As an Investor, there are really only two real rules that you should know of when determining which properties are great income properties. The first is the obvious “Location Location Location” and the second is “Net Profitability of your investment property.” The first you already know but, it is still amazing in this day and age that people still overlook this fundamental rule. You should know that when buying to invest, it is not as important to buy what you want but rather what 80% of the buying public wants! An example of which could be, if you were to buy a new condo or townhouse in an area that has a lot of students, do not worry yourself about upgrading finishes inside, rather keep it simple and let your tenants pay down your investment. When it comes time to dispose or sell this asset, you can always update and upgrade it before you are ready to sell and by doing so you can write off the expenses against the sale.
The second rule in plain English is simply the amount of money you will generate or “CASH FLOW” after all your expenses are paid. Income property insiders live by the following formulas:
- Monthly cash flow = monthly rent - (mortgage + insurance + taxes + maintenance)
- Net profit = Assignment price – (Purchase price + legal fees + marketing fees.)
There are a lot of specific formulas that we could apply to calculate your market capitalization rate (CAP RATE) but once you start becoming a more seasoned investor you will be more concerned with what percentage of return (ROI) you want before considering an opportunity. I like to try to get at least a 25% return on our investment in the short term (less than a year) but do consistently see returns in the 50% 100% range. Let us stop to clarify as I’m sure most of you are wondering how do we validate these numbers! Most people tell you that you can make X amount by investing with them for Y period of time. The way we like to position ourselves is that if we put down $20K on a property that we can assign before closing, we like to make $10-$20K on the assignment. Thus the return on your investment of $20K is between 50-100%. Not too shabby, if you consider current GIC’s at the bank will pay you only 0.91% and Canada Savings Bonds pay you 1% as well! why let the banks keep your money and not give you anything for it! My simple point of view!
The alternative and more common method is positive cash flow. Depending on where you are in your investment journey, for some of you this will be your first purchase, for others this may be your 100th unit! The one rule that all successful real estate investors follow is to buy properties that generate positive cash flow. Let's take a look at an example: If you bought a new condo unit with me, a 1 + den unit that retails for $205,000 you would be able to pick up for $175,000. You would have to put down your $20,000 deposit, now normally you would have to put down an additional $15,000 to have a 20% down payment and avoid paying CMHC fees. But because you have got such a great deal, when you go to secure your mortgage you will actually have almost 25% down as you would have received and additional $30,000 in equity just for working with me.
What this translates to in numbers, with a mortgage of $155,000 amortized over 25 years at a fixed rate of %2.89 (I can also help you with the mortgages as well!!) you would be looking at $725 per month for payments, your monthly taxes would be around $150 and maintenance should be around $260. Any utilities that are not included by the maintenance fee should be paid by the tenant, therefore you are looking at an additional monthly expense of $1135, these units rent for a minimum of $1400 a month so at the minimum you will be netting a positive cash flow of $265 a month! Over the year that would be additional $3180 in your pocket in addition to having your tenant pay down the mortgage on your investment!
What options do you have with income properties (what can you do with them after purchase)? How do I know which is the best option?
There may be a lot of different opinions as to what you should do with your income properties after purchase. A lot of these opinions usually come from people who have not really invested in real estate before. I’m sure you’ve heard of all kinds of horror stories of the “Tenant from hell” or losing your shirt from buying a “Too good to be true” deal. Just like gambling, would be real estate investors always talk about the “Big Money” they have made and never really tell you about all the losses or bad decisions they have made. As an Income Property Insider you will at least get a real birds-eye-view into how you should be investing. We at Income property Insider believe that although there may be lots of “Get Rich Quick” investment strategies, there are only three tried and true methods.
1) You can buy and hold for the long run. This method is the most common in my opinion, to build your net worth, to build up equity in properties by having others pay the mortgage off for you, to have an income stream for you now or as you get closer to retirement and to refinance tax free as long as you do not sell the property!
2) Assign or Flip the property to someone else before you even close on the property. This method, although less common, is still a good way to make a great return on your money and you do not have to wait that long to recoup all your initial investment.
3) Rent to Own – this strategy takes a little from both strategies 1 and 2. You would in essence be trying to get a property at below market value, and then find a tenant who due to personal reasons can’t buy on their own but wants to own a home and is tired of renting. You give them the incentive to rent from you for 2-3 years with the rights of first refusal when it comes time to purchase the home. This method may seem a little more challenging, but if you put in the time up front you will have a tenant that will treat your property as their own, they will maintain it and as an added feature to them, you will even credit a portion of their rent as a deposit so that if they exercise their rights to purchase the property a portion of the deposit is already collected. There are of course some other specifics that you would need to know to implement this strategy, but for the purpose of this strategy know that you are in the driver’s seat with the tenant. If the tenant decides they do not want to buy, you still own the unit, you can re-rent it or simply sell it at the current market rate. By having a rent-to-own agreement in place, you effectively negotiate a future sale today (usually calculated at X% increase per year) thus the need to spend money on marketing and promotion is minimized. All of these methods do work, what is best for you depends of what your long term and short term goals are. The best result is probably one that combines all three strategies so that you are benefiting in the short term, mid-term and long term. So you see, although there may be lots of other options available to you in regard to your income property. We at Mesh Mistry Real Estate fundamentally believe that these three methods of real estate Investing will garner you the best results not only in the short run, but also in the long run as well!