One of the most common concerns by those considering condos as investments is that rent doesn’t cover taxes/maintenance fees/mortgage, leaving them to subsidize the purchase and making the investment ‘cashflow negative’. A valid concern and something that was not the case up until a few years ago when capitalization rates on residential real estate became more suppressed.
This model walks through the math and assumptions to illustrate where the IRR and NPV for leveraged real estate investments land over a 10 year period based on some conservative assumptions.
I have found great value in a tool like this for context building as I evaluate properties for investor clients. The key take away is not IRR in isolation, but how does it compare between all properties being considered. When accounting for the differences in location, building age, and unit specific features, the assumed appreciation rates will have a material impact on the rate of return, the perspective of these side by side comparisons is invaluable.
Using an example of a condo purchase I posted on September 2nd, 2021:
https://lnkd.in/gvjxhdwW
Assumptions:
– Return based on a 10 year holding period.
– 3.5% appreciation (below historical average, unit purchase below market, keeping this conservative)
– Minimal vacancy as evidenced by record low vacancy rates pre covid and trajectory of current vacancy rates.
– 20% down payment, 1.7% fixed 5 year rate, ignores taxes
IRR = 13.61%
An additional free resource that I have found useful for a bird’s eye view of specific areas and their current performance is www.konfidis.com #toronto #realestate #condos #investment
