Ontario real estate is on fire. Prices are rapidly appreciating, creating similar market conditions to what was experienced by south Ontarian’s in 2017.
In this video I am going to show an example of someone who bought a property at the height of the real estate market in 2017. We are going to see where would they be at today in terms of property value and equity.
The numbers and examples that I will be using will be for real estate located in Barrie, ON, as that is where I am located, but, this would be somewhat similar for real estate markets across southern, central Ontario.
Ok, let’s get right into it.
I am going to show two examples and they both will be fictitious for privacy reasons.
Example 1 – Bought an investment property in March 2017. The property is a turn key, registered duplex.
Purchase price is $545,000*.
(*NOTE – Purchase price was generated from taking the median sales price of 13 registered duplex’s that sold in Barrie, ON, in March 2017)
The interest rate was 2.3% on a 5 year fixed rate (rates taken from https://www.ratehub.ca/5-year-fixed-mortgage-rate-history), amortized over 30 years. (only way to get that property to even come remotely close to cashflow positive).
I have been managing rental properties in the Barrie, ON, area since 2016, so I have accurate data of what average rental rates were in 2017.
For our example, we are going to use $1,500 per month, all inclusive for the upstairs 3 bedroom apartment and $1,000 per month, all inclusive, for the downstairs 1 bedroom apartment.
See the video for a break down of the numbers.
After 41 payment periods (41 months, April 2017 – July 2020), your principal balance owing on the property would be $400,059.48.
Let’s now fast forward to present day (July 2020).
The current value of that same duplex now (July 2020) would be approximately $540,000 which is the median price taken from recent sales of registered duplex’s in Barrie.
So after nearly 3.5 years of hands on management, including rent collection, maintenance etc., you are sitting with approximately $140,000 worth of equity. It’s also important to note the monthly cashflow, or really, lack of monthly cash flow, as it was calculated to be a net loss of $2 per month, which is essentially breaking even.
Total return on investment, ($140,000+- / $118,975) is 117%.
Scenario Two –
Ok lets now fast forward to buying that same property in August of 2017, only 4 months after the previous example.
Purchase Price is $470,000*.
(*NOTE – Purchase price was generated from taking the median sales price of 7 registered duplex that sold in Barrie in July, August 2017)
The interest rate was 2.6% on a 5 year fixed rate (https://www.ratehub.ca/5-year-fixed-mortgage-rate-history), amortized over 30 years. (keeping with same as Scenario 1).
We will also use the same amounts for the rents as scenario 1, as they would have remained unchanged, $1,500 per month, all inclusive for the upstairs 3 bedroom apartment and $1,000 per month, all inclusive for the downstairs 1 bedroom apartment.
See the video to review the numbers.
In this case, after 36 payment periods (36 months, Sept 2017 – July 2020), the same hands on management, including rent collection, maintenance etc., your principal balance owing on the property would be $350,116.24.
The current value of that same duplex now, present day (July 2020) is the same as scenario number one, $540,000.
So only 4 months less than the previous example (scenario 1), in this case you would have approximately $190,000 worth of equity plus a monthly cashflow of approximately $170 per month, which after 36 months equals $6,120. Total return on investment ($196,120/$102,475) equals 191% ROI.
I ask you this, which scenario would you have wanted to buy in?
See comparison chart in video.
I would like to emphasize that I am not saying you need to wait and time the market. Nobody really knows what the real estate market is going to do as we head for the second half of 2020. What I am trying to point out here is that if market conditions are similar to what was experienced early 2017, and given what could be coming as a result of the coronavirus on the economy, if you can afford to be patient, there may come a better time to invest capital into the real estate market. You should always be on the lookout, as deals do pop up, and you can always buy in any market, but only if it’s a deal.
Nobody knows forsure where we are at in the current cycle, if I were to fetch a guess, we are still on the up and up climb. I do feel confident that a different real estate market is around the corner. A market with higher amounts of inventory which will soften prices leading to better investment opportunities.
Do you have a different opinion? Let me know in the comments…
If you liked this post, you might like a previous article, http://jeffgilbert.ca/content/5-reasons-why-i-would-not-buy-a-house-in-the-barrie-area-right-now-unless/