Investing in Real Estate | Pure Mortgage
With Edmonton & Calgary being ranked as 2 of the top Cities in Canada to invest in real estate, many people from across the country are looking at our market to build personal wealth by investing in property. An investment property is being increasingly viewed as a pension plan for the future, particularly since so many are not covered by workplace plans. Rental income typically pays for most or all expenses and property appreciation has often outperformed stocks and bonds over the long term. With vacancy rates as low as 1.5% in parts of Alberta and Edmonton mortgage rates at an all time low, the demand for potential tenants moving to Alberta should only continue to increase.
This is not just an investment for well-established business people and experienced homebuyers. Savvy first-time buyers are often jumping in with both feet: purchasing a duplex or house with basement suite, and then managing the additional units to pay down the mortgage while they make a start on home ownership. And parents who add up the cost of accommodations for their university or college-bound children are often deciding to be landlords themselves, seeing an opportunity to offset the cost of housing with a sound investment.
Let’s have a look at the numbers.
Assume you qualify for a home worth $400K which has 3 BR’s on the main floor unit and a 2 BR basement suite along with a 2 car detached garage with 20% to put down ($80K). If you start your term with a 5 yr mortgage of $320,000 and a 30 yr amortization from a mortgage broker, you will have payments of about $1,270/mth. Now let’s assume property taxes of about $300/mth, and let’s take 5% of your gross monthly rent to cover vacancy (1 month every 20 months it will sit empty) and another 5% to cover maintenance and repairs. You will also need to get home insurance which will mean an additional payment of about $50/mth. This totals $1,747/mth. Now if you were to get $1,000/mth for the basement suite, $1,300/mth for the main floor and $200/mth for the garage this means total monthly rent of $2,500 which means net profits of about $753/mth ($9,036/yr) which is an 11.2% return on your original investment of $80K not factoring in inflation and mortgage pay down. How does this look over 5 yrs? Well if the property appreciates by 2% per year, it should in theory be worth $432,972 by the end of your first 5 yr mortgage term. Your mortgage balance should be about $282,039 at the end of the 5 yr term assuming the rate stays the same meaning you’ve now got equity of $150,933 when subtracting the mortgage amount remaining from the value of the home. Subtract the initial $80K investment and this shows a profit of $70,933 just on appreciation and mortgage paydown which translates to an 88% return over 5 yrs which averages out to 17.6%/year. Add the 17.6% to the 11.2% you earned on the monthly cashflow, and this totals about 28.8% per year. Even if the property value didn’t go up and all you got was mortgage paydown and monthly cash flow, your return is still above 10% per year on initial investment which is considered by most standards a good investment. With the equity you have at the end of the 5 yr term, why not refinance it and use that equity for a down payment on another property and multiply the effects?
If you have 5% to put down and you want to live in 1 unit and rent out the other, you can get your foot in the door and you’ve got someone covering much of your expenses which will allow you to aggressively save 20% to purchase your next property.
Real estate is not the be all end all of investments and as a mortgage broker based in Edmonton, I’d like to be forthcoming and say it can be as volatile as any other “risky” investment. But if you add it to your portfolio of investments, it simply becomes a different investment vehicle which allows you to diversify yourself a bit rather than putting everything in stocks, bonds or mutual funds. Like any investment, it does require a plan, it requires some research, and it requires a good team of professionals which should include a realtor, lawyer, accountant, and mortgage broker.
There are many reasons to consider investing in property property in Edmonton. If you are interested in exploring this wealth-building strategy, talk to us. We can help you determine your downpayment options and run the financial calculations that you’ll want to see for cashflow and capital appreciation.
*For general illustrative and educational purposes only. Not intended as legal, tax or financial advice. Always seek professional advice to determine how an investment property purchase pertains to your own financial situation.