Resale Investment Condo
Why everyone should have at lease ONE investment property, really! Let’s breakdown the numbers.
An investment property requires 20% downpayment to finance and closing costs are approximately 3% of the purchase price which totals to 23% for our analysis purposes.
Let’s use an example of buying a $500,000 resale investment property, most likely an investment condo in Toronto.
Required capital is $115,000 (23% of $500,000). For now we’ll assume the $115,000 is not borrowed from a line of credit, it is from personal savings or investments.
In 5 years at 2% annual appreciation, the investment property would be valued at $552,040. The mortgage principal at renewal in 5 years would be $341,898 (borrowing at 3% amortized over 25 years). The difference ($210,142) is the equity built.
The initial capital investment $115,000 would be $210,142 after 5 years which is $95,142 in pre-tax profit ($19,028 per year or 16.5% return on investment).
Pre-Construction Condos Leveraging
Let’s look at example of buying a pre-construction investment property for $500,000 as well. Let’s assume in this case, the real estate investor has access to a secured line of credit HELOC on their home at prime+0.45% which is 3.45% based on today’s interest rates. The cost to carry 20% down payment ($100,000) over 4 years which is a typical period of time to construct a condo is $287.50 (interest only) per month, which can be viewed as an “investment contribution” similar to regular monthly RRSP contribution. If the investment property appreciates at 2% annually in the 4 years which historically has shown stronger appreciation, the value of the investment condo at the time of registration would be $541,216. $41,216 in 4 years is 10.3% annual return on investment without having to maintain a property, deal with tenants or pay a mortgage. Keep in mind the interest on the borrowed $100,000 is a tax write off since it is used for investment purposes (Please consult a professional accountant as this is not intended to be tax advice). 5 years after the investment property registers, the condo would be worth $597,546 (at 2% appreciation) with a mortgage balance of $341,898, that’s $255,648 in equity over 9 years or 13.5% annual return on investment.
Advanced Investment Property Strategy
Initially, the real estate investor puts down 20% into the investment property and finances 80% of the property value. Over 5 years time frame and as the mortgage matures, based on 2% annual appreciation and mortgage paydown, the equity in the investment property is at approximately 50%! The real estate investor has 2 options at that stage:
- Renew the investment property mortgage and continue paydown as originally planned
- Pull some of the built equity and acquire another investment property
To determine what’s best for the real estate investor, the following questions are to be addressed (hint: it is something we can help real estate investors with):
- How much cashflow is required assuming the mortgages are paid to support desired lifestyle?
- How many investment properties are required to achieve the above desired cash flow?
- Which areas can the real estate investor invest in to achieve the desired cash flow in the shortest period of time?
4 Takeaways from leveraging an investment property:
- With 20% equity into an investment property, the real estate investor’s equity position is at approximately 50% with mortgage paydown and 2% appreciation at the time of mortgage renewal in 5 years
- Rinse and recycle: in 5 years with mortgage renewal, the real estate investor can pull the built equity to acquire another investment property
- Using borrowed funds is an advanced tax strategy (consult accounting professional)
- 2% appreciation is equivalent to 15+% return on investment. 2% might sound like a low number but it results in double digit return on investment!
Are the above numbers overwhelming and you want to invest in real estate? Contact us. We can help!