Number Crunching


3 minute read

June 5, 2009

After my post on Wednesday about entry-level condos and the sub-$225,000 bracket, a reader commented and asked how this scenario would play out for investment purposes.

I’m going to attempt to break down the numbers in what will result in a crude financial analysis of a theoretical property.

I’m hoping my accountant, actuary, and investment banker readers will poke holes in everything I write…


Some of my buyers get so caught up with the investment portion of their purchase that I have to remind them, “You know, you have to actually live here as well.”

Purchasing a condo brings many factors into play, such as:
-purchase price
-potential resale value
-maintenance fees, taxes, utilities
-neighborhood & infrastructure
-layout & living space
-potential rental income

You can’t buy any condo in any area just because “the numbers” make sense, can you?

Are you only looking for a condo that will out-appreciate the market?  Or do you want to live in a specific neighborhood or a specific building, regardless of the cost?

It all depends on why you are buying the condo.
1.  Primary Residence
2.  Investment Property
3.  Both

If you plan on living in the condo, maybe you couldn’t care less what the unit would rent for.  1-bedroom units and 2-bedroom units bring in a great return on investment, whereas 1-bedroom-plus-den’s don’t because they are too expensive for one person, and not enough space for two.

But if you’re looking purely for investment, you might not care what or where you buy, so long as you get a good return.

For the purposes of this example, let’s ignore the potential resale value just for now.  Obviously, you’ll consider what the condo will be worth when you sell it in 1, 5, 10, or 20 years.  But that’s not easy to forecast since we don’t have a crystal ball to see where the market is going, and we don’t know which buildings will out-appreciate the others (although we could probably hazard a guess).

Take a unit at 11 Brunel Court, listed at $206,900.

Looking up the recent lease prices for units in this building, at this size, I can see $1150, $1160, $1200, $1200, $1250, and $1200.

Let’s assume that we buy a condo for $200,000, and lease it out for $1200/month.

First, how much are we going to put down on the condo?

Let’s assume 10%, or $20,000.

There is Provincial Land Transfer Tax payable on the condo of $1,725, but let’s assume we are an astute investor who is also responsible for the Municipal portion of an additional $1,725.

Add this to the $20,000 downpayment, and out total cost up front is $23,450.

Make the following assumptions about the mortgage:
Amount: $180,000
Term: 5 years
Amortization: 35 years
Rate: 3.80%

Total Payment: $777.62

We’ll also be responsible for a CMHC Insurance premium of $3,600 (since the downpayment is less than 20%), which will cost $8.57 per month amortized over the 35-year term.

This brings the total carrying cost to $786.19 per month.

Maintenance fees on this unit are $202.45 per month, not including hydro, but the tenant is responsible for that.

Taxes are approximately $1200 per year.

To summarize:
Rent: $1200
Mortgage: $786.19
Maintenance: $202.45
Taxes: $100

This leaves a monthly profit of $111.36.

Per year, you’re making $1,336.32.

But also consider that of the $786.19 per month mortgage payment, approximately $210 of that is principal.

Add this into the mix, and your monthly profit is $321.36, and your yearly profit is $3,856.32.

How much did this property cost us up front?


That’s a return of 16.4%.

I like it!

Had you been able to amortize the cost of the Land Transfer Tax (which some lenders may do), things could have been different.

Consider putting down 10% of the total $203, 450 (the $200,000 purchase price plus the $3,450 LTT), which amounts to $20,345.

Now re-run the numbers:
Downpayment: $20,345
Mortgage Amount: $183,105
Monthly Payment: $794.42
Principal Portion: $214.00

Yearly profit is $3,805.56 but the initial investment was only $20,345!

That’s a return of 18.7%.

I like it even more!

There are a hundred assumptions, another hundred variables, and everybody would work their investment paramaters differently.

A downpayment of only 5% would result in a profit of $3,378.48 per year on an initial investment of $10,173.

That’s a return of 33.2%.

How do you turn that down?

Why is there no lineup for people to jump on board this money train?

Well not everybody qualifies for a mortgage with 5% downpayment, and not every lender will allow you to amortize the cost of your Land Transfer Tax.

There are also personal income tax considerations, and closing costs such as legal fees, renovations, and of course the fee you’ll pay a good-hearted Realtor to lease your condo for you.

And some might argue that you can’t include the principal portion of your mortgage payment in your calculation of return on investment.  I’m not sure why, or why not, I just know that there are many different schools of thought.

Speaking of school, it’s been a long time since I’ve calculated EBITA.  What the heck does that stand for anyways?

So, how did I do?

Any comments from the peanut gallery?

I probably should have consulted my brother before I ever picked up my calculator…

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

Find Out More About David Read More Posts

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  1. fidel

    at 9:55 am

    Thanks for this great article… it all sounds so easy, there’s got to be a catch somewhere…

  2. Krupo

    at 10:46 am

    Earnings before interest, tax and amortization 🙂

  3. JB

    at 3:13 pm

    One catch: you have to be a landlord.

    It can get messy at times. Perhaps this is why some landlords will even lower the price a little/raise rent less for “good” tenants to keep them.

    What about bachelor units? As a renter, I feel that rent on bachelor units are not significantly less expensive when compared to 1 bedroom units. On the other hand for investors, bachelor units might be less popular with renters since for just a little more one can get a 1-bedroom.

  4. Potato

    at 3:36 pm

    Wow, and if you put 0% down, it would be an infinite return!!

