Will You Make Money On Your Property ? Cash Flow Analysis

April 20th, 2011 · 26 Comments · Kids & Family, REIN, Rental Property

Too Much Bullshit on TV
Creative Commons License photo credit: ssoosay

Todays internet adventure brought me to a clip of Don Campbell, President and CEO of REIN doing property analysis making up stuff for BNN. He says that Hamilton is a great place to invest. The mayor says Hamilton is a great place to invest. The Anchor on BNN seems to think that Hamilton is a great place to invest. I seem to be the only dream stealer around.

Here’s the BNN video for those who want to watch Don smile and smooze… you’ll also see BNN promote his best selling book promotional material for the Real Estate Investment Network.

Who needs reality when you can make amazing returns of 16% with an average property, all you have to do is give Don a couple hundred bucks per month and he’ll teach you how.

If You’re Too Lazy To Watch

Rachelle’s Synopsis: Close up of REIN marketing materials, followed by Don going blah, blah, blah for a while, then a clip of the Mayor of Hamilton, then Don shows us some sample properties that will make you rich!  Here’s the numbers he gives for the 2 properties.

Property 1 – Duplex, Don Campbell’s Version

The property is very pretty and has a nice upper apartment, I’m presuming 3 bedroom and a basement apartment. Usually in these kinds of houses you’ll see a one bedroom basement apartment. The upstairs is a 2 story.

Price - $210,000 with 25% down of $52,500

Income -$ 1850 per month ($800 for the basement)

Mortgage (3.75% 30 year amortization) – $727 per month

Taxes – $ 224 per month

Operations ??? – $185 per month

Income is a whopping $714 per month ($8568 annually) with a 16.3% return on cash ($8638/$52,500=16.3%)

Property 1 – Duplex, Rachelle Berube’s Version

Price – $210,000 with 25% down of $52,500

Income -$ 1850 per month ($800 for the basement) I only get $1515 using comparables…

Upper Three Bedroom – Here’s what looks like an upper apartment in a home. (it’s not stated if it included the basement) for $990. (This ad has changed for some reason… the price is reduced and it changed categories from 3 bedroom to one plus a den WEIRD) Here’s a four bedroom co-op townhouse going for $957. There are 27 available 3 bedrooms so not very many and most are either townhouses or the whole house.

Basement Apartment – In Hamilton it’s hard to even find a one bedroom for $800. All the prices tend to be lower than that. There are 81 one bedrooms on the market currently on Viewit.ca and the only one bedroom basement I found was for $525 plus hydro.

Mortgage (3.75% 30 year amortization) – $727 per month

Taxes – $ 224 per month

What the hell is operations? It’s an income property not a surgery patient. We already have names for expenses and here they are…

Property Management – 10% or $151 + HST = $170.63 monthly

Utilities = $100 per month – Here I’m assuming the upper floor tenant pays a portion of utilities 60% so you’ll have to pay the 25% out of the $525 you get from Mr. Basement Hydro was not included but satellite TV was so…

Vacancy = 4% or $60 per month – Hamilton vacancy is about 3.9% according to CMHC so I’m budgeting that.

Repairs and Maintenance – $200 per month… New furnace is $5000 every 20 years, New roof $5000 every 20 years, painting in between tenancies, eavestroph cleaning, lawn mowing and snow removal and more. 41$ per month for roof and furnace, lawn mowing and snow removal $150 per month, let’s just say, $200 per month we know we’re short on this for sure…

Income is a whopping $33.37 per month ($400.44 annually) with a .7% return on cash ($400.44/$52,500=.7%)

Let’s Give Don Another Chance Folks

Surely the king of fundamental analysis of property just had an off moment… he’d buy properties like this all day long he says. How can this go wrong?

I believe in a personal Belize where owners make so much money on their properties they raise my management fees. It’s just not fair to do due diligence before you appear on BNN in front of a national audience pumping real estate. Surely Don can come up with a hit this time…

Hamilton Property #2 Townhouse – Don Campbell’s Version

The property is ok and has a dated kitchen with the handles located in the middle (a sure sign of quality), in the video you can see that the countertops are regular laminate. I’m presuming 3 bedroom. It’s not a “premium property” it’s very average.

It took about 5 seconds of investigation on rental market conditions in Hamilton…I knew Mr. REIN himself was lying, fabricating, making shit up uhmm wrong.

Price – $160,000 with 25% down of $40,000

Income -$ 1400 per month

Mortgage (3.75% 30 year amortization) – $554 per month

Taxes – $ 166 per month

Operations ??? – $140 per month

Income is a fantastic $540 per month ($6480 annually) with a 16.2% return on cash ($6480/$40,000=16.2%)

Hamilton Property #2 Townhouse – Rachelle Berube’s Version

Price – $160,000 with 25% down of $40,000

Income -$ 1400 per month In all of Hamilton there are only 5 properties listed on Viewit.ca for more than $1200 per month.

