I was just looking at MLS listings earlier today and I saw this nice little place on Main Street in Vancouver and noticed the following statement by the realtor:
Investor alert, 2 potential suite. Main floor $1200/mo, 2nd floor $1500/mo, total $2700/mo
Investor alert? So he is implying that is an investment and I wanted to see if he was right. He is saying that rent would be $2700 for the whole place per month, and the asking price is $788,000. I am assuming that he his being completely honest on that rent figure or over-estimating it, as he has a vested interest in making this property as appealing as possible. Let’s assume some ideal conditions, that I have a 25% down payment as well, a 35 year mortgage, and a low interest rate of 5.5% (even lower than ING’s lowest rate). Plugging those into MLS’ handy mortgage calculator, even then, the monthly mortgage costs are $3149.80/month. If we rent the place out we are still short $449.80. So this is not an interest-bearing investment of any kind. We have invested $197,000 for the down-payment, and in return we owe at least $449.80/month (most likely more if we include maintenance costs, property taxes, etc…). That’s a -2.7% annualized return. If we put down a $78,800 down payment (or 10%), we owe at least $1100/month. It starts to become profitable with about a $300,000 down payment. I have neglected capital appreciation of the home of course. Historically, however, housing prices have grown with inflation, as shown in the graph below:
So one can never expect to make much off of capital appreciation of real estate. Not only that but as prices get higher and higher the probability that they will continue to grow faster than inflation decreases and the chances they will fall increases. Now back to the original MLS listing. How is this an investment?