February 22, 2019    中文(简体)   
Investment series 37: Investment analysis of apartment building

 

 

I have done some analysis on single family home, duplex before, today I am going to run some numbers on an apartment building.

Why buy apartment building?

When most people start to buy investment property, they start with single family residential. Once they are at certain level, they may have little single family residential everywhere, it may not easy to manage. So some people may think to sell some of the single family residential, buy a small apartment building, that will make management easier.

The property in the picture is currently on the market, it is in a convenient location in Oshawa. It has nine 2 bedroom apartment, the asking price is $999,900, monthly rent is $7,740.  2 bedroom is better than 1 bedroom or bachelor as the tenant turnover rate is much lower.

Below is the numbers from listing agent:

Gross Income (rent per year): $92,880

-Vacancy Allowance:

- Operating Expense: $36,479

= Net Income Before Debt: $56,401

Here is the break down for the operating expense:

Taxes:         $18,599

Insurance:  $2,000

Management: $0

Maintenance: $0

Heat: $4,307

Hydro: $5,896

Water: $5,677

Other: $0

Nine 2 bedroom unit, the rent for each unit is $860 per month, including utilities. This is below the local market, the average rent for 2 bedroom unit including utility is around $1000 to $1100. So there is a lot of potential. But first, we need to reconstruct the expense list. Let’s put 8% for the management fee, 5% vacancy allowance, 5% for the maintenance, here is the new list.

Taxes:         $18,599

Insurance:   $2,000

Management: $7,430

Maintenance: $4,644

Heat:    $4,307

Hydro: $5,896

Water: $5,677

Other:  $0

Total expense is $48,553

Gross Income (rent per year): $92,880

-Vacancy Allowance: 4,644

- Operating Expense: $48,553

= Net Income Before Debt: $39,683

For the upside potential, let’s use $1,000 for the rent, see below

Gross Income (rent per year): $108,000

-Vacancy Allowance: 5,400

- Operating Expense: $50,519

= Net Income Before Debt: $52,081

You can see the annual potential is $12,398. So if we increase the rent by proper renovation, it is worth it. Investing in apartment building is a totally different game than investing in single family residential. Initial cash flow is low because of renovation, mortgage. Once it is stable, cash flow will start to increase.

From the financing point of view, banks will pay more attention to the income it can generate, typically 15% to 35% down payment is required, and your net asset need to have about 25% of the property price. You will also get better mortgage rate if your mortgage is insured from CHMC (Canada Housing and Mortgage Corporation). most of the times, the seller can provide some type of financing in addition to mortgage from banks, this will depend how you negotiate the deal.

 If you are interested in investment opportunity or investment strategy, let your money work for you, you can  visit our website atwww.torontohomehunting.com, or wechat TorontoHomeFinder. We have products for both inactive investor and active investor.

 
Posted by: Ronald
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