Running the numbers: Is it a money-maker or a bank-breaker? Find out in under 5-minutes
Here we are, the post you’ve all been waiting for. This is the single most frequently asked question I get from people when I start talking about investing in real estate.
“How do you know whether it’s a good deal or not?”
Well, it’s really just some simple math. There are of course some extraneous factors you’ll also want to consider, but those come later on. The very first thing you want to do when a multi-family property pops up on the market in your desired location, is to run the numbers. This simple calculation will quickly tell you whether you want to ask your realtor to look at the property or move on to the next one.
Let’s use my first property (pictured below) as an example and work through the numbers. By the way, all of this can be easily documented in an Excel sheet.
Purchase price: $510,000.00
*This was close to the max we were qualified for on 2 incomes of about $55,000/year each, also accounting for potential rental income from the suites
Mortgage rate: 2.69% 5-year fixed, 25-year amortization period
Monthly mortgage: $2,303.00 (for my FAVOURITE mortgage calculator, check out RateHub’s calculator. At the bottom of the calculator you can expand the “Cash Needed” that will tell you your total cash required in closing costs so you won't have any surprises about the amount of cash you'll need to have on hand.
Insurance on property: $2,300.00/year (monthly = $192.00)
Taxes: $3,280.21/year (monthly = $273.35)
Water & Sewer: $260.00 quarterly (monthly = $86.67)
Hydro: Approx. $160.00/month (upstairs had a separate meter and paid for their own so we split costs with downstairs unit) = $80.00/month each
Property management fees: ? *If you aren’t living in the property or simply don’t want to manage yourself, add an additional 10% of total monthly income for this management expense. We managed ourselves because we were living there so this was $0.
Renting any equipment: ? *Water heaters, furnace, heat pump? This is generally a pretty minimal expense from $10-40$/month depending on how many things are rented, if any. We didn't have any rented equipment so this was $0.
Total Expenses: $35,216.21/year (Monthly = $2934.68)
Suite 1: (2 bed with laundry): $1,000 (basement)
Suite 2: (2 bed + den with laundry): (middle floor - living)
Suite 3: (2 bed with laundry): $1,350 (top floor)
Total Income: $28,200.00/year (Monthly = $2,350.00)
Net: - $584.68/month
No one wants a negative monthly cashflow, do they? Well, even though the net is a negative number, remember that we were living in one of the units, and therefore not paying rent. I was previously paying $600/month + utilities in my last house, and now I am paying $584.68 / 2 (because we were splitting this deficit between the 2 of us) = $292.34 including utilities!!
That’s LESS THAN HALF of what I was paying for rent previously, not to mention paying someone else’s mortgage rather than my own.
Now, if we were instead to rent out unit #2 at fair market value of $1,500, rather than live in it, all of a sudden the property cash flows a significant amount per month, while covering all of its operating costs. How amazing is that!?
Let's check it out:
Monthly Expenses: $2934.68
Monthly Income (with all 3 suites rented out): $1,000 + $1,350 + $1,500 = $3,850.00
What could you do with an extra $915 per month?
But wait, how do I know what the income and expenses are?
Sometimes they’re listed right in the MLS listing, but most times they aren’t, so you’ll have to do a little digging. You have a few choices here. You can either reach out to your realtor, “Hey Sharon, I’m interested in this property and was wondering if you can get the income and expenses for me”. Or, you can email the selling realtor yourself and ask for them directly. I generally do both just to make sure I get them as soon as possible. Remember, time is of the essence with a lot of the multi-family properties, especially if the numbers look good.
If for some reason, like the house we bought, there wasn’t much information on income and expenses because it was rented by family, you'll have to make some educated guesses + do a little more investigative work. If you know what rents are like in your area, use those to guess what kind of rent you'd get for a 2 bedroom basement suite with laundry. If I’m looking in a city that I don’t live in and am not in-tune with the rental market, I hop onto Kijiji and start looking for similar apartments and what they rent for to give me this approximate income. There are also handy sites like Rentometer.com that you input your address and number of bedrooms and it’ll find average rent for that area and apartment size.
