Investing in residential property, putting upwards of 35% down, experiencing negative cash flow and still getting out ahead seems to be the norm these days — especially in cities where prices have appreciated so greatly, rental rates are at the lowest lows, and real estate investors are still seeking opportunities.
Which brings me to one of the opportunities you may want to consider if you’re looking to take a dive into real estate investing this year or in 2020.
Cornell is a neighbourhood situated in the uppermost northeast area of Markham with Stouffville to the north and Pickering to the east. It is a fast growing community with top ranked schools, a growing employment and business sector, and city infrastructure including transportation hubs (GO station, VIA transit and highway 407).
There are many families living in Cornell, many are younger families who have young children, and some are older families and individuals. The average income for a household living in Cornell is approximately $124,000, which is in line with the city’s average. Families living in Cornell primarily own their home, with a low rental rate of about 6% of the total properties in the area. This has a positive effect on property valuations and on the demographics attracted to the area.
There is a vast selection of resale homes including detached, semi-detached, townhouses and condos in Cornell. The majority of homes are single family freehold properties but there is a quickly growing segment of the market catering to more affordable entry level homes. Low rise condos are starting to be built, and freehold townhouses are being offered as brand new construction from builders with price points starting in the mid $700,000’s.
Some builders are offering inventory homes. One such builder is Forest Hill, one of Cornell’s main builders having developed entire subdivisions of homes starting in the early 2000’s. Of the various property styles Forest Hill has built, one of the most limited yet high demand is the freehold detached single family home with a coach house.
One of the inventory homes being sold by Forest Hill is an approximately 2800 square feet, four bedroom detached single family home. Approximately 500 square feet of the total home livable area is a coach house which is separate from the main living area situated above the garage and adjacent to the main home’s master bedroom (but separated fully with a separate entrance, separate HVAC and its own hot water tank). Total parking is four vehicles — two inside the garage, and two outside on the driveway.
The home is being offered at $1,325,000 (including HST) with a closing as early as 60 days. The exterior of the home is fully completed, with the interior being in a drywall stage ready for the eventual investor’s choice of finishes and customization options.
How much can it rent for?
Rental properties are in extremely high demand in Cornell. Properties have a very low vacancy rate and rent quickly, usually within two to four weeks of being listed on the market. Detached four bedroom homes have recently rented for $2700 and more. Coach houses are renting from $1300 to $1800. In total, a conservative estimate of rent for this investment property would be $3900 to $4100.
Let’s Crunch Some Numbers
Purchase price: $1,325,000 (including HST)
Downpayment: $463,750 (35%)
Monthly Payment: $4,174.30 (3.20% over 25 years)
Property Tax: $500 per month (estimated)
Total Monthly Costs: $4,674.30
Estimated Rent: $4,250.00
Monthly Cash Flow: – $424.30
First Year Principal + Interest & Earnings Potential
Principal Paid: $22,865
Interest Paid: $27,227
With a negative cash flow of $424.30 per month, or negative $5,091.60 per year, an investor would still reap a positive return based on principal paid (mortgage pay down) netting $17,773.40 in their first year ($22,865 principal paid less $5,091.60 negative cash flow).
Assuming a property appreciation at a modest rate of 3%, an investor could potentially earn an additional $35,176 by means of an increase in the property’s value based on its purchase price net of HST.
Risks to Consider
The calculations herein are based on a 35% downpayment. It is entirely possible that an investor may not have access to such funds and opt for a lower down payment. A lower down payment will negatively impact cash flow and increase the amount of negative monthly cash flow.
Although the real estate market has consistently experienced positive returns year after year, averaging approximately 5% since 1970’s to present, there are a few years where returns have been negative. In the long run, investors with a long term commitment to the market have experienced positive returns. It is possible that an investor may not have the resources available to own and maintain property should a market downturn occur, in which case there is a risk of loss not only from a cash flow perspective but from a capital perspective.
The rental market is currently strong with low vacancy rates throughout the entire Greater Toronto Area, including the Cornell neighbourhood in Markham. Nonetheless, there is a risk that it may take longer for an investor to find a suitable tenant to rent property, and there is a risk of vacancy between the time an active tenant leaves the property and another commences a lease. Investors should be prepared to contribute payments should a property be vacant, with such payment benefiting the investor anyway in the sense that it pays down the mortgage and increases the equity that the investor has in the property.
Although this is a new home, there is a risk that the investor may have to pay for repairs whether in the initial stage of acquiring the property or in subsequent years (depreciation and wear & tear). Investors should have the resources necessary to pay for such repairs should they be required in order to maintain the property in a marketable condition.
The Cornell neighbourhood in Markham is an opportunistic place to invest as the community continues to grow, employment increases, and infrastructure is built to accommodate growing demand for the area. Home prices are stable but have room to grow as confidence returns to the real estate market and as supply diminishes amidst increasing demand. Increased zoning for high density projects shows that developers are looking to build upwards due to the decreasing availability of land.
These factors present a positive opportunity for an investor looking to acquire detached freehold homes in both the new build market and the resale market. Investors with the necessary capital to make this investment have the potential to earn a positive return on their investment which could include returns as a result of cash flow, price appreciation and increasing equity.