Real Estate

The Calculus of Investment Property

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  • Jan 14th, 2022 2:42 pm
Deal Addict
Mar 22, 2010
3703 posts
1631 upvotes
hosuplee wrote: Hi, check out Function9.co for more accurate real estate calculations in Ontario.
Full disclosure, I'm part of the Function9 team, but it's a free tool :)
Just tried Resale analyse tool. Pretty neat. Well done mate.
Deal Guru
User avatar
Jun 26, 2005
10096 posts
1954 upvotes
Toronto
You are missing a lot of other things because this is a business. If you ask any restaurant owner how much effort and time and sweat did you put into your business? And is it worth it? Different owners will tell you different answers.

So it is entirely up to you it all depends on how much hard work you are willing to put into something. Some people think getting up in the morning it's hard work enough.

Specifically to your topic if you buy a good location in Toronto you are definitely going to see the value go up. Imagine you bought something 25 years ago downtown Toronto midtown Toronto. You are mortgage free now and value doubled or more.

Now during this 25 years, you would have gone through some bad tenants, frustrations, time spent or wasted dealing with all these issues. And maybe have to evict someone which cost thousands of dollars.

Just look at these threads on this forum of issues. It is not a walk in the park. Is it worth it? Again it depends on the owner.

For me I know I've never heard anyone say oh I'm so sorry you own 10 condos in Toronto. All collecting rent and your kids will get them later. So sorry about that.

There are many ways of making money investing in property is just one of them. However I do know many of the richest people on Earth make their money from being property owners.
Newbie
May 12, 2020
52 posts
8 upvotes
Guelph
Hi everyone,
We currently have 1 rental property (and our principal residence) and would like to pick up another. I am working on a spreadsheet to help to a quick assessment of properties in my area to see if the cash flow adds up. You will notice in this spreadsheet that I just have to first mortgage amount (mortgage on the new rental) but have not factored in the loan that I will take out from the equity in my current properties to help pay for downpayment, closing costs etc. Would anyone be willing to check out my spreadsheet and see how I might add this? Trying to get prepared! Here is the link to my google sheet spreadsheet. Your text to link here...
Thank you!
Jr. Member
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Aug 14, 2020
180 posts
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Many posters have pointed out things like principle pay down and conservative rent and value increase numbers. I'm OK with the conservative numbers but wanted to add a couple of other missed considerations. Most small landlords have a day job, so cash flow at zero is ideal. Deferring income to the future and paying deferred taxes from imbedded capital gains is the objective. Every year you should be gradually raising rent to what the market will bear/law will allow. From year 2 onward your cash flow is already increasing, and any landlord that has been at it for more than 5 years should know that makes a big difference. Rent goes up, mortgage stays the same. OP, I'd encourage you to look at the issue with a longer view in mind. With transaction costs to buy and sell added on, this only makes sense in the mid to long term.
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Jr. Member
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Aug 14, 2020
180 posts
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User149646 wrote: Hi everyone,
We currently have 1 rental property (and our principal residence) and would like to pick up another. I am working on a spreadsheet to help to a quick assessment of properties in my area to see if the cash flow adds up. You will notice in this spreadsheet that I just have to first mortgage amount (mortgage on the new rental) but have not factored in the loan that I will take out from the equity in my current properties to help pay for downpayment, closing costs etc. Would anyone be willing to check out my spreadsheet and see how I might add this? Trying to get prepared! Here is the link to my google sheet spreadsheet. Your text to link here...
Thank you!
I've taken a brief look at the spreadsheet out of interest. I've built versions myself, and the main value was to understand the process. I think it's important to help you wrap your head around how it works and to get constructive feedback from others.

Another consideration is that lenders will look at things with an entirely different set of objectives. If it works for them and it works for you, it probably makes sense. What I'm getting at is how and how much rent is considered.
They may add 50% to 100% of rent to your income (addback) or they may deduct it from your expenses (Principle, Interest, Taxes and Heat - PITH) which is called "offset". Offset is a more generous calculation usually. The addback or offset calculation is loosely tied to interest rate. The more generous the terms the higher the rate - roughly, so different lenders fit different situations. Rate is only one of many considerations in any purchase.
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Newbie
May 12, 2020
52 posts
8 upvotes
Guelph
aeromortgage wrote: I've taken a brief look at the spreadsheet out of interest. I've built versions myself, and the main value was to understand the process. I think it's important to help you wrap your head around how it works and to get constructive feedback from others.

