A Real Analysis of My First Investment Property

About 11 years ago I decided to buy my first investment property. At that point, I had been a licensed Realtor for about 1.5 years and I figured the time was ‘right’ to jump into the investment market.

There were a lot of people giving me their unsolicited advice, despite the fact that I was a Realtor. I heard comments like:

  1. The market was heated and that it ‘wasn’t the right time to buy’
  2. The market was going to correct itself and there would be a decrease in property values
  3. Condos were a bad investment.

I listened to them all and made a list. That list included reasons I should buy and reasons I shouldn’t buy. We (me and my partner) carefully reviewed this list and made our decision and am glad that we decided to purchase that property.

We bought a one bedroom and den condo at East Lofts (King and Sherbourne). 11 years ago, King and Sherbourne was not a ‘sexy’ corner in Toronto. The price per square foot wasn’t the cheapest I could find (you may laugh as it was $320psf WITH parking) but I liked the fundamentals that the property featured. My analysis went something like this:

Accessibility

         1.  The proximity to transit was excellent.

         2. The St. Lawrence Market and Financial District were within a 10 minute walk from the front door of the building.

The Developer

  1. I liked the Developer’s standard finishes(Harhay Developments). They didn’t require any upgrades to make the loft stand out.
  2. The developer’s history played an important role in my belief in the project and their history of previously completed projects and timelines to complete was above average.

The Building

  1. It was a mid-sized building in terms of the number of suites.
  2. The building didn’t have extensive amenities that could drive the maintenance fees higher in the future.

Neighbourhood Analysis

  1. The rental rates at the time substantiated my belief that with a 20% down payment and interest rates in the range of 5.5% would carry the property at a neutral cash flow.
  2. I believed in the area. I could see how the neighbourhood would continue to appreciate over time. New establishments were popping up as residents had moved into buildings already completed. I could envision how the neighbourhood would be sought after and in demand in the future, and I wanted to own a part of it.

Exit Strategy

  1. I was adding this property to a portfolio (I envisioned it that way at the time, even though we didn’t have any other investment properties) that I wasn’t planning on selling for at least 7-10 years. The long term hold strategy would allow me to ‘ride out’ any ups and downs or ebbs and flows of the economy if things took a turn for the worst.

I made my purchase, gave my deposits and got excited. Then, the project got delayed. No surprise, but then it was delayed again. The project was over 18 months delayed from it’s initial anticipated completion date. The developer was legally required to give me the option to rescind from my purchase (given a certain period of time if the building had passed and construction had not begun – a.k.a the ‘economic viability clause’). After 18 months, the Developer asked if I wanted my deposits back and if I wanted to be released from my purchase. I didn’t want anything other than the project to be completed. The value per square foot had increased and my intention was to hold the property for a long period of time. ‘Just finish the project’ was all I could think. I want to get things rolling and to be a Landlord!

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Photo courtesy of http://www.torontoboutiquecondos.ca/

The project finally came to completion and I advertised and found my first renter. A great young couple offered on the property and after we completed our due diligence (credit check analysis, employment letter, references, etc), we had our first tenant. What made things even better was that the interest rates that I had anticipated increasing actually decreased. My first mortgage on that property was in the range of 3.79%. I was ecstatic and my positive cash flow after all mortgage payments, maintenance fees and property taxes were paid was approximately $400/mth.

Since this purchase, I’ve continued to grow my portfolio. We currently own 7 rental properties and we’d like to grow this number to approximately 15-20 over the next 5 years. I’m actively researching and pursuing options to purchase, when I have the time. I have a few areas of interest that include within Toronto and outside of the city. My strategy has changed slightly over the past decade.

Here is a real snapshot of my cash flows on this current property at East Lofts:

650 sq.ft., 1 + den with parking. There is a juliette balcony and we did not upgrade any of the standard finishes.

  1. Rent = $1895/mth. Tenant pays hydro and gas in addition to the rent.
  2. Vacancy over the past 6.5 years = 4 weeks in total.
  3. Current monthly accelerated bi-weekly mortgage payments = $712.80/mth **FYI – My current interest rate is 2.99% and with current rates, my monthly payments could be lower and cash flows would be even higher.
  4. Monthly maintenance fees = $351/mth
  5. Monthly property tax = $242/mth
  6. Insurance = $10/mth

Total Expenses per month = $1315.80

Rent per month = $1895

Positive cash flow per month = $579.20

Annual cash flow = approximately $7000

Annual Mortgage Depreciation (payments of my mortgage by my tenant) = $5000

Annual Appreciation (assume about 3% *of original purchase price for the purpose of this analysis*, which is quite conservative in comparison to the 5-8% statistical increase per year over the past handful of years) = $6000

Total increase in ‘value’ per year = approximately $18,000

**My initial investment, with land transfer tax, development fees and other costs was approximately $50,000. This is an $18,000 return on a $50,000 investment, per year.**

Every year, this single investment property results in approximately $7000 of positive cash in our bank account while the tenant pays off approximately $5000 of our mortgage. In addition to this, the property has more than doubled in value. I would likely list the property for sale in the range of $725psf if I were to list for sale at the moment. This would translate into a sale price of approximately $475,000.

Let’s look at these figures again:

  1. Initial purchase price = $210,000
  2. Current anticipated sale price = $475,000
  3. Gross gain = $265,000
  4. Initial Deposit = $41,000
  5. Annual positive cash flow = approximately $7000
  6. Annual mortgage depreciation = $5000

There were additional costs I had to make when I originally purchased. I had land transfer tax, development fees, GST payments (we disclosed it was an investment property to the CRA, as you are supposed to do). Even with all of these factors coming into play, this property is generating an annual return on initial investment in the range of 40% if I assume a modest 3% annual appreciation of the property from this date onwards.

Full disclosure – owning investment properties is not like ‘million dollar listing’ on HGTV. I’ve found myself cleaning, answering weekend calls when a hot water tank leaks, dealing with plumbers and electricians to fix things and occasionally, much less glamorous activities. I try and take it all in stride and anticipate that nothing worth having doesn’t come without effort. I mean, imagine what my partner must put up with being married to me?? 

We can pick this analysis apart. Investment analysts, accountants and investment bankers may want to highlight the tax implications (which I’m aware of), cost of commissions when I sell, capital depreciation and more. The bottom line is that this was a great investment and I challenge a mutual fund advisor or other investment expert to argue otherwise.

Not every property runs at these rates of return but even without the substantial positive cash flow per month, I’m still extremely pleased having this property as a part of my portfolio. I’m still buying real estate and my most recent purchase was completed about 5 months ago. The property was located in Toronto, and I’m anticipating fairly neutral cash flows with about 22-24% downpayment. My analysis for this new acquisition is based on a number of factors and I’m definitely not perfect at forecasting what the future holds. I do believe in SELECT opportunities in Toronto and want to stress that NOT EVERYTHING is a good buy. Don’t always believe the hype. Don’t always believe what Realtors have to say. Work with someone you trust and have open and honest communication about what additional costs are involved. Be prepared for these figures and buy property with the ability to ‘hold’ it if the market were to cool in the future. Please note that I don’t foresee a slowing of the Toronto real estate market in the short/mid term but real estate is CYCLICAL and we cannot continue at 8-12% annual appreciation forever. Rental properties are a great way to complement your retirement or investment portfolio and should you find it to be a fruitful or successful endeavour, perhaps owning more properties is something you may enjoy.

Brandon

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