If you're looking to buy a smaller income property, you might have considered a condo apartment or even a townhome.
Let's have a look at these Two scenarios and break them down to see if they make sense, or meet your criteria as the smaller property investor.
Does it make financial sense to buy a Condo Apartment Investment...?
Let’s look at the need and the numbers, and then you decide. So you would like to buy a 15 unit building but are about $600,000 shy of a down payment.
You need to lower your investment goal and decide to buy an existing condo apartment, nothing fancy or central, and something you can afford, in a decent neighbourhood.
In Ottawa, in a south central neighbourhood called Greenboro you could purchase a 2 bed room, 2 bath condo for $175,000. It’s got parking, in suite laundry, close to shopping centers, and the O Train. You want to buy it but you need to know your numbers.
Here they are:
- Purchase price $175,000
- 30% down payment 52,500
- Mortgage 122,000 (at 3% for 5 years with a 25 year amortization)
The rental income you can expect is $1,050 per month or $12,600 annually.
Annual expenses are as follows:
- Condo fee 3,360
- Property taxes 1,700
- Insurance 500
- Mortgage 6,957
- Total Expenses 12,517
Your Profit and Loss statement after 12 months is plus $83.
So on your investment (which is your down payment of $52,000) you have made $83. Your ROI is virtually zero.
Of course you are paying down the mortgage and the unit is increasing in value annually, but is it enough for you. If you lose one month rent due to a bad tenant or to do renovations, there goes your profit and you’re looking at an annual loss of about $1,000.
In our next scenario we will look at a town house which is not a condo to see if that delivers a better profit statement.
If you're thinking about a Condo Apartment Investment, or want more info, feel free to contact me.
Will it make sense to buy a single family townhouse as an investment?
Let’s use similar criteria that we used in our last blog for investing in a resale condominium. We will use the same Greenboro neighbourhood and will have the same down payment percentage of 30%.
You can purchase a nice town house with 3 bedrooms, 3 bath rooms and a finished basement for an average price of $339,000.
We will take out a mortgage for 70% of the value with a 3% interest rate with a 5 year term over 25 years amortization.
- Purchase Price $339,000
- Down payment at 30% is $101,700
- Mortgage is $237,400
Rental income is $1,600 per month or $19,200 annually with the tenant paying all utilities.
Expenses are as follows;
- Property taxes $3,250
- Insurance 800
- Mortgage 13,476
- Total expenses $17,526
Your year end profit and loss statement is plus $1,674. (Rental income 19,200 less expenses of 17,526)
Based on your investment of $101,700 (down payment) the ROI (return on investment) of $1,674 equals 1.6%.
This scenario is more profitable that our previous example of the Lorry Greenberg condo.
In fact you could lose a month’s rent with this town house and still manage to break even. However your 30% down payment of $101,700 is twice as high in actual dollars so this can be a limiting factor in your investment portfolio.
Whether you are investing in a condo, a residential, or a multi-unit building you need to have criteria for what is an acceptable investment for yourself.
An experienced Realtor can help you define those criteria but ultimately you are the one who needs to rest easy knowing that you invested in a property that fits your criteria.
Leave us your comments, or ask me any question about investing in a smaller condo or townhouse.