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

Investment	Amount
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 Years	Average Annualized
Income
Rents (@100%)	7,200	14,400	17,700	17,700	57,000	14,250
Vacancy		4,250	1,400	0	5,650	1,413
Total Gross Income	7,200	10,150	16,300	17,700	51,350	12,838
Expenses
Taxes	3,815	2,475	2,381	2,464	11,136	2,784
Insurance	323	730	1,412	1,018	3,483	871
Repairs/Maintenance	93	1,456	3,184	42	4,775	1,194
Utilities	495	832	0	49	1,376	344
Admin/Advertising	0	0	47	0	47	12
Total Expenses	4,726	5,493	7,024	3,573	20,816	5,204
NOI	2,474	4,657	9,276	14,127	30,534	7,633
Mortgage - Interest Payment	1,832	3,350	3,131	3,330	11,643	2,911
Mortgage - Principal Paydown	1,972	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%
ROI	1.15%	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

• Purchased in May - Our second rental income property
• Christmas - Shooting at the house