Sunday, March 18, 2012

Why invest outside of large cities?

When thinking about buying a rental property for a long term many investors are naturally drown towards big cities.But way too often investors forget the most important factors – cashflow and ROI (return on investment). Let’s look at a few examples in Toronto. 

First one is a 2 bedroom condo. You might be lucky to find something for $300K and maybe even rent it for $2000 (unlikely but never the less). Your mortgage is $1142 (4% interest 30 years amortization, we will use it going forward), one month vacancy is $167 ($2000/12), $200 taxes and of course there is condo fee, say $400. So your income is
$2000 – ($1142 + $167 + $200 + $400) = $91
assuming no repairs need to be done (and there is always something). This adds up to $1092 annually or 1.8% with 20% down payment.

You probably have better luck with a house where there are no condo fees. Let’s say you found something in the outskirts of Toronto for $400K and you can rent a basement, not just house itself and get $2500 total income
$2500- ($1523 mortgage + $150 insurance + $250 vacancy + $300 taxes) = $277
Again with a house you are more likely to need repairs, but we leave it out of equation to be consistent. So we have 4.2% annual income with 20% down.

Not very impressive if you ask me. Of course many would remind me about property value increase, but I still don’t have my crystal ball and can’t speculate on this. And after all I’ll have to sell the property, pay capital gains and lose my asset to get that money. Aren't we looking at a long-term investment plan?

So what to do if you want to secure your money in a real estate but get high ROI at the same time? Look a bit further, not big cities. We recently acquired a duplex for under $100K in Sarnia which rents for $1300. So here is what we have:
$1300 – ($380 mortgage + $100 insurance + $108 vacancy + $100 taxes + $130 management fee) = $682
With 20% down we are talking 40.1% annual return or 10 times more than in the big cities. Notice that I pay 10% property management fee, so I don’t have to worry about broken toilets or finding new tenants. As you can see we have better returns and fewer headaches.

Of course there is more to this, but details of remote property ownership is  a topic for another article. Let me know if you are interested.