But hey, if it’s your money-maker, you have to sell sell sell!
Truth is, people spend more time reading the Nutrition Facts on the back of a bag of Doritos Cool Ranch than they do researching claims that “Housing is the best investment”.
Your friends, your parents, your brokers and especially your real estate agent will always tell you that “housing is the best investment.” There might be some skewed truth to that (depending on many factors).
The truth is, for something to be “the best investment” it has to
a) Pay for itself
b) Pay you
c) Appreciate in value
So where can we find this?
Take McDondals for example. Everyone hates on the food but who doesn’t love a good McChicken, Big Mac or their wickedly salted, golden French fries after a night of pounding back jack and cokes?
$10,000 invested in McDonalds stock back in 1980 would be worth over $900,000 today. That’s a return of 90x your money. As Wayne Campbell would say to his good friend Garth Algar, “Sha-wing!”
Ok let’s get back to business here. What if you have some cash to throw around as an investment in real estate. You could tell your friends that you are buying some vacation property or getting into the real estate investment game.
You’d be cool for sure, right?
Let’s take a high-level overview of what constitutes a good investment by breaking down a few numbers in a few different locales.
The Vancouver House As An Investment
Here’s a typical Vancouver house listed at $865,000.
This east Vancouver beauty, built when black and white televisions were hardly in any homes and also when the United Nations was less than a year old, boasts 4 bedrooms and 2 bathrooms. The interior is non-descript, likely because the realtor didn’t see it fit that the pictures would flatter the home on the listing. No points for artistic merit from the Russian judge.
According to a scan of similar houses in the neighbourhood on Craigslist, a house like this could rent for $2200 per month.
What if we wanted to buy this place?
Let’s flatter the sellers and buy it for their asking price of $865k (never offer asking price if you’re going to buy – always work with your agent and offer under).
If you had the money - $173,000 - to put 20% down and avoid the CMHC insurance premium for a high-risk borrower, you’d have a mortgage of only $692,000. Go big or go home, right?
Not bad, you owe the bank a lot of money and their shareholders (like me, pension funds and rich people) thank you for your business. And for the fact you’re enslaving yourself to debt to impress your friends.
Say you got a 5-year fixed rate mortgage of 3.0% from your mortgage broker buddy over a standard 25-year amortization. Your monthly payment would be $3,275 per month.
The Skinny - Basic math alert!
You still have to factor in property taxes. So a quick look here and you can find out the property tax information (and assessment) for any Vancouver property. This particular property paid $3,837 + $1,634.00 = $5,471 in property taxes in 2013. That translates to $456 per month.
So the property tax + mortgage adds up to just over $3,700 per month
Total payments as an investment = $3700 per month
Total incoming rent = $2200 per month
Net loss = $1500 per month for this Vancouver home.
**Note that this does not factor in the principal pay down per month of around $1500. We’re ignoring the pay down for reasons I’ll detail in another post. Also excluded is any house maintenance - roof, gutters, holes in walls, etc..
Investing in Bellingham, Washington
Bellingham is a about 35 stone's throws away from Vancouver and yet housing prices for some beautiful homes and lots is less than half of it's northern counterpart.
You also get unfettered access to American Netflix and Amazon Prime. Count it!
How about this place? It's pretty damn sweet...
This 4 bed, 3 bath beauty is nestled on a forested 1/3 acre lot. Other than being a pretty cool looking home with more curb appeal than slutty Halloween costumes, the bedroom carpets have been vacuumed with almost perfect “V’s”.
According to Zillow’s estimates, this place could rent for $1,859 per month. A quick scan of Bellingham’s craigslist shows several prices above this amount for similar size homes within a couple mile radius but let’s take Zillow’s number as conservative.
This place is asking $499,000 as of this writing and Zillow values it around the $450,000 range. Let’s purchase it for the buyer’s asking and give them a g-note shy of 500 large (as the 1% like to call thousands).
With $99,800 in cash money we have our 20% down payment. The total mortgage payment would be in the ballpark of $1,879 per month. Luckily for us, in ‘Merica the interest rate is a hair extension shy of 4%. FOR 30 YEARS!
Yes, your rate won’t change for 30 years, unlike in Canada where you can’t get this term length and ultra low mortgage rate unless your last name is Royal Bank of Canada.
Property taxes for this crib in 2013 were $4,274 or $356 per month for those that like to divide by twelve.
Total Payments as an Investment = Property tax + mortgage = $2,235 per month
Total Incoming Rent = $1,859 per month
Net Loss = $1,859 - $2,235 = $376 per month
Better than the Vancouver home and way more bang for your buck but unless you a) talk down that asking price by 5-10% and seduce a renter to pay 5-10% more per month, you’re not breaking even. Also the price is almost half of the Vancouver home and twice the house.
Investing in Phoenix, Arizona
Ah yes, the valley of the sun.
A favourite of Canadian snowbirds. Golfing, spas, authentic Mexican food and NHL hockey tickets that cost less than parking in downtown Victoria. Who doesn’t want a piece of that action?
Check out this place in Phoenix.
This 3423sf, 4 bedroom, 4 bathroom home reeks of upper middle class awesomeness. You could ditch your current friends and fine new ones that want to hang out with you in a hurry. Thirty minutes from downtown Phoenix in traffic and less than that to the NFL stadium in Glendale. This home is located in the top ten wealthiest Phoenix-area ZIP codes according to this bearded research director
Did I mention the sweet pool with more curves than Kate Upton? Imagine how many Instagram pics of your feet you could take on the patio overlooking that thing.
According to Zillow’s estimates, this place could rent for $2,619 per month. A quick scan of the Phoenix classifieds and craigslist shows that this is around the low end of the going rate in this high-income neighbourhood for a lusty pad like this. Best to keep the skids out, of course.
This place is asking $575,000 as of this writing and Zillow values it around the $555,000 range. Let’s purchase it for the buyer’s asking like the previous two examples. We’re playing with fake money, so we can do whatever we want.
With $115,000 in cash money we have our 20% down payment. The total mortgage payment would be in the ballpark of $2,165 per month. That’s less than an all-inclusive trip to Mexico for a 4.5 star hotel.
Once again, that’s considering just a nose hair shy of a 4%, 30-year mortgage rate. Yes, that rate is locked in for 30 years! Something that you can't do in Canada.
Ok, so the city of Phoenix skins you for about $3,332 per year in property taxes. Dividing by a dozen months in a year gives us $277 per month to add to our payments.
Total Payments as an Investment = Property tax + mortgage = $2,442 per month
Total Incoming Rent = $2,619 per month
Net Profit = $2,619 - $2,442 = $244 per month
Finally! Positive cash flow after a high-level assessment. And you get this pool too.
Like this one.
Or this one.
Or this one.
You get the point. Phoenix is a spot where rents are greater than mortgage and a bunch of fees rolled in.
All of these links provide positive - or pretty close to it - cash flow if you were to rent it out. Of course, you might want a property manager ($) and have to declare the rental income to the government ($) but these few calculations give you a starting point on how to look.
The next time someone tells you that "Housing is a good investment"…ask them where and go sort out all the details that i mention first, for starters.