Cash flow Or Capital Appreciation?

When buying an investment/rental property, sometimes the question is: Should I buy the property to generate cash flow on a monthly basis or do I sacrifice cash flow (break even) and hope for capital appreciation over the long term?

In today's downtown Toronto condo market, it is difficult to generate positive cash flow without a significant downpayment.  Buying an investment/rental property is a buying a business. If you were presented with an opportunity to buy a business which requires 30-40% capital investment that breaks even, would you buy it?  Being profitable on a monthly basis and having time on your side for capital appreciation is a win-win investment strategy. The stronger the cash flow of the property, the easier it is to sell the property in future when you decide to do so.

Here is an idea: Having 2 rental properties that generate $400 each on a monthly basis will net $800.  If you were to put the $800 on your personal mortgage (which is not tax deductible), your mortgage amortization will significantly be reduced paying it off faster thus providing access to your home equity for further investments.

In conclusion, it is important to surround yourself with a team of professionals who are investment savy (mortgage broker, real estate agent, accountant and insurance broker) who understand your long term goals and can help you be on the right track.

For detailed cash flow, cash on cash return, return on investment, cap rate and capital appreciation analysis for your rental properties portfolio, please contact me.

Buying An Investment Property Should Be Like Having a Three Course Meal!

I heard Russell Westcott, REIN™ General Manager, in an interview on Inside Toronto Real Estate show say: "Buying an investment property should be like having a three course meal" and I couldn't agree more with him.  Here is his, and my, approach to buying an investment property, otherwise it's not worth it:

• Mortgage pay down: the generated rental income has to pay down the mortgage to build equity over the long term
• Cash flow: the rental property has to generate cash flow after all expenses.  Having an investment property is owning a business, and no one in their right mind would acquire a business that does not generate cash on a monthly basis
• Capital appreciation: Investing in areas where there is long term capital appreciation due to job growth, infrastructure investments and immigration

I believe the above three courses, or rules, provide a solid foundation when deciding where and what to buy. For a complete cash flow, return on investment, cash on cash and investment property analysis, please feel free to contact me.

How To Get Financing For An Investment Property?

Buying an investment property is an option many Canadians have considered over the last few years to diversify their investments. Arranging financing for an investment/rental property can be complex depending on the applicant's employment situation (salaried, hourly or self employed). The most effective way to get the mortgage approved is to have the rental property looked upon as a business.  What does that mean? There are lenders who require a 1.1 to 1.2 DCR (debt coverage ratio) to approve the mortgage financing.  Debt coverage ratio is the ratio of net operating income (rental income - vacancy - repairs & maintenance - management fee (if applicable) - property taxes - insurance - condo fees (if applicable)) to monthly mortgage payment.  If that ratio is 1.1 to 1.2 (depending on lender) then the mortgage would be approved.

The conventional method of GDS/TDS (gross debt service ration / total debt service ratio) is usually maximized after the applicant owns more than 2 rental properties based on the revised government guidelines which went into effect April 19, 2010. Also, the GDS/TDS might not work if the applicant has a car loan and some outstanding debts.

Please contact me if you are contemplating buying an investment property (single family home or a multi-plex) and to get access to my cash flow, cash on cash return, ROI and property analyzer worksheets.