Real Estate

The Calculus of Investment Property

  • Last Updated:
  • Jan 14th, 2022 2:42 pm
Newbie
May 12, 2020
52 posts
8 upvotes
Guelph
tczernec wrote: 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.
This is a great post. Would you be willing to share your spreadsheet? Always looking to improve :)
Sr. Member
User avatar
Aug 22, 2009
588 posts
149 upvotes
Guelph, ON
pters11 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!
Did you ever end up buying your property? Was just looking at your speadsheet (very nice!), but am questioning your assumed maintenance expenses. Your calculation is taking 1% of your Gross Annual Income, but I think you meant to take 1% of the Purchase Price instead? It results in a very different value:

Spreadsheet Maintenance Calculation
= 1% of Gross Annual Income
= 1% * $39,600/yr
= $396/yr

Alternative Maintenance Calculation
= 1% of Purchase Price
= 1% * $600,000
= $6000/yr

I'm pretty sure that your maintenance expenses will be closer to $6000/yr than $396/yr? From some reading online, depending on the property, maintenance costs should be assumed to be between 1% and 4% of the purchase price. Taking 2% in the middle, your maintenance cost could go as high as $12000/yr. In general, I've read that a "rule of thumb" is to assume that 50% of yorur gross rents would go to insurance, taxes, maintenance, etc. Based on your numbers, you're only assuming 17%. If you increased maintenance to 2% of purchase price ($12K), then you'd hit the 50% rule of thumb.
Newbie
May 12, 2020
52 posts
8 upvotes
Guelph
VifferFun wrote: Did you ever end up buying your property? Was just looking at your speadsheet (very nice!), but am questioning your assumed maintenance expenses. Your calculation is taking 1% of your Gross Annual Income, but I think you meant to take 1% of the Purchase Price instead? It results in a very different value:

Spreadsheet Maintenance Calculation
= 1% of Gross Annual Income
= 1% * $39,600/yr
= $396/yr

Alternative Maintenance Calculation
= 1% of Purchase Price
= 1% * $600,000
= $6000/yr

I'm pretty sure that your maintenance expenses will be closer to $6000/yr than $396/yr? From some reading online, depending on the property, maintenance costs should be assumed to be between 1% and 4% of the purchase price. Taking 2% in the middle, your maintenance cost could go as high as $12000/yr. In general, I've read that a "rule of thumb" is to assume that 50% of yorur gross rents would go to insurance, taxes, maintenance, etc. Based on your numbers, you're only assuming 17%. If you increased maintenance to 2% of purchase price ($12K), then you'd hit the 50% rule of thumb.
Thanks for the response! I did end up purchasing the property and did have to adjust the maintenance cost :) So far so good!

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