This past Victoria Day long weekend gave me the opportunity to do some bicycling in the neighbourhood of Cornell.
An idea came to mind.
Being curious as to figuring out how many homes being rented on the market are either cash flow positive or negative, I decided to pick a recent 4 bedroom Cornell home that had been rented out.
I won’t give the specific addresses. But I will give you enough details to figure out how lucrative it is to invest in real estate and renting out property in today’s market.
Let’s dig into the details.
This particular home was a four bedroom, close to 3,000 square feet detached home built in 2014.
The original owner (way back then) acquired this home for just over half a million dollars.
It came back to the market in the fall of 2017 for a whopping $1.1 million dollars. I guess they missed the spring 2017 market, right?
It eventually sold for $980,000.
Property taxes: $5,097.95 based on 2017 figures.
So let’s crunch some numbers!
Assuming a 20% downpayment of $196,000, the mortgage will be $784,000.
At 3% over 25 years amortization, we’re looking at a monthly payment of $3,710.24
Now let’s factor in property taxes — which works out to $425 per month.
Carrying costs work out to $4,135.24 (plus property insurance).
The owners decided to lease the property and after a month and a half on market, it eventually got rented for $2,300.
That’s a negative cash flow of $1,835.24, or a touch over $22,000 per year.
If you look at an amortization table using these numbers, the first year’s principal payments amount to $21,440.
Basically, the owners of the property are just close to breaking even on principal.
Plus the amount of money they would have had to spend during the months when the property wasn’t rented out (vacancy).
Does this look like a reasonable investment?
Someone putting in over $2k per month must have the income to sustain handling negative cash flow, but also banking on the potential for appreciation of this property.
Markham homes have dropped anywhere from 20% to almost 30% from the 2017 peak market.
Is it too early to call a bottom on home prices?
Would you buy this house, rent it out, and pitch over $2k per month in hopes of appreciation?
Buyers buy homes for many reasons. And a buyer making this move with the assumptions above certainly has bullish views on Cornell.
And why not?
Great, well ranked schools.
Plenty of parks and green space.
A massive community park with baseball fields, soccer fields, tennis courts — and so much other stuff — coming soon.
And a limited amount of expansion, which controls supply, considering the greenbelt is just at its border.
Highway 7 south of this area will see a bit more density as proposed condos and townhouses continue to be built.
The remaining plots of land are staked and marked for future homeowners.
Recent 4 bedroom sales in early 2018 peg 4 bedroom homes at or over a million dollars (already pocketing a paper profit to these home buyers).
So perhaps it is worth shelling out an extra $2k per month, especially if you’re earning a good income.
And especially if you’re banking on Cornell home prices continuing to increase.
Would I do it? Would I buy a home and rent it out for negative cash flow of $2k per month?
I wouldn’t recommend it either.
My advice — find something cash flow positive (which is challenging to do in the GTA) — or, be prudent and put down a bigger down payment.
Buy the type of property you can afford to invest in with as much down as possible to break even or generate a bit of positive cash flow.
If you can’t buy a freehold detached, look at semi’s, or townhouses. Consider condos.
Or look beyond your comfort zone.
How about Hamilton? Waterloo? Or Ottawa… or even Montreal?
My primary criteria: be cash flow positive. Let price appreciation be a bonus.
Cash flow is the only thing you can really control and account for.
Appreciation will come. Real estate is inflationary. Buy and hold.
Besides. It’s a great feeling having someone pay off your mortgage — without you having to throw in extra money just to be cash flow positive.