But how do I find hydro costs, insurance costs, taxes, and water? Well, this is where you have to spend about 20 minutes making some calls. Did you know that you can call BC Hydro, give them the address of the house you want to know the hydro bill for, and they’ll give you the average bill from the last 12 months? It’s that easy! For taxes, all you have to do is visit the BC assessment website and input the address of the property you are interested in and it’ll show you the yearly taxes. Every province should have a similar website. For insurance, I would pick an insurance company, give them a call, outline the specs of the house (age, number of units, etc) and they should be able to quote you an amount that is fairly close to what you would actually get. You can also shop around for house insurance, as this will definitely vary. Lately I’ve found that TD Meloche Monnex gives good rates, especially if you’re a University alumni or you have other products from TD that you can combine for a discounted rate.
Other things to consider:
Closing costs (i.e., down payment + fees in order to acquire the house)
Because we we’re living in it and it was our first house, we were able to only put 5% down (thank goodness, because that’s all we had!), which equated to $25,500. But, in most provinces you also have to pay land transfer tax if the house purchase price is above a certain amount, so that was an additional $8,200. Add on legal fees (approx. $1,500), plus the cost to perform the house inspection (approx. $500), and we we’re looking at a total of $35,700 in “closing costs” in order to get the house. So that was $17,850 each. Remember to check out RateHub's mortgage calculator to estimate your total closing costs within just a few seconds!
To be completely transparent, I did have to borrow about $3,000 from a line of credit to supplement the amount of money I had for my portion of the down payment but given that I was currently saving about $1,000/month, I knew that I could pay this amount back in approximately 3 months.
CMHC mortgage insurance
If you’re putting less than 20% down, which a lot of first time home owners have to do, you’ll get stuck paying mortgage insurance. This is built into your mortgage every month, but ends up costing you about an extra 4% of the purchase price over the 25 years. This equates to about $20,000 over the entire 25 term mortgage, or monthly, about $68.00. If instead of putting 5% down on this property we would have put 20% down, our monthly mortgage payment would have dropped from $2,303 to $1,867, allowing for more monthly cashflow ($436/month) but also a much larger sum of money upfront ($102,000 to be exact, which we DEFINITELY did not have).
Ongoing Maintenance + larger repairs
Some of you may have noticed that I didn’t build in an amount for ongoing maintenance costs and larger repairs (called capital expenditures) like a new roof, new windows, etc. In other words, the BIG expenses that you should save for each month. I didn’t want to busy up the basic calculations by adding this in because it really varies with each property. If you’re buying a newer property, or one where these items have all recently been upgraded, then I might save 2% of the monthly income for those capital expenditures. Alternatively, if I buy an old property and one where I know this will need to be done sooner rather than later, I’ll adjust that Capital Expenditure number to 10% of the monthly income. With maintenance costs, it’s similar. Newer houses will require less maintenance in the beginning, and so I would likely save 5% of my monthly income for maintenance, whereas with older properties I would save 10% monthly income for maintenance issues. If you want, you can build these into your calculations easily by using the Bigger Pockets calculators. I’m a big fan of these because you can adjust percentages as you go and it’ll spit out this really nice 2-page report breaking down all of your income and expenses. This calculator even adds things like your assumed vacancy rate (in Victoria, basically 0%), plus future assumptions about how the property value will change over time such as annual income growth, annual property value growth, annual expense growth, and your eventual sales expense when you go to sell the property down the road. What I also like about the report it produces is that it gives you a "cash-on-cash return on investment (ROI)". My rule of thumb as of late is never to buy a property that has less than a 10% cash-on-cash ROI, so this calculator quickly tells me that.
So, where do I start?
My suggestion is you start with a simple Excel spread sheet listing each of the items I outlined above for income and expenses, and then decide on a number you are comfortable getting each month. Are you happy to live for $292.34 per month like I did? Or would you feel better about living for $0? That is up to you to decide. For me, I figured if I could live for the same amount as I was previously paying in rent but instead OWN something and have the mortgage being paid down each month while also building equity in a property, that was a win in my books.
My second suggestion (if you become obsessed with real estate like I’ve become) and you start to find yourself analyzing a lot of deals, it could be worth it to sign up as a Bigger Pockets PRO member to have full access to all of their calculators, plus much more. It’ll run you about $350/year but if you use the calculators as much as I do (about 2X per day) then it’s well worth the fee. What I really like about the reports it produces is if you’re ever looking to convince someone to go in on a property with you (an outside investor perhaps?), these reports easily show the value of the property now, and 25 years from now. Plus, you can customize them with your own logo so they look super legit!
Even though I feel I’ve covered a lot, there is still so much more to talk about! Like, once you decide you’re happy with the numbers and want to make an offer, what are the next steps? Don’t worry, Stella and I have got you covered in next week’s blog post.
Stay tuned, investor friends :)