Investment

Will your investment property actually make money? – Financial Post

Published

3 years ago

January 4, 2022

Harry Miller

The monthly cash flow from your rental property is important, but it’s not everything

MoneyWise

Clayton Jarvis

Andy Dean Photography / Shutterstock

Becoming a real estate investor in Canada may seem like a surefire shortcut to wealth.

Though it has been for many, few people become successful real estate investors simply by buying whatever properties they can afford and assuming the rent will do all the heavy lifting.

A recent analysis found that, from January 2020 to May 2021, nearly all Toronto homes purchased would lose money for their owners in the rental market. Research has shown that Montreal property investors often lose money on a monthly basis .

Choosing the right property to invest in requires careful consideration. You need to examine the surrounding neighbourhood to understand the appeal it offers residents, take a look at the local economy to ensure it’s supportive of long-term housing demand and evaluate the property itself in terms of rentability.

And one of the most important steps is calculating cash flow, the amount of money the property will either earn or lose every month.

If it’s your first time encountering the term “cash flow,” don’t sweat it. Calculating it is fairly easy.

Monthly income isn’t everything

Though ideal, positive cash flow isn’t necessary for a property investment to ultimately be considered successful. A negative cash-flowing home can still be a winner in the long run — if it appreciates in value over time, as has generally been the case with real estate in Canada, and if you can afford the monthly cost.

“Most people, and especially beginner investors, believe that successful investing is all about cash flow, and that there’s really nothing else that matters. But the real winnings in real estate come from having a long-term view,” says Tom Karadza of Rock Star Real Estate in Oakville, Ont.

Either way, determining what a property will earn (or cost) you every month is critical in helping you understand whether an investment property fits your budget or your overall investing plan.

The cash-flow formula

The first thing to do is determine the property’s gross income. Based on the home’s condition and local rent values, how much will you realistically be bringing in from rental income every month?

Once you’ve got that number, it’s time to add up your monthly expenses and subtract them from the gross income. Taxes, maintenance fees and property management costs all need to be included here, as do utilities if your tenants won’t be paying them.

This part of the equation can be tricky for inexperienced investors, who may not know what to pencil in for maintenance and management.

Monika Jazyk, an Ontario-based real estate investor and founder of Real Property Investments, says she typically subtracts five per cent of the monthly rental amount for maintenance, and eight per cent for property management. If you’re not using a professional property management company, you can ignore this expense.

Jazyk says investors also need to factor in the cost of vacancies. She suggests basing this figure on your local market’s vacancy rate and subtracting that amount from your gross income. So if your local market has a five per cent vacancy rate, you would subtract five per cent from gross income.

“There are times when it could be zero because there’s such a demand for housing, but you will have times during your hold period when tenants leave, so you should always just put that number in there anyways,” she says. “I always do three per cent.”

Finally, subtract your monthly mortgage payments from your gross income. What’s left over will give you a clear idea of what your monthly cash flow will be.

An example

Let’s run the numbers on a single-family home in Toronto that’s been assessed at $1 million. The tenants are paying all utilities and you’ll be managing the property yourself, so no need to factor in those costs.

Monthly rental income: $4,000
Monthly expenses: $509 (taxes), $200 (maintenance), $120 (vacancy)
Mortgage cost: $3,501 ($800,000 principal, 25-year amortization, five-year fixed rate of 2.29 per cent)

This particular property would be cash-flow negative by $330. For Toronto, circa now, that’s not bad.

If it’s not good enough, improving a property’s cash flow is possible. Working with your mortgage broker to get a lower interest rate will make a difference, as will adding a second rental unit, renting out space in the garage or even putting billboards up on your property, if those are options.

But you won’t be able to find solutions to your cash flow problems until you know how to correctly identify them. Make sure you know how much you’re making or losing every month.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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Economy

Energy stocks help lift S&P/TSX composite, U.S. stock markets also up

Published

1 day ago

September 17, 2024

Anne Joseph

TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.

The S&P/TSX composite index was up 34.91 points at 23,736.98.

In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.

The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.

The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.

The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.

This report by The Canadian Press was first published Sept. 17, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX gains almost 100 points, U.S. markets also higher ahead of rate decision

Published

5 days ago

September 13, 2024

Anne Joseph

TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.

“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.

In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.

The S&P/TSX composite index closed up 93.51 points at 23,568.65.

While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.

Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.

But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.

Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.

“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.

“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.

A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.

It would also be “counter to what they’ve signaled,” he said.

More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.

“That’s going to be more important than the size of the cut itself,” he said.

In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.

“Here, the labour situation is worse than what we see in the United States,” he said.

The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.

The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.

The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.

— With files from The Associated Press

This report by The Canadian Press was first published Sept. 13, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX composite down more than 200 points, U.S. stock markets also fall

Published

2 weeks ago

September 6, 2024

Anne Joseph

TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.

The S&P/TSX composite index was down 239.24 points at 22,749.04.

In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.

The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.

The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.

The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.

This report by The Canadian Press was first published Sept. 6, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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