People talk about running the numbers before buying an investment property, but what are the numbers and how do you get accurate numbers?Running the wrong numbers can make the difference of making $500 or losing $1000 per month.
| RENTAL INCOME When you run the numbers, you’ll be creating yourself a couple of different scenarios. One is of the present time; working with the rents you have already. Another is the “potential” income, which would be rents that reflect the market value, your potential income.Make sure you double check the rents with all of the leases.MORTGAGE INTEREST Otherwise known in Canada as CMHC. Recently the rates have been lowered to 20%. Which means you need to put down at least that amount or you will be charged a percent to insure your mortgage. This percent amount will be wrapped in your mortgage. If you are buying a duplex or a house, the loans are generally around 3%. Triplexes and 4plexes tend to have higher rates, and commercial is a whole other ballgame.The best way to get educated is to talk to a variety of mortgage brokers and banks to find your best solution; not all loan places have the same programs.MUNICIPAL TAXES When figuring out your future cashflow, don’t assume that the taxes will stay the same. In Quebec, taxes change every 3 years. VACANCY COST TENANT TURNOVER COST INSURANCE COST MAINTENANCE COSTS |
Property Type – When you evaluate different properties remember to take into account the type of property. If it’s brick you won’t have to paint or worry about wood root. Decks need constant maintenance. A property with wood or concrete floors will be easier to clean and will not have to be replaced when a tenant moves out. Just think about the aspects of the property and their maintenance costs.
**Property Size – A smaller property is easier to maintain than a larger property. For instance, say there are two properties for sale for 200,000 and each have a combined rent of 2000. A property with 2 units and a total of 1000 square feet will be cheaper to maintain than a property with 6 units and 3000 square feet. The larger property will be more expensive to maintain when you are replacing the larger roof, painting the interior walls etc. More units mean more money spent on advertising, make-readies, and more appliances to repair.
**Property Location – Consider your proximity to the property. If you buy a property 30 miles away, over the course of a year you can spend a decent amount of gas money driving back and forth.
Your personal management style – How often will you do maintenance work yourself vs. hiring help? For instance, when a unit needs painting will you paint the rooms or hire a painter? Hiring professionals is definitely more expensive, but you have to be realistic about how much you will personally do, especially if you are looking at many units.
UTILITY COSTS
Be sure to check what the tenants pay for and what the owner pays for. This includes all the utilities and lawn maintenance. In addition, there may be owner expenses like parking lot lights and trash bin service.
PROPERTY MANAGEMENT COSTS
If you are going to hire a property management company, look into all their rates and services. They vary quite a bit.
START-UP COSTS
Building inspector, notary, welcome tax, adjustment costs, transfer of title, CMHC fee…please read Considering Start Up Costs for more details.
SUMMING THE NUMBERS
Once you add all the numbers up, you often find the property has 0 cash flow or even negative cash flow. This doesn’t necessarily mean you should not purchase the property. There are positive tax benefits to rental properties and depending on your situation; a property with 0 cash flow could still put more money in your pocket due to tax benefits and it appreciating in the future. Therefore a zero or negative cash flow property could still be appealing to you.
The point here is that if you are buying a property with zero or negative cash flow, it’s best to know beforehand instead of after the property has been purchased.
