Wednesday, January 31, 2018

Real Estate Income Property - Case Study #1


This post is a case study of one of our rental income properties from its initial acquisition to date.

Hope you find it helpful!

Rental Income Property

This freehold town house is located in a nice family-friendly neighbourhood of Barrie, ON
At purchase, the house was about 35 years old. Previous owner had it for over 20 years. She lived in it during the first 10-12 years, and then rented it out. 

We were happy that the property came with tenants and had positive cash flow. We realized that the house would need to be updated eventually once the original tenant would move out.

Key features: 

  • Freehold town home
  • Built in 1982
  • 3 bedrooms, 1+1 bathrooms
  • Finished basement
  • 1 car garage
  • Electric heating
  • Washer, Dryer, Dishwasher, Water Tank
  • No AC

Purchase

We got this house privately without a real estate agent. Click to read the full story at Our second rental income property
  • Asking price: 189K
  • Purchase price: 185K
  • Found on: Kijiji, private sale
  • Rent: $1,200/month
  • Expenses:
    • Utilities: Paid by tenant
    • Taxes: ~ $200/month
    • Insurance: ~ $100 / month
  • Financing: 80 LTV, 30 year amortization, 5-year term, variable 2.5% interest

Total Investment

This property required a 55.5K investment.

A major renovation had to be completed in 2015 after tenant's Christmas party went really wrong. Renovation cost is listed as capital improvements in the investment summary below. Read full story about this renovation in Our House Was on TV blog post.


Investment Summary


InvestmentAmount
Downpayment$37,000
Closing Costs$3,196
Capital Improvements$15,450
Total$55,646

Cashflow and ROI 








  • Total return on investment (ROI) is 34%, or 8.5% annually
  • During the first two years, cash flow was negative
  • Cash flow was positive in Years 3 and 4
    • 2016: $217 / month
    • 2017: $598 / month.
  • Net profit has been positive every year
  • Annually, on average, the property runs with:
    • ROI of 8.5% 
    • Cash on Cash return of 3%
    • Cash Flow of 1.5K 
    • Net profit of 4.7K


Year 2014 Year 2015 Year 2016 Year 2017 TOTAL All YearsAverage Annualized
Income
Rents (@100%)7,200 14,400 17,700 17,700 57,000 14,250
Vacancy4,250 1,400 0 5,650 1,413
Total Gross Income7,200 10,150 16,300 17,700 51,350 12,838
Expenses
Taxes3,815 2,475 2,381 2,464 11,136 2,784
Insurance323 730 1,412 1,018 3,483 871
Repairs/Maintenance93 1,456 3,184 42 4,775 1,194
Utilities495 832 0 49 1,376 344
Admin/Advertising0 0 47 0 47 12
Total Expenses4,726 5,493 7,024 3,573 20,816 5,204
NOI2,474 4,657 9,276 14,127 30,534 7,633
Mortgage - Interest Payment1,832 3,350 3,131 3,330 11,643 2,911
Mortgage - Principal Paydown1,972 3,446 3,530 3,615 12,563 3,141
Cash Flow-1,330 -2,139 2,615 7,182 6,328 1,582
Net Profit (Loss)642 1,307 6,145 10,797 18,891 4,723
Cash on Cash Return-2.39%-3.84%4.70%12.91%11.37%2.84%
ROI1.15%2.35%11.04%19.40%33.95%8.49%






Appreciation / Equity

Market prices in Barrie increased dramatically between 2014 and 2017. Many believe that there may be a bubble, price adjustment, etc. Because of these concerns, I will use MPAC numbers for value calculations and not current market prices. MPAC approach is more conservative.

Based on MPAC assessments, the value of the property increased by 42K during the last four years. Once we include the equity gain in ROI calculations, return on investment becomes 27% per year:

  • Total gain including appreciation: $18,891 + $42,000 = $60,891
  • Total ROI including appreciation: 109% overall and 27% annually.




History

2017

  • Great tenant renews lease. Hurray!
  • Bank of Canada increased interest rate. Mortgage payment went up. 


2016

  •  Plumbing issues cost about 3K
  • Change of tenant - new great tenants moved in.


2015

  • Major renovation from January to June.
  • Great tenants moved in July 1st


2014