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Monday
Nov252013

Condos ... Do They Cashflow? 

It seems like everyone is talking real estate these days.  One of the most common conversations revolves around what type of real estate one should be investing in.  Condos are at the top of the list as they are abundant, easy to manage and always in the news.  The question is are they a sound investment and do they cash flow?

For our purposes, we will assume we have $100,000 to invest in a condo. 

As a real estate agent, I have access to the Toronto MLS, which allows me to look up all recent sales and leases.  In a completely unscientific manner I opened up the MLS map of Toronto and picked a condo in downtown Toronto completely at random.  My criteria was to find a sale transaction and rental transaction of the exact same condo unit within the past 6 months as it would establish both the rental rate and value of unit.  It didn't take much searching before I found a condo on Charles street - Unit #1505.  It was rented out on June 17th, 2013 for $1,650.00 and it was subsequently sold on Oct. 16, 2013 for $370,000.  With those 2 numbers in hand, the rest was simple math.

The investor has $100,000 to work with in this transaction.

  • $92,500 - Downpayment (75% LTV)
  • $7,450 - Land Transfer Taxes (Toronto and Ontario)
  • $1,000 - Legal Fees

The total required is approx. $101,000 so we're on track.

The next step is to determine what type of return the condo will provide on the investment.

CASH FLOW

Monthly Rental Income: $1,650

Monthly Expenses

  • $1,356.34 Mortgage Payment ($277,500 Mortgage - 5 Yr Term/3.3%/25 Yr Am)
  • $299.00 Maintenance Fees
  • $191.58 Property Taxes

Total: $1,846.92

Negative monthly cash flow is approx. $200.

RETURN ON INVESTMENT (ROI)

To determine the annual return on investment we need to look at 2 things:

  1. Cashflow: -$2,400.00
  2. Mortgage Paydown: $7,791.60

Annual Return: $5,391.60

ROI: 5.4%

The good news is that a return of 5.4% is a heck of alot better than the returns of GIC's, bonds or bank accounts.  The bad news is that you are out of pocket $2,400 every year to support this investment.

While condos are not my favorite real estate investment vehicle, I can definitely understand the allure of condos, especially with all the media hype surrounding them.

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