    Yeah… that’s not how that math works. While that’s all you put down, you have the whole $200k at risk [ok, that is your return on your down payment, but that’s not comparable to the return on say a GIC since the risk on that portion is so much greater — you have to be aware of the 90% leverage]. You also forgot a vacancy allowance and insurance. Say $600/year for both combined (and that’s being pretty loose). You’ll have to factor in some maintenance expenses (fixing walls, replacing fridges, though thankfully with a condo you won’t have too much more than that between tenants) — perhaps another $300/year. That takes your yearly profit down to a razor-thin $2988/yr, or less than 1.5% on the cost of the unit. If your interest rate at the end of the 5 years goes up even a small amount, you’re hosed; likewise if you have to sell, 3 years of your profit will disappear to transaction fees.

    A quick rule of thumb is to look at the unit price as a multiple of the monthly rent: 200k/1.2k = 167X. That’s in the grey zone: you might be able to make a profit with enough leverage, luck, and a stable market (which meshes with the more detailed calculation above), but it’s not so overpriced that it’s out of the question to buy it to live there yourself. Generally though an investment property should be under 150X, otherwise you’re basically just buying in the hopes of appreciation (i.e.: speculating).

  5. David Fleming

    at 11:28 pm

    @Potato – Let’s assume, just for a moment, that the acquisition price of the asset is fixed, ie. the condo never depreciates in value.

    How would my numbers look then?

    If you keep this property forever, the only real risk is in the change in interest rates. There is no risk of the property decreasing in value (which in the long-long term, in my view, will never happen) because it doesn’t matter if you don’t sell it.

    I don’t plan on ever selling any of my investment condos simply because they generate substantial income, and they carry themselves.

    I can always renew my mortgage at current rates…

  6. dave

    at 2:33 pm


    As an actuary I’d like to point out the following variables you’ve not accounted for.

    First, the vacancy rate. At some point, the unit will sit empty for a month or two. You need a vacancy assumption higher than 0%.

    Second, your $586 interest cost is predicated upon a historically rock bottom 5 yrear mortgage rate, and indeed a rate which is no longer available in Canada as of this week. (5year rates spiked 5-10% this week). Rather than using 3.75% you should use a more realistic average rate over the term of your investment. I note that an average 6% rate would eliminate your profit.

    Third, you need to price in your labour. How long will each tenant stay? How much time does it take to locate a new tenant (showing the unit, etc).

    Fourth, upkeep costs. Not everything is covered by the maintenance fees.

    Fifth, variances in taxes and maintenance fees. The writing is on the wall wrt to taxes, both federal, provincial and municipal. Similarly as you know maintenance fees for newer buildings tend to increase after the first couple of years.

    Sixth, variances in rental income. Even if you think this is proper rate, you should consider what happens to your long term prospects in different scnarios. 10% increase? Good! 10% decrease? not so good. Inherent in this is the pricing of your capacity for risk.

    Seventh, opportunity costs. You should price in the cost not just of your mortgage, but also the lost opportunity cost of your closing costs and principal deposit. (ie you could have invested them in other assets)

    Eighth, transaction costs. Even if you plan on “never selling” the reality is that eventually you will. Whether it is now, or in fifty years. When that happens you will face transaction costs (agent fees, etc). Perhaps because you are an agent, you can keep those lower than the average person.

    Ninth, asset price depreciation. Your opinion that there is no long term risk of the property decreasing is simply wrong. It may be unlikely, but the risk exists. Take a look at Detroit. You may think it unlikely, you may price it at a 1% chance of a 10% decrease over the next 25 years. But if you price the risk at zero, then you ignore the principle of “gambler’s ruin” (google it).

    Tenth, liquidity risk. Even if you plan on never selling (or not for 25 years), you may find yourself in a situation where you want or need to sell. Real estate is a relatively illiquid asset. It is one of the only assets which you are taxed upon owning, and has very high transaction costs (relative to other assets). While the longterm price appreciation may be positive 99% of the time, we have seen that there are relatively large historical swings around the trend line. You may find that you are forced to sell (or want to sell) at a time when you are carrying a loss in the asset price.

    In summary, it may be that after factoring in the above considerations it is still a good investment. That is up to the investor to decide. I am simply advising that as an actuary if I was doing this analysis for my employer I would consider these factors, and that applies double if it was my own money.


  7. JS

    at 8:32 pm

    Another point to add to Dave the actuary’s list of risk factors is maintenance fee increases well above the rate of inflation, and also the risk of special assessments, which could happen even in newer condos.

  8. Potato

    at 2:55 pm

    Dave looks to have nailed down the issue of risk better than I could, but since I composed this offline anyway, might as well share:

    If you’re in a position where you can lock up your investment for 35 years, and have the cushion to ride through rough times (i.e.: vacancies, high rates), then great, go for it. Certain risks, such as lack of liquidity might not be material to you, but you should be aware of them.

    But you asked “Why is there no lineup for people to jump on board this money train?” and the reason is that there are some sources of risk (as well as sweat equity) that you weren’t accounting for.

    With half the leverage you could get that same 16-17% return in REITs (and a few of the smaller/riskier ones are yielding that without leverage), and you wouldn’t have tenants calling you at all hours. If you got in a situation where you had to sell, you could, and if you move cities you can take them with you. Of course, the volatility is higher.

    As the commercials say, some people like having investments they can touch, and that’s great if it works for you, but it’s not exactly a “money train”, and there are risks.

    “I can always renew my mortgage at current rates…”


Pick5 is a weekly series comparing and analyzing five residential properties based on price, style, location, and neighbourhood.

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