Running the Numbers

by Mr. Cheap

It always drives me nuts when people recommend a specific investment, give a bunch of reasons to buy it then finish with “of course, do your own due diligence before buying”. As I’ve written before, it always feels like such a cop-out. Often books which specifically claim to help you learn how to buy stocks or real estate will give the same out. Or they’ll encourage you to talk to an advisor before making any purchase (not a bad idea, but didn’t you buy THEIR book for information, then they just tell you to go talk to someone else).

I’d be a little more accepting if they gave a detailed overview of HOW to do your own due diligence, but I’ve seldom come across any writers even willing to give that. By way of example, I thought it might be worth running the numbers on a property currently for sale here in Toronto (this is an exercise I’d usually go through to decide if it was worth going to see a property and digging further into the details about it).

I like to watch real estate listings in one area of North York and another area called Crescent Town (which is near the Victoria Park subway station). I’ve been able to get a feel for prices in these two areas, as well as rents. If I found out another area that supposedly offered good deals, I’d look into it, but would be a lot more skeptical of my calculations (and would spend more time verifying things before making an offer or following through with a purchase).

Crescent Town is great in that its a complex with a bunch of buildings, so there’s a TON of comparables for any details you might want. The cheapest unit available is listed here (link will be dead eventually, I’ll write relevant details here – the asking price is $92,900). As a 1 bedroom unit, a $900 rental price is probably reasonable (that’s what other units in the complex rent for), as long as its in decent shape (which they claim it “Shows Well”).

Income ($900 / month):

  • $900 / month (rent)

Expenses ($476.02 / month):

  • $370 / month (condo fees)
  • $66.02 / month (0.8528434% property tax)
  • $40 / month (insurance – this is what I pay on my condo)

This is looking pretty good! $424 / month cash flow positive! Sweet! Perhaps we’ve been reading the Canadian Capitalist too much, and we know he insists on REAL expenses, not just the pretend hypothetical kind where we ignore stuff we don’t want to face (he’s such a stickler for reality!). So lets add on 5% of the monthly rent as a vacancy rate, and 1.5% / year of the purchase price as a maintenance rate (this might be a LITTLE high for a condo, since the corporation handles all outside maintenance, and SOME inside maintenance).

  • $75 / month (vacancies)
  • $116.13 / month (maintenance)

The maintenance DOES look high, but we’re including in this things that are expensive and only rarely needed (such as replacing the carpeting or getting the unit painted – amortizing them over the length of time we own the unit). $233 / month profit is still pretty nice.

Lets think about transaction costs and financing now. Legal costs will probably be about $2K, Toronto’s new transfer tax will be $1,393.50 (1.5%), if we put 5% down (lets ignore CMHC fees) that’d run us an additional $4,645. So cash down we’re looking at about $8K (we’re assuming NO renovations are needed).

On an INTEREST ONLY mortgage at 5.5%, we’d be looking at paying $404.50 / month in interest (simply the purchase price, minus the down-payment, multiplied by 5.5% and divided by 12).

This puts us at $170 in the hole each month. We’re paying $8K for the honour of losing this money each month. And this is the cheapest unit in the complex. In order to BREAK EVEN every month, we’d need to up the down payment to 20% and for them to accept a purchase price of around $81.5K. To make $50 / month (as recommended by Violent Acres), we’d need a purchase price of $72.6K.

Surprisingly, telling sellers they need to give us a killer deal in order for us to have a cash flow positive property rarely produces good results. As a very low priced unit in the complex, I don’t think the agent or the sellers would take you very seriously if you went in and offered them a low ball offer. However, there’s nothing to lose, so there’d be no real reason not to (and maybe you’d get lucky and they’d need to sell for some reason). Some real estate investors claim the hardest part of getting into it is being willing to burn down the shoe leather looking at places and putting in low offers (trying to find the 1 in a 100 seller who will accept). This unit has been on MLS for a while, so I’m sure they’d entertain offers below asking.

Obviously you can make the numbers work for ALMOST any property by just increasing the down payment (as we did when we upped our down-payment to 20%). You have to be honest with yourself, however, that money has value. If you’re using it for the down-payment, you’re missing the chance to use it for something else (the opportunity cost). Assuming a 10% opportunity cost for the down-payment and transaction fees might be reasonable to include in your calculations (we won’t here, as it’d put us in the hole again).

Condos are notoriously bad money makers for people getting into real estate investing, and the numbers are usually bad. By being able to control the costs that are made up by your condo fees, in properties that you own on your own, you’re usually able to cut costs to turn a profit. The big advantage is that condos are cheaper than single family homes or apartment buildings and let you “try on” the landlord hat without being overwhelmed.

If anyone goes to view this condo (Guinness416 lives in the neighbourhood I believe), please post a comment with how it looks, and if anyone makes an offer, please let us know how it goes!

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