ROI on Investment Condo

by Mr. Cheap

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As I’m coming up on the 6th month anniversary of purchasing my investment condo, I thought now might be an interesting time to have a look at the ROI (Return On Investment) on my investment.

How to calculate this had me scratching my head a little, so I’ll present the results and my methodology, and if this seems weird to anyone, please feel free to suggest other ways to calculate this.

After *ALL* regular, on-going costs (including condo fees, property taxes, insurance and mortgage INTEREST) I clear $256.62 / month. I took all the money I’ve put into the condo that WASN’T related to these expenses (e.g. ignoring mortgage payments, insurance payments, etc since I’d already accounted for them) and it adds up to $43,811.68 (remember this includes the down payment, legal fees, renovations, maintenance, etc). Therefore I’ve had a ROI of 3.51% (256.62*6/43,811.68) over the last 6 months, which is an annual ROI of 7.03%.

Just for interest’s (pardon the pun) sake, I calculated my ROI WITHOUT mortgage interest factored in and it was 8.88% (17.77% annually). This is interesting just because the interest rate will probably be the largest variable that will change on future deals (it should be a lot more volatile then rent, labour/material costs or other fees involved).

So 61% of the cashflow is going to the bank, and 39% is going to me. I’m not sure if that’s good or bad. Certainly I couldn’t have done the deal without the bank’s capital, and this should shift as time goes on (as the mortgage gets paid off, more of the cashflow will go to me each month). Additionally, any increases in the cashflow will go to me (just as any decreases would come out of my share, not the banks).

Ignoring the mortgage, my ongoing costs are about half the rent I’m collecting. I’ve read that the non-mortgage expenses of a rental property will usually be 45% of the market rate rent (in a normal, balanced rental market). This includes management fees (and people who claim to be running a property for a lot less than 45% usually are doing the management themselves and ignore the value of their time). Property managers usually charge 10% of the gross rent. Therefore I’m either significantly under-charging for rent (which I don’t think is the case as I tried to rent it out for more and couldn’t) or my expenses are very high compared to other rental properties (which I believe IS the case, people often say renting condos isn’t very cost effective).

Certainly not amazing, but nothing to sneeze at either (and I’ve learned quite a bit while earning that 7.03%).

This ignores vacancies (I’m assuming the tenants moved in the instant I bought which wasn’t the case), any maintenance expenses beyond the condo fees (which I’m hoping will be minimal), and my time and effort.

It also ignores appreciation of the value of the property, tax implications (postive and negative) and the discount I purchased the property at.

As much as I love condos and feel much more comfortable investing in them, perhaps I should be looking at a more lucrative form of rental property going into the future…

Q at $1 Million to My Name: You need to hold my hand while I buy my first apartment building! ;-)

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{ 6 comments… read them below or add one }

1

Found a blog post with a ROI calculation on a rental property: http://www.2millionblog.com/2006/10/the_real_return_on_my_rental_p.html

He used a similar calculation as I did (net income)/(equity + capital improvements+legal expenses).

His return of 7.72% is quite close to my 7.03%.

2

Don’t forget your mortgage interest cost is at it’s peak and should go down over time which will increase the profit and ROI going forward.

3

Absolutely! That’s definitely one of the perks I’m looking forward to in the future (although I’ve been foolishly pre-paying on my mortgage, so I’ve maximized this increase, while throwing away a very tax-efficient and low-interest loan).

I have stopped the pre-paying (switch from accelerated to non-accelerated), so I’m at least being a little more rational now :-).

4

E-mail me anytime with questions, I’ll do my best to answer them.

onemilliontomyname at gmail.com

5

If you don’t have any other debt, then paying off tax-deductible debt is not foolish…after all, even after the tax rebate you are still paying for quite a bit of interest.

There might be better uses for the money (or maybe not) but foolish it isn’t!

Mike

6

Well, I don’t have any other debt, but I feel that I currently have multiple higher-yielding investment opportunities (buying more real estate, buying dividend stocks, contributing to an RRSP) that would yield more then the tax-adjusted 3.4% I’m paying on this loan.

I would be able to meet all of my debt obligations (with cash to spare) out of my regular income, so the only risk is that the investments don’t work out as well as I’d hope (then its “hi-ho, hi-ho off to work I go” for a longer period of time) or that I become disabled and can’t work AND my investments all fail (which would suck, but that’d be a bad situation with or without the debts).

So, in my particular situation, I *do* feel pre-paying on a low-interest (compared to the current rate), tax-deductible mortgage is a little irrational (e.g. foolish).

I definitely understand if other people place a higher value more of a “margin of safety”, but there’s a price to be paid for that as well (slower accumulation of capital).

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