Another consideration is that lenders will look at things with an entirely different set of objectives. If it works for them and it works for you, it probably makes sense. What I'm getting at is how and how much rent is considered.
They may add 50% to 100% of rent to your income (addback) or they may deduct it from your expenses (Principle, Interest, Taxes and Heat - PITH) which is called "offset". Offset is a more generous calculation usually. The addback or offset calculation is loosely tied to interest rate. The more generous the terms the higher the rate - roughly, so different lenders fit different situations. Rate is only one of many considerations in any purchase.
Okay thank you very much. So, based on what you see in the spreadsheet, what you make any changes? Would you add some sort of rough calculation for loan for downpayment etc?
Sr. Member
Oct 14, 2010
695 posts
771 upvotes
Toronto
Agree with this.
We have had our rental for about almost 2 years now.
And the property is cash flow negative, but with appreciation factored in gives a profot of $2,000 per month.
All of this is getting deferred, that is fine with us. Especially as it was bought with 100% leverage. I.e. the down payment came from a HELOC.
Jr. Member
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Aug 14, 2020
180 posts
168 upvotes
User149646 wrote: Okay thank you very much. So, based on what you see in the spreadsheet, what you make any changes? Would you add some sort of rough calculation for loan for downpayment etc?
It's a really good spreadsheet. As for the loan for down payment, have you considered that you are financed at 100%? 80% through the bank, and 20% on your equity? You pay interest on both, you write off tax on both. The purpose of the down payment is only for the investment.
You've even gotten into DCR. I post on here about addback and offset to keep it simple, but lenders often have DCR worksheets as well.

I would say you can be more conservative on interest rate instead of planning 25 or 30 years at the lowest rates of our lives. You could probably double the interest and only add 20% to your mortgage payment, which in turn is only one of your expenses. Also, your time is worth something, so allow something for management and accept a lower ROI. Even though you'd rather be paid in ROI, and effectively will be.

In the end, we could add assumptions all day, inflation, rising rent, increasing principle vs. interest, variations in expenses, tax changes. It never ends - The Map is Not the Territory. By building it you understand what you are getting into, so that's the point of the exercise. Now you have to make it happen for real and pull the trigger!
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Newbie
May 12, 2020
52 posts
8 upvotes
Guelph
aeromortgage wrote: It's a really good spreadsheet. As for the loan for down payment, have you considered that you are financed at 100%? 80% through the bank, and 20% on your equity? You pay interest on both, you write off tax on both. The purpose of the down payment is only for the investment.
You've even gotten into DCR. I post on here about addback and offset to keep it simple, but lenders often have DCR worksheets as well.

I would say you can be more conservative on interest rate instead of planning 25 or 30 years at the lowest rates of our lives. You could probably double the interest and only add 20% to your mortgage payment, which in turn is only one of your expenses. Also, your time is worth something, so allow something for management and accept a lower ROI. Even though you'd rather be paid in ROI, and effectively will be.

In the end, we could add assumptions all day, inflation, rising rent, increasing principle vs. interest, variations in expenses, tax changes. It never ends - The Map is Not the Territory. By building it you understand what you are getting into, so that's the point of the exercise. Now you have to make it happen for real and pull the trigger!
HI there. You make a lot of great points here. Thank you. Yes I have factored in the 20% additional loan for downpayment, just not sure how to include this in the spreadsheet. How would you suggest to do this?

Also, by management, I am guessing you mean to factor in a property manager?

Thanks again
Jr. Member
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Aug 14, 2020
180 posts
168 upvotes
User149646 wrote: HI there. You make a lot of great points here. Thank you. Yes I have factored in the 20% additional loan for downpayment, just not sure how to include this in the spreadsheet. How would you suggest to do this?

Also, by management, I am guessing you mean to factor in a property manager?