I found this very nice detached property on MLS with a similar style kitchen for $1295 and CMHC says the average price for rental townhomes is $920 in the Hamilton area. If you add in Burlington the average is $1036. So let’s be kind and use $1036. You can find the very useful CMHC reports here under Rental Market Reports Major Centers.

Mortgage (3.75% 30 year amortization) – $554 per month

Taxes – $ 166 per month

Property Management - 10% or $103.60 + HST = $117.06

Vacancy Rate - 4% = $41.44

Repairs and Maintenance - $200 per month… New furnace is $5000 every 20 years, New roof $5000 every 20 years, painting in between tenancies, eavestroph cleaning, lawn mowing and snow removal and more. 41$ per month for roof and furnace, lawn mowing and snow removal $150 per month, let’s just say, $200 per month.

Income is a negative $-42.50 per month ($-510 annually) with a  return on cash ($-510/$40,000= -1.3%)

The Math Doesn’t Lie…

Properties are a lot more expensive to keep up than people consider. That’s the bottom line and any lowly property manager knows that detached homes and townhouses are the most expensive to keep up.

A question you might ask me is…You charge management fees of 5%, why are you putting in 10% as a management fee? I also charge a tenant locator fee of one month’s rent when the tenant moves out. That’ll add another 8% to the 5% if the tenants move out every year. Most tenants don’t move every year so I figured 10% would be a more realistic figure.

You might also say that you’ll do that work yourself. I can do the management and the lawn mowing and snow removal so it won’t cost me anything. Fair enough, but… if you follow REIN’s vision, you don’t do that stuff, you hire out while you go on vacation to your great new lifestyle as a property owner.

The Perils Of Catching a Falling Knife

If prices go up as they have been for the last 20 years, you look like a hero. But as you can see from this analysis, capital appreciation is a 100% requirement for this ever to work. So if you really and truly believe that prices for property will continue to go up in Canada for the next 5 years, go ahead and buy as many properties as you want. Just don’t go kidding yourself that you’re not speculating.

Rents Will Go Up

Rents will go up, but they won’t go up fast enough to save your ass as you shovel your hard earned after tax dollars into your cash sucking cow of an “investment.”

When your property is worth $20,000 less than you paid for it, and it costs you money every month, you’ll love shoveling snow for your tenants in -30 degree weather.

Mortgage Paydown

With mortgage paydown I’ll be building equity, even if I break even, my mortgage is being paid down. Let’s shine the bright light of mathematics on that myth.

Property 1 – Flat Market – Sell In 5 Years

After five years of paying your mortgage religiously you’ll have paid down a whole $15,698 and you’ll still owe $141,802.  In a flat market if you sell at year 5 for the same price you paid, after paying real estate fees of 5%, you’ll get a hefty return of $5,198 plus all the money you got for cash flow… $2002.20.

That’s a combined total of $7002.20. Now let’s divide that by 5 and figure out our real ROI. $1440.00 per year on an investment of $52,500. A whopping 2.7%…

Property 2 – Flat Market – Sell In 5 Years

On Property #2 you’ll have paid down $11,960 and you’ll still owe $108,040. In our flat market after paying real estate fees of $8000 you’ll have made $3,960 except we had a little cash flow problem on this property remember? We ended up $-510 on this property… every year. That puts us in the hole by $-2550 but that’s ok because we made $1410 on our investment property after 5 years or $282 per year. Basically you can go out on the town and celebrate wildly once and spend all your profits.

Is It Even Possible To Make Money In Real Estate?

Yes, but it requires a lot of skill, and a willingness to wait for a property that will pay you to own it. The properties that make sense right now are extremely rare and moving out to Hamilton doesn’t make it better.

Greg Romundt, President and CEO of Centurion REIT (A guy who does make money in Real Estate) said to me “Duplexes and Single Family Homes are not investment grade properties.”

What do you think of this analysis? I don’t rent in Hamilton at all, any investors who own properties they rent out for this kind of dough? Tenants paying these rents? Let me know if you do…

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26 Comments so far ↓

  • jesse

    Good analysis. I will quibble only with the mortgage rate. 3.75% is a great rate! Sieze the day but at some point in the next 30 years I think it will be a tad higher than 3.75%.

    On either of these properties the only way the numbers would work is if you get capital appreciation as well. I’d add that this is far from a “hands-off” investment even with Rachelle working for me. Property investment is no lazy-bones index fund that can be managed in an evening. Big-name property managers know this, which is why they don’t own these places at these prices!

    Interestingly, I think US home builder Beezer is getting into the property management business in the southwest. And they should — all-in caps down there are easily 8%+! Not to mention nobody buys down there any more… prices are too low ;)

  • Peter Scholtens

    Rachelle, you’re bang on. I refused to make an offer on a house in our Hamilton neighbourhood (friendly vendor, private sale) because the numbers just didn’t make sense. You can’t make any money in Hamilton renting out SFHs at current prices.

  • sami

    the whole purpose of these gurus is drum up the greed emotions in all of us so they can have more members and sell more books. They need to capitalize on the investors fleeing the stock market as they need to put their money somewhere.

    these returns are pie in the sky for single homes. I am just wondering what is your analysis about condo investing?

