Investing in real estate deserves another good look.
People typically invest in three areas:
- Bank products, and
- Real Estate
It’s no secret. Today the stock market is on a roller coaster ride and interest on bank deposits is at an all time low. As well, people are somewhat apprehensive about real estate.
Yet Canadians are either investing or thinking seriously about investing in a second home to rent.
In a recent study by TD Canada Trust:
- 42% of buyers plan on keeping their first home as a rental property, and
- 32% (compared to 20% in 2010) plan on renting the new home purchase.
Taking a Closer Look
On looking at this strategy more closely, one can see why renting a second home can be a smart investment long term. There are people who have money sitting in a bank, not because it’s a good investment but because they don’t know where to put it.
What could result by placing the money in a home purchase?
As an example, we looked at a 5-year fixed mortgage rate of 3.59%. The net rent, after taxes, insurance and even management, on a $150,000 purchase would carry a mortgage of about $120,000. This determines a $30,000 down payment, the buyer’s investment. The key is this: the rent drives the mortgage amount and in turn the down payment needed.
The Magic is in the Investment Long Term
We then looked at a very conservative average annual appreciation on only 2.25% over 5 and 10 years The 30-year average in Canada is 5.5%. Here’s what we found.
- After 5 years, the appreciation or gain produced an 11.77% return on the $30,000 investment.
- As well, the retirement of the mortgage debt gave an additional annual return of 10.8%, a return of investment.
The two percentages total a striking annual return of 22.6%.
We then subtracted 5.5% from the
22.6%, which represents
- -4% of the purchase price for maintenance and replacements, which is high, and.
- -1.5% of purchase price per year for possible rental loss.
This still left an impressive total return of 17% per year.
Finally, expense write-offs, such as mortgage interest, taxes, house insurance, property management fees, utility costs, and maintenance costs comprise an added benefit.