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:
- Cashflow: -$2,400.00
- 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.