    • Rachelle

      Pretty similar except you end up with less outdoor stuff to do because that is included in your maintenance fee. Usually though you don’t even have to go as far as I did because when you add in the maintenance fee, your numbers go upside down…

      • Devore

        Then you hope the condo is well run, maintenance fees are adequate to deal with maintenance, and the contingency fund is sufficient to deal with all the work the building will need in 10-20 years.

        Unfortunately, condos have been priced way too high by “investors” who have no idea what they are buying. You should take the condo fee, double or triple it to be realistic, add it to the mortgage payment, then work backwards to figure out the “purchase price”, because that is what you are buying. Condos should be heavily discounted (and presales even more so) but they’re barely competitive with equivalent SFH.

        There is just to no way to make the math work for condos.

  • Financial Uproar

    I love how much you hate the REIN guys. A successful RE agent from my neck of the woods once tried to get me involved with REIN. I agreed to check out a meeting, until I found out it would cost me money. Glad I stayed away.

    I haven’t bought an investment property since about 2005. Back then these properties were giving a net return of 10% with gross returns in the high teens. In hindsight, I should have bought more.

    I’m way too greedy to even consider buying RE where it barely cash flows. Considering record low interest rates and record high prices, I think someone has to be a special kind of stupid to think we’re going to see any sort of appreciation in the near future.

    • Rachelle

      Well I didn’t hate them until they decided to trademark my business name and buy the .com of this site. They can earn back my mild contempt by transferring the trademark to me for $100 fee to the government and apologizing.

      Their shtick only works until someone who knows how to analyse property actually looks at it. I don’t think they’ll enjoy my continued attention.

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  • Anna Amateur

    Out of the frying-pan into the fire.

  • Michael Carabini

    on the day after being notified that they must clear their sidewalks.. The city assessor would determine the cost incurred by the city and send that bill to the property owner.

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  • Real Estate Invertor Software

    Great information and reference! Very valuable information Rachelle.

  • Kallie

    What about the fact that the tenants are paying the cost of the mortgage? You have included the payment of the mortgage (principal plus interest) into your cash flow calculation. However, you then are not including the principal paid down as income when the sale occurs. Even in a flat market, if the cash flow is net $0 but the principal on the mortgage gets paid and covered by the rents, then when you sell the property you have gained that equity. It seems like you are taking a monthly cash-flow view only, and not assessing the long term potential.

    • Rachelle

      After the first five years of mortgage payments you will have just about enough equity to pay the realtor in a flat market.

      In any case the equity trapped in the house is for all intents and purposes lost to landlord because you can’t use it until the house sells.

      I’m in the firm don’t count your chickens before they hatch camp.

  • Irene

    Very good analysis of the income properties – you are right, it takes a lot of time and money to run a real estate portfolio.

  • Fabio

    Can someone give me the formula for my rate of return for my investment property. Is it the downpayment down vs the income every month formula or am I missing something

  • Martin

    I own Hamilton rentals and am buying more. I also analyze a lot of them as I shop (using http://propertycheck.landlordlabs.com/, a great tool btw). A lot of them do have great numbers. Only time will tell what happens to the appreciation, but they’re almost always cash positive in the meantime.

    Here’s a real example: http://propertycheck.landlordlabs.com/property/8829359d-929d-4894-83cf-96c8f9b36ebb

    Cheers.

    • Rachelle

      It’s a neato tool, but you’re still not including property management expense, or vacancy expense. It’s ok, that’s all. And your figure of $214 per month for maintenance is there.

      There’s no doubt that there’s money to be made but it’s nowhere as glamorous or wonderful as it’s made it out to be and including capital appreciation into your equation just turns it into fairytale land story.

      • Martin

        Actually a 3.4% vacancy rate is included in these calculations. There’s no property management fee because a management company isn’t being used. The appreciation is set to 3.3% per year which is conservative; below what percentage do you personally not consider appreciation to be “fairytale land”?

  • Rudy

    Hi Rachelle,
    Was moved to contribute to your blog as I find your insight refreshing. I am neither a bear nor bull, just an investor that looks for value in any market (including bonds, stocks, futures, real estate etc.) as profits can be made when markets go up, down or sideways. I owned and managed several cashflow properties in 2007 until I was hit by an earth shattering event……….I got married. The terms of ‘surrender’…or matrimony had me liquidating the properties (happy wife, happy life). Made nice profits on the sales. Now I’m ready (have permission) to jump back into the RE market full throttle but this time around with a property manager. After scouring the region and plugging in numbers of potential deals, 95% of properties for sale do not cashflow. If today’s RE were put into terms of a stock to purchase, its PE ratio would be considered highly overvalued. I have seen this song before in other markets, and all markets are cyclical. I will continue to apply understanding, discipline and patience in waiting for more favourable conditions to buy. Your cashflow numbers reinforce my conclusion on the overextended state of rental properties today. It would appear there is a plethora of new landlords entering the market today (not understanding fundamentals) who will become tomorrow’s motivated sellers.

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