Rental Income – THE MATH
Friday Nov 02nd, 2018
Have you considered purchasing a property for rental income. It can be a lucrative proposition IF done correctly. Here I will walk you through the math behind one rental income propertie to hopefully shed some light on what makes a good investment vs a bad one.
Lets take Sam as an example. Sam purchased a 1+den condo downtown Toronto for $650,000. Sam had $130,000 as a down payment (20%). Sam now has a mortgage of $520,000 with a 25 year amortization at 3.34% interest rate. Additionally, Sam had Land Transfer Tax of $18950 and Lawyer fees of $1500 on this purchase. Sam’s lender was able to add this onto Sam’s mortgage for an additional $96/mth for a grand total of $2648/mth or $31776/year.
Upon closing Sam immediately called a realtor to put the condo up for lease on the MLS system. Sam was asking $2400/mth for a 1 year lease. Due to Toronto’s extremely low vacancy rate, Sam had several people apply for rent within the first 24 hours of posting the lease. Sam was actually able to lease the property for full asking price of $2400/mth for a 1 year lease term within the first week of it being listed.
Assuming that Sam has a renter that will make their payments each month, the math for 1 year lease would look like this…
Income - $2400x12 = $28,800/year
Mortgage - $2648/mth x 12 = $31776/year
Condo Maintenance fee - $400/mth x 12 = $4800/year
Property tax - $3200/year
Realtor fee (½ mth rent to the listing agent, and ½ mth rent to the leasing agent) = $2400/year
Condo insurance - $30/mth x 12 = $360/year
Total Expenses - $42,536/year
So in this scenario, Sam’s cash flow would be negative $13,736/year or $1144/month.
If Sam were to Short Term Rent the unit, Sam could expect much higher returns per month. As an example, it can be expected that a 1+den in a good Short Term Rental building will average approx. $6400/mth in rental income. Now Sam is a lazy person and does not want to have to deal with the headachs of Short Term Rent (ie Advertising, Check-in/out, cleaning etc.) so Sam opts to pay a management company to handle all of these tasks. The management company charges Sam 20% of the gross rent to fulfil these task for Sam.
So after all is said and done, Sam averages $6400 – 20% ($1280) = $5120/month average x 12 = $61440/year.
If we apply the same expenses as before ($42,536/year or $3544/mth) and subtract it from the Short Term Rental income of $61440, Sam actually has a positive cash flow of $18904/year while paying down a mortgage.
Additionally, because this is short term rental, all renters pay for the unit in advance. There are no issues of chasing renters for the rent money.
If you are considering purchasing an income property, give me a call. I would love to talk to you about some options that you might find will produce higher than average incomes.
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HomeLife Landmark Realty Inc., Brokerage
7240 Woodbine Ave, Markham ON, L3R 1A4
Direct: 416-725-5157 Fax: 905-305-1609
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