrades & Higher Rents
Obviously the more rent you charge, the more cashflow you get. Completing slight cosmetic upgrades (i.e. paint, replacing carpets,lighting) will allow you to create a wow product. Throw in some staging and good photography and you can easily get a bidding war for your rental. This will not only allow you to pick the best and most qualified tenants, but also charge a premium rent.
Remember that there is no rent control when you lease your property and there is always someone willing to pay for that wow experience. You should be able to move from charging $1800 to $1850 or even $1900.
The market is one thing we can’t control. As it continues to change, we must make opportunities happen. I will leave you with a great quote:
So until next time, happy Canadian Real Estate Investing.
Jose Jafferji, REIA