(originally published in Spring 1997, updated to 2017)
The following Case Study illustrates Investment Properties have equaled a very affordable Home for some savvy Investors. Income from Suites can make the difference of every owing real estate, especially in Vancouver and not having to pay rent. It is a number game, between the sell price of the property, down payment, available cash flow rental income from the property Suites and the mortgage obtained. This case study was done in the Spring of 1997 - 20 years ago! Below is a brief summary update regarding value performance for this property to 2017.
Sale/Purchase Price Feb 1997: $260,000
Current Assessed Value 2017: $1,397,000
Capital Appreciation Factor 9%/annum: Gross $$/Wealth Gain: $1,137,000
(Not including mortgage balance pay down by tenants/income.)
Cash Flow Gain - Wealth Gain: This Wealth Gain does not include mortgage balance pay down by tenants/income, and the cash flow returns which would increase each year as rental rates increased. Given the decline in mortgage interest rates, it is possible that the entire mortgage balance of $195,000 would have been paid off if the original mortgage payment schedule was maintained. Current rental rates in this area indicate current monthly gross income in the range of $5,500/mo or over $66,000/yr, creating very high net cash flows to the Owner.
The Property: A small, 3 level triplex (legal duplex with unauthorized basement suite) in the Mount Pleasant area of Vancouver. The building is approx. 2100 sq.ft., with 3 X 1 bedroom suites on a 40’ x 66’ lot. The condition is good, as the owners had done renovations during their 4 years of ownership.
The Revenue: The property generates rent of $1,750/month, with tenants paying heat and light. Taxes and expenses are roughly $350/mo. At closing, the house was delivered vacant. Area rents indicated that the monthly revenue should be Top floor: $1,100; Main floor: $1,500; Basement $1,550; Garage $250 = total of $4,400/mo or $52,800/yr. An expense ratio of 25% or $13,500/yr, gave Net Income = $3,300/mo or $39,600/yr.
The Sale: The property sold for $260,000 to an owner occupier planning to live in the smallest unit, and collect rent of $1,250/month from the other 2 suites. Down payment was $65,000 (25%) and a 1st mortgage of $195,000 was arranged a 6.25% on a 5 year term, 25 year amortization. Monthly payments are $1,276 plus $90 net taxes. The selling Realtor observed that “Someone with a paper route could afford to own this house!”
The Investment Analysis: For an investor, the initial “numbers” look like this: Down payment of $68,500, including property purchase tax and closing costs: 1st year net income of $16,800 less $15,320 debt service = $1,480 before tax. Assuming that net income will increase at an average rate of 3% year, the net income after 5 years will be $18,910, or $3,590 after debt service, and the mortgage balance would be $175,800. At a capital appreciation of 3% per year (very conservative), it would be worth $301,500 after 5 years. At that point, the investor could refinance or sell. If the property is kept, the monthly net income of $1,575 could support a new 1st mortgage for the balance of $175,800 to a rate of 11% - providing some interest rate “risk insurance” for the owner. If Interest rates stayed the same (6.25%), the income would permit the investor to “take out” his original investment of $68,500.
The Summary: If the property sold at $301,500, the net proceeds (after commission and mortgage balance) is $113,370. The internal rate of return to the investor for the 5 years (before tax) is 13.5%.
Basic Real Estate Tips & Principles:
- Buy Something Sooner Than Later.
- Getting an acceptable deal is more likely to create wealth than waiting for the “perfect deal”.
- Great deals, in a strong market, are usually “made”, rather than “found”- or delivered
- If you want inflation and amortization schedules to work for you, you have to give them something to work with - and time to work.
Is there anything you want to know regarding real estate, please contact Bob Bracken at 604-220-2035 cell, 604-263-2823 office, or email@example.com email.
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All information while deemed to be correct, is not guaranteed
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