Thursday, October 12, 2017

How to get Rental Property with Positive Cash Flow

Here is an example of how to purchase a small income property with positive cash flow. This works for freehold townhouse, semi, single or duplex.

Please use this as a generic simplified template. It doesn't cover everything that can come up. There is always possibility of additional costs and risks. The more properties you review and purchase, the more precise your intuition becomes to steer away from trouble.
  1. Find out how much money you have for a down payment. Example, 50K.
  2. Subtract 10K since most likely you will need to spend some money on updates: 50K - 10K = 40K. 
  3. Divide the result by 22%, of which 20% is your down payment and 2% are the closing costs: 40K / 0.22 = 181K. This is the maximum purchase price you can afford.
  4. Go to MLS ( set a filter at your maximum price and look for areas where you can buy a property at this purchase price.
  5. Research the location. The goal is to understand that this is not a D market where D is for dead, dying, drugs, deserted, etc.
  6. Go to Kijiji and find average rents in this area for 1 bedroom, 2 bedroom and 3 bedroom. If no one rents in the area, look for a different place.
  7. Go to Indeed and find out how many jobs there are in this area. If there are no jobs, look for a different area. 
  8. Go to Google and find out there are businesses, infrastructure, colleges/universities, retirement homes, and other places to keep people busy in the area. 
  9. Find a mortgage broker who does rental property mortgages and get a preliminary quote on interest rate. Submit paperwork to pre-qualify for a mortgage. Confirm if there are any fees they'll charge on top of the interest rates (ex., broker fee).
  10. Go to one of major bank's online mortgage calculator, and confirm your monthly mortgage payment.
  11. Find a property on MLS with existing tenants. Contact the agent and ask for income and expenses in as much detail as possible. Ask the agent to schedule a day to show you as many similar rentals as possible.
  12. Contact your insurance broker and get a rough quote for a property this size. Say, $100 / month.
  13. If you don't live near the rental or have no time to self-manage it, contact several property management companies and confirm their prices.
  14. Do your math in an Excel template for each of the properties you come across:
  - Insurance 
  - Mortgage 
  - Monthly Property Tax 
  - Property Management Fee 
  - $30 for rented water tank 
  - $150 for maintenance (snow / grass / other minor repairs)
= Cash Flow.

Now, assume you get a mortgage at a high interest rate (ex., private 7% interest only). Do your math again. If you are still getting positive cash flow, then go for it!

Pls note that if you have a conventional mortgage, then your actual gain every month also includes the principal that the tenant is paying down for you, which is really nice.

This looks like a lot of work. Take a look - every step is doable. It feels great when you are done. The second rental will seem even easier. 

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