What is a Good Mortgage to Rent Ratio in Calgary for Investment Property?

[Thomas Beyer]

QUOTE (investmart @ Aug 15 2009, 06:25 PM)
...



Thomas, just plug in 10% down instead of the higher % you put down on your own apartment buildings, and you will also get ROI>36%.

...


indeed .. with the comment that 2.5% interest is an unrealistic figure to use .. more like: