How much of a return can you really make from investment properties?
There are 3 ways you get a return from purchasing an investment property:
- Rental income
I specialise in finding positive cash flow properties for my investors. These are properties that have a positive cash flow after calculating the rental income minus all the costs involved in owning a property (taxes, insurance, utilities, maintenance)A good property could make anywhere between $500 to $2000 in net cash flow per month, with the most usual being $500 to $1,000. That would give you rental income of $6,000 – $12,000 per year
- Paying down your mortgage (Gaining more equity)
Every month there is a mortgage payment you need to pay, which is covered by the rental income that is received from the tenants. This mortgage payment consists of interest payments and principle payments that go towards the property. After a duration of 5 years, approximately 50% of your mortgage payments go towards your principle (given that the mortgage is a 25 year term at approximately 3% interest)
- Appreciation in property value
The last method that your property gets you a return is by appreciating in value year over year. Property value in Ontario has been soaring, specially areas and cities that are within an hour drive of Toronto. This trend does not look like it will stop anytime soon, with the population constantly increasing and more people looking to buy homes, as well as investors who are constantly purchasing, it is likely that most areas will continue to see an increase in property value.
Some cities are booming and seeing a 10-15% increase in property value year over year. This can give you huge returns on your initial investment and I can help you find properties in those booming cities/areas.
Now that we have seen the several different ways that an investment property can give you a return, lets look at an example over a 5 year period:
You purchase a property for $600,000 that has a positive cash flow of $600 per month. You provide a 20% downpayment, so the downpayment plus closing costs are $130,000 – this is your initial investment.
Rental Income: $600 x 12 = $7,200 per month
Over 5 years, that would be $36,000 in rental income.
Gaining equity: Mortgage payments on such a property (over 25 years at 3%) would be around $2,275 per month.
After 5 years, approximately half of that will go towards equity on the property – giving you an additional $69,000 in equity over the 5 years.
Value Appreciation: If over the 5 years there is an appreciation in value of approximate 4% per year (being modest here), then the $600,000 property you bought is now worth $696,000, giving you a $96,000 gain in value over the 5 years.
$36,000 in rental income
$69,000 in equity gain
$96,000 in value appreciation
Total of: $201,000 over 5 years or $40,200 per year on an initial investment of $130,000, giving you a 30% return per year
So that is how much you can make off an investment property, which is an excellent return and one of the best ways to invest your money if you have some laying around.
Get in touch with me if you have any questions or concerns, or if you would like any help in purchasing the right investment property for you!