Thanks again
Just add another line almost identical to your mortgage interest but with HELOC or Refi interest. Or combine them at 100% with a combined interest rate in a single line. How you do that, I can't really suggest. Your spreadsheet is already prettier than anything I'd make ;)
Yes, re: property management. It's only a suggestion to value your time. I'm not against doing it yourself, but account for the value you add. If you need a manager one, day it will already be in the budget. Then you just have to manage your manager, so get a good one!
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Newbie
May 12, 2020
52 posts
8 upvotes
Guelph
aeromortgage wrote: Just add another line almost identical to your mortgage interest but with HELOC or Refi interest. Or combine them at 100% with a combined interest rate in a single line. How you do that, I can't really suggest. Your spreadsheet is already prettier than anything I'd make ;)
Yes, re: property management. It's only a suggestion to value your time. I'm not against doing it yourself, but account for the value you add. If you need a manager one, day it will already be in the budget. Then you just have to manage your manager, so get a good one!
Okay beautiful. Now if I add it seperately or combine it, I could potentially lock it in like the other portion and get a low rate? Right now both of my properties are at 1.45 variable....if I borrowed equity to take pay for down payment etc (first mortgage) and used that money to get property and have a second mortgage, I guess I would be at the mercy of current rates correct? From what I have seen, loc are around 4-5 but then I would just lock it in like a mortage? Sorry for all the questions. I really appreciate it.
Jr. Member
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Aug 14, 2020
180 posts
168 upvotes
User149646 wrote: Okay beautiful. Now if I add it seperately or combine it, I could potentially lock it in like the other portion and get a low rate? Right now both of my properties are at 1.45 variable....if I borrowed equity to take pay for down payment etc (first mortgage) and used that money to get property and have a second mortgage, I guess I would be at the mercy of current rates correct? From what I have seen, loc are around 4-5 but then I would just lock it in like a mortage? Sorry for all the questions. I really appreciate it.
You can get a HELOC below 3%. You can possibly refinance at 1.7% or lower. The refi rates are a little higher than purchase rates.
.
Newbie
May 12, 2020
52 posts
8 upvotes
Guelph
aeromortgage wrote: You can get a HELOC below 3%. You can possibly refinance at 1.7% or lower. The refi rates are a little higher than purchase rates.
Thank you!
Member
Feb 15, 2018
444 posts
546 upvotes
Edmonton
This question can be very location specific. In cities like Vancouver and Toronto cash flow is less of a consideration than capital appreciation. Bottom line is find out what calculus works best for your situation and your lender - as the banks will have the final say.
Edmonton area Realtor
Deal Addict
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Dec 13, 2016
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BananaHunter wrote:
Let's say I want to buy a $500k condo in Toronto, and willing to put in $150k as downpayment (initial investment), resulting in a $350k mortgage. Let's further assume that the rental rate will be a conservative $2000/month.
Good luck with that
Sr. Member
Nov 22, 2017
942 posts
696 upvotes
aeromortgage wrote: Many posters have pointed out things like principle pay down and conservative rent and value increase numbers. I'm OK with the conservative numbers but wanted to add a couple of other missed considerations. Most small landlords have a day job, so cash flow at zero is ideal. Deferring income to the future and paying deferred taxes from imbedded capital gains is the objective. Every year you should be gradually raising rent to what the market will bear/law will allow. From year 2 onward your cash flow is already increasing, and any landlord that has been at it for more than 5 years should know that makes a big difference. Rent goes up, mortgage stays the same. OP, I'd encourage you to look at the issue with a longer view in mind. With transaction costs to buy and sell added on, this only makes sense in the mid to long term.
I think the issue is cost of entering the market. RE has truly become like bitcoin and most first time investors are stretching themselves very thin to get in on the frenzy, so yes they do need to be cash flow positive.

I think it's also a good idea to remember that RE prices in cash flow positive regions are forced up due to the high volume from low barriers of entry. They get forced up until that region is no longer cash flow positive because rents don't go up at the same pace due to strong tenant laws.
Jr. Member
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Aug 14, 2020
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Extrahard wrote: I think the issue is cost of entering the market. RE has truly become like bitcoin and most first time investors are stretching themselves very thin to get in on the frenzy, so yes they do need to be cash flow positive.

I think it's also a good idea to remember that RE prices in cash flow positive regions are forced up due to the high volume from low barriers of entry. They get forced up until that region is no longer cash flow positive because rents don't go up at the same pace due to strong tenant laws.
I think that's a pretty accurate picture. Real estate probably isn't as efficient as the stock market but money flows to the better deals and that always changes. There will always be risk, not the least of which is getting a professional tenant. Rare but they do exist and they give a bad name to tenants who are mostly good. How you do things is very important, do the math, examine the risks, make plans, know your neighbourhood and vet your tenants.
.
Sr. Member
May 10, 2020
792 posts
1015 upvotes
BananaHunter wrote: I want to run my thought process of determining whether an investment property is worth the effort. Here is how I think and valuate. Let me know if there is something else I am not factoring in.

Let's say I want to buy a $500k condo in Toronto, and willing to put in $150k as downpayment (initial investment), resulting in a $350k mortgage. Let's further assume that the rental rate will be a conservative $2000/month.
Please can I buy this mythical condo as well? I would buy tomorrow if this existed.
Member
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Apr 9, 2007
273 posts
620 upvotes
Toronto, ON
Many people needlessly overcomplicate this. Assume we don't care about cashflow (I don't), all we need to make RE a very interesting and viable investment is a >= 0% ROIC (meaning negative cashflow is offset by principal paydown). Why? Because real estate investing, at least in my view, is all about capital appreciation - not crazy Toronto-area appreciation, but even just inflation-level appreciation. You put 20% down, and over the *long term* you can assume appreciation of at *least* inflation. Let's say inflation is 2%. Due to the 4:1 leverage (20% down), you're actually making 10% per year. Compounded. That alone is the #1 selling point of RE investing. You can't cheaply 4:1 leverage in any other market that appreciates reliably with inflation. And historically, average capital appreciation is at least double CPI inflation - so that 10%/year becomes 20%/year.

Now, how much 'gravy' you add to your returns is definitely a good topic. And cashflow realistically is important to people because not everyone wants to (or is able to) dish out cash every month just to build equity. So look at cashflow, use investment calculators, it's all good - I use some insane spreadsheets to calculate all this stuff too. But when it comes to the thesis of RE as an investment, it's the growth via capital appreciation, at or above inflation, leveraged, that is the secret sauce.
Deal Fanatic
Jul 3, 2011
6517 posts
3788 upvotes
Thornhill
Seems you are looking for affirmation that real estate is more volatile and less profitable than stocks.

So Buy stocks, they never lose value, right?

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