Return on Investment
We have had a lot of clients recently inquiring with us about investment properties and their return on investment with these properties. It can be a great way to make money but the numbers have to work and that can be the challenging equation to figure out.
Many friends and family members have increased equity in their homes as we get older and continue to pay down our mortgage and as the market value of our homes continues to rise here in Southern Georgian Bay. So, how do you know an investment property is right for you?
1. Before you even begin to worry about the finances of the project do you really want or have the time to manage another property? Your income property over time may require a new roof, kitchen, bathrooms and even monthly maintenance with lawn care and snow removal.
2. If you are borrowing money against another home with a line of credit or second mortgage then you also have to keep in mind interest rates. Cash is king in this situation and the more you can put down on the home the more return on your investment you will see.
3. Don’t forget that if this is an income property HST may be applicable and capital gains could be incurred on the sale of the home.
4. Don’t forget on top of the mortgage payments you will also have taxes, insurance, and any maintenance cost for the home.
To calculate a return on investment (ROI) let’s use a recent example I had an inquiry about:
If you purchased an income property for around $450,000 you could possibly rent the home for $2,000 a month plus utilities. A duplex would be an even better situation with two possible rental incomes of about $1250 each depending on the finishes and location of the home.
Therefore if you purchased a duplex you would collect $30,000 a year in rent. Minus $3,500 in taxes, approximately $1,200 in insurance, and another $1000 in general maintenance, in the end, you would have netted $24,300. Assuming your initial down payment is 20% your monthly mortgage payment at 3.5% would be $1,797 with total mortgage payments for the year of $21,564. Therefore, your net profits are $2,736 per year.
Our ROI for this example = 2,736 – 21,564 / 21, 564 = -8% ROI Ouch that’s not a good number
Plus you also have to consider how the $90,000 (20% down payment) really could have been working for you. If you have a mortgage on your current home, just focus on it and pay it down. ROI on investments fighting another interest rate more often than not, don’t work out.
Hope this helps