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cdr108 said:
either your friend isn't giving you the full accurate figures, or you're misleading us.
again, do the calculations yourself and you will see they do not add up.
i've provided you factual numbers based on your figures AND they do not match the ones you gave us.





mortgage principal repayment (MPR) cannot be used in your 'positive' cashflow theory.
again, this is money that was borrowed from the financial institution and has to be paid back. it's part of one's expenses.

if one didn't get those funds (MPR) , the 'owner' would have to pay for it out of pocket to the bank, thus it would be negative;
if one gets those funds (MPR), the 'owner' would pay it to the bank, thus neutral;
if one gets more (MPR), the 'owner' gets to pocket the difference, thus positive.

can i guarantee that rental rates won't go up in the next 5 to 10 years?
no, but history is a good indicator. can you guarantee rental rates will go up?

am i sure there won't be any capital gains in the period?
No, but can you guarantee (in writing would be appreciated) there won't be capital loss?

no one will deny in the long run R/E price always go up, right?

historical data (400 years) shows in the long term it goes up a mere 0.2 percent per year more than inflation.
models created using post-1950 U.S. data give a biased picture of reality. there will be troughs and peaks during cycles than can give impressions of large gains or losses.

http://www.nytimes.com/2006/03/05/magazine/305tulips_shorto.1.html?pagewanted=all
Click to expand...


I would like to discuss some issues about the rental income here.
(a) Rental price increases much more rapidly in dt core than some rural areas like scarb.
(b) Due to the downsize of the units, the figure underestimates the rental increase. For example, a 500 sft 1+1 unit is rented out at $1500 monthly which is as same as a 620 sft large 1+1 unit did 2 years ago. However that 620 sft 1+1 can be rented out at $1750 now because it can be used as a small 2 br unit.
(c) When you look at many 2 brs in dt core, you will realize that many of them which was $2000/month 2 years ago, can be easily rented out at $2500 or higher today. When people cannot afford large two brs, they will start to look at large 1+1 unit which can be converted into a two br unit. Such action will continue to push up the price of smaller units as well.
 
Chris,

forget about price increase, as I mentioned I am not taking the unit appreciation into account. Last month condo prices fell 4% so it can go either way.

you mention $600 MPR, and I agree with you on this. that's basically his ROI based on the details you have provided, this will offcourse will change with potential mortgage rate increasing.

However I think the problem I have with your initial statement is that you still see an ROI at $600-700 sf. your friends is getting a return because he is priced in around $400-500 per sf.

the numbers are completely different when you are paying $600-$700 per sf. ex. 650 sf x 600 is $375k plus closing, plus parking potentially... you are looking at 450k.

if you put down 100k your mortgage is 350k at 3 percent rate its $1700 a month. at 5.2% in 5 years its $2100. You just blew through all the money you made in MPR with the $500 difference in mortgage.

With the increase in rate after year 5, you are negative cash flow on your carrying cost and eating into the money being returned through MPR.
 
bird1010 said:
Chris,

forget about price increase, as I mentioned I am not taking the unit appreciation into account. Last month condo prices fell 4% so it can go either way.

you mention $600 MPR, and I agree with you on this. that's basically his ROI based on the details you have provided, this will offcourse will change with potential mortgage rate increasing.

However I think the problem I have with your initial statement is that you still see an ROI at $600-700 sf. your friends is getting a return because he is priced in around $400-500 per sf.

the numbers are completely different when you are paying $600-$700 per sf. ex. 650 sf x 600 is $375k plus closing, plus parking potentially... you are looking at 450k.

if you put down 100k your mortgage is 350k at 3 percent rate its $1700 a month. at 5.2% in 5 years its $2100. You just blew through all the money you made in MPR with the $500 difference in mortgage.

With the increase in rate after year 5, you are negative cash flow on your carrying cost and eating into the money being returned through MPR.
Click to expand...

In this example i use $350,000 which is the current price of a 1+1 unit with parking and locker at city place. My friend's purchasing price was even cheaper because he bought two years earlier. But as I've shown in my example, even if you use all the current price and interest rate, you will still make pretty good ROI.

Also, I agree with you that many dt core projects charge $650+ psft now, but do you think they're gonna charge the same as a city place unit? Obviously NOT! Many 1+1 units of new projects at Yorkville, Yonge and Bloor or Yonge and College can charge $1,800 to above $2,000. In the 2014 or 2015, the rent will not be the same as today neither!

Lastly, why not mention capital gain? I've discussed before, average unit price decline does not equal to average sft price decline! Price can be decrease due to downsize of the new projects! Moreover, location matters. Yorkville and Regent Park are all 416 district. Can you imagine condos in these two neighbourhoods will appreciate at the same rate. Based on the past ten years or even 20 years data, with the leverage, even if a moderate 2% average annual price increase can give investors an additional 6% to 10% ROI!
 
Chris_Hull said:
cdr108 said:
several points:

* you now have an investor putting more equity than usual with 30% down payment !
any proper r/e investor would be looking at calculations with 20% (or less dp).
a good r/e investment should carry itself fully with 0% down but not realistic as a down payment will be required

* your original assertion had to do with pre-construction selling for $750-1000 psf (ie. "$750-$800 psft such as Casa2, Massey, Indx, 1000 Bay, Britt, Karma, Five etc. Some newly added units at One Bloor, U condo, Aura, Exhibit, Yorkville Plaza, Yorkville Condomium etc all selling at $800 to $1000 psft." )

* in your current example with a CP condo you have provided completely inaccurate figures for the mortgage payment in both scenarios of 20-year and 25-year amortizations;
in addition as someone else noted, one cannot get a fixed rate for the full term of the amortization Canada, unlike our neighbours to the south;
you can NOT say the principal portion goes to the owner, as s/he has borrowed the funds and all of it needs to be repaid to the financial institution

> $250K for 5-year term / 20-year amortization @ 3.0%:
monthly mortage payment is $1,384/m with principal and interest portions ranging from $763-883 and $621-501, respectively.
at the end of 5 years, $200,695 balance is outstanding.

in this example, $1,384 mortgage + $350 maintenance (where is the parking and locker maintenance fee?) + $150 tax = $1,884; which is more than the $1,750 top rent you illustrated.
btw, the total cost of $1,884 has not included owners' property insurance and other auxillary costs, etc.

> if in the next 5 years the rate goes up by 2% to 5% from 3%, $200,695 balance for 5-year term / 15-year remaining amortization :
monthly mortage payment is $1,582/m with principal and interest portions ranging from $754-961 and $828-620, respectively.
at the end of 10 years, $149,480 balance is outstanding.

$1,584 mortgage + $350+ maintenance + $150 tax (both which are sure to go up in the future) = $2,084+
considering rents have been mostly stagnate the past decade and this building will be 5 years older, $1,750 rent will most likely either remain the same or decline because of being an older product.


>> $250K for 5-year term / 25-year amortization @ 3.0%:
monthly mortage payment is $1,183/m with principal and interest portions ranging from $562-651 and $621-533, respectively.
at the end of 5 years, $213,687 balance is outstanding.

in this example, $1,183 mortgage + $350 maintenance + $150 tax = $1,683; which is JUST under the $1,750 top rent you illustrated. again, the total cost of $1,683 has not included owners' property insurance and other auxillary costs, etc.

>> if in the next 5 years the rate goes up by 2% to 5% from 3%, $213,687 balance for 5-year term / 20-year remaining amortization :
monthly mortage payment is $1,404/m with principal and interest portions ranging from $523-961 and $667-738, respectively.
at the end of 10 years, $178,169 balance is outstanding.

$1,404 mortgage + $350+ maintenance + $150 tax (both which are sure to go up in the future) = $1,904+



and to repeat important details daveto stated:

your assumption has left out the following:

1. Acquisition costs (land transfer costs, etc).
2. Sale costs (if you ever wish to sell)
3. Vacancy costs. (it is unrealistic to presume 100% occupancy for eternity)
4. Maintenance/damage costs (at some point you'll need to fix something or replace something)
5. Special assessment condo fees (it happens to most condos at some time)
6. Management costs. (if you do this yourself, then you must factor in your time as a cost)
7. Finally, you have assumed 3% interest rates unchanged over the life of your mortgage. I trust you realize that is unlikely?
Click to expand...

I think I don't need to explain too much and everyone will easily understand MPR will be the benefit to investors since tennants pay for this amount. It is like a monthly saving account deposit to investors. And this is the largest theory weakness for doom and gloomers because with this MPR, investors can always win in the forseeable future!
Click to expand...

again, you've only provided conjecture and not looked at the actual numbers.
all you're doing is repeating what most realtors say, hoping that an investor never crunches the numbers, which sadly, they don't.

the only way your friend would be paying $950/m in mortgage payment on a $250K loan is if s/he has an interest rate of 1.075% 5-year term / 25-year amortization:

http://www.mackenziefinancial.com/calc/jsp/MortgLoanAmortScheduler/mortgloanscheduler.jsp?$dir=self


A loan’s principal payment (MPR) is a reduction of a liability and a cash outflow (ie. debt expense)

people who bring up facts are not "doom and gloomers" because they show your numbers are a lie !
 
cdr108 said:
again, you've only provided conjecture and not looked at the actual numbers.
all you're doing is repeating what most realtors say, hoping that an investor never crunches the numbers, which sadly, they don't.

the only way your friend would be paying $950/m in mortgage payment on a $250K loan is if s/he has an interest rate of 1.075% 5-year term / 25-year amortization:

http://www.mackenziefinancial.com/calc/jsp/MortgLoanAmortScheduler/mortgloanscheduler.jsp?$dir=self


A loan’s principal payment (MPR) is a reduction of a liability and a cash outflow (ie. debt expense)

people who bring up facts are not "doom and gloomers" because they show your numbers are a lie !
Click to expand...

I've said even if you pay back $1,200 per month you will still make a very good ROI, and my friend definitely paid less than $12,00 per month. People may get different rates from different banks. However, let's even assume the monthly mortgage payment goes up to $1,400, it is still a good investment.

Also, MPR is definitely your gain rather than your cost in this case. Anyone with basic logic will realize that MPR will go to your account while maintenance fee, tax and interest payment are all sunk costs.

Besides, it is unrealistic to rule out capital gain in medium and long run. This is just like you cannot say people in the stock market won't make a profit by capital gain and all their profit comes from dividends. When you look at any major market all over the world, compared with decade ago, their R/E prices have no other directions to go but up!
 
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urbandreamer said:
Translation: It is likely your unit, you got your real estate license relatively recently, business is slow.

Investors have fled the market, so your tale is old news!

Do Vacuum Cleaners provide a ROI?
Click to expand...

It really depends upon how much you can rent it out and how much resale price you're gonna get.
 
urbandreamer said:
Translation: It is likely your unit, you got your real estate license relatively recently, business is slow.

Investors have fled the market, so your tale is old news!

Do Vacuum Cleaners provide a ROI?
Click to expand...

Investors don't need to unload their properties because of the positive cash flows from their investment properties. Moreover, most investors are wealthier than the young first time home buyers, so they have the better abilities to borrow the mortgages or hold their units. However, there are many first time home buyers have to turn to the rental market and to help these investors paying back their mortgage thanks to the strict mortgage rules!
 
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I think what a lot of investors fail to understand is the concept of cost of capital. If you put 20%, 30%, 40%, etc. into your condo to get a positive cash flow, it doesn't mean you're making money. That deposit/downpayment needs to have a return as well. If big institutional investors are demanding 4% or more on their capital for real estate, I think small investors in condos should ask for at least 6% for it to be worthwhile on a risk adjusted basis. I'm just estimating cap rates here, but I think people will know what I'm talking about.

Moreover, just because you bought a condo for $300/sf doesn't mean your investment return should be based on your original cost. It should be based on your fair value as of today to determine if you should continue to hold the investment. If its now worth $600/sf, is it still a good investment? Your return, if it was 6% at $300/sf, is now at 3% for example.
 
Chris,

Can I ask what are the details of your friends condo.

How much he paid? including closing cost
how many Square feet?
and how much rent he is collecting?

I think you have already confirmed that his unit is in cityplace, im assuming one of the older city place buildings?

thanks
 
Xenosblitz said:
I think what a lot of investors fail to understand is the concept of cost of capital. If you put 20%, 30%, 40%, etc. into your condo to get a positive cash flow, it doesn't mean you're making money. That deposit/downpayment needs to have a return as well. If big institutional investors are demanding 4% or more on their capital for real estate, I think small investors in condos should ask for at least 6% for it to be worthwhile on a risk adjusted basis. I'm just estimating cap rates here, but I think people will know what I'm talking about.


Moreover, just because you bought a condo for $300/sf doesn't mean your investment return should be based on your original cost. It should be based on your fair value as of today to determine if you should continue to hold the investment. If its now worth $600/sf, is it still a good investment? Your return, if it was 6% at $300/sf, is now at 3% for example.
Click to expand...

Your reasoning is correct but on the issue of present market value it is not as simple. For e.g. you purchased for $300/sq.ft. in 2002. Today it is worth $600/sq.ft. in 2012. However, when you sell, you have to recapture depreciation so based on 4%/year (2% the first year) you will have 38% of recaptured depreciation. Depending on your tax bracket, say 40% that would mean that 15.2% of your original cost of the building(not the land) will be lost. If we assume for arguments sake 1/3 land cost, that leaves 2/3 of 15.2 or 10% of your equity which goes to tax when you sell. Then you have all the expenses of selling. The point is that 15-18% of your equity based on $600/sq.ft. would disappear meaning you will see about $500/sq.ft.

As an investor you have to make the return on $500/sq.ft. which is what is left over, not the $600/sq.ft. when you reinvest. The longer the you own the property, the more the recapture of the depreciation.
 
interested said:
Your reasoning is correct but on the issue of present market value it is not as simple. For e.g. you purchased for $300/sq.ft. in 2002. Today it is worth $600/sq.ft. in 2012. However, when you sell, you have to recapture depreciation so based on 4%/year (2% the first year) you will have 38% of recaptured depreciation. Depending on your tax bracket, say 40% that would mean that 15.2% of your original cost of the building(not the land) will be lost. If we assume for arguments sake 1/3 land cost, that leaves 2/3 of 15.2 or 10% of your equity which goes to tax when you sell. Then you have all the expenses of selling. The point is that 15-18% of your equity based on $600/sq.ft. would disappear meaning you will see about $500/sq.ft.

As an investor you have to make the return on $500/sq.ft. which is what is left over, not the $600/sq.ft. when you reinvest. The longer the you own the property, the more the recapture of the depreciation.
Click to expand...

I'm jumping in on this thread, but I'm unsure what you mean here. In your example you assume a purchase price of $300psf and a current 2012 value of $600psf. Then you give a formula for calculating depreciation and then name the figure of $500psf. If it's current value is $600psf then why even talk about depreciation or $500psf?

In the case of new condos in a rising market they may not keep pace with the price of the newest condos, but it's current value is it's current value, even if it hasn't kept up with the newest buildings on the block. What am I missing?
 
^^^
Sorry Neubilder. I perhaps did not make my thinking clear.
I am talking about what happens to an investor when he makes the decision to sell. Tax becomes an important issue as the tax will be paid in the year of disposition leaving less capital with which to invest. The old adage of a tax deferred is a tax not paid is a t play here.
My point was not that the condo was not worth $600. It was that as an investor you would only get $500/sq.ft. x Number of square feet of capital to reinvest and not $600/sq.ft. x Number of square feet. Eventually the tax will have to be paid but assuming you have a property now worth $300K (500 sq.ft. x $600/sq.ft.); when you sell it you will only receive after all expenses, fees, and recaptured depreciation (+ tax on capital gain) of less than $250K to invest. This will weigh on the investors decision, especially if the investor is seeking income since with less money to invest, his return may well be lower on the residual amount.
I was not referring to age of the building though clearly this is a counter argument...that the older building will appreciate (assuming an appreciating market) at a less rapid rate than a newer building (presumably)l
Hope this makes sense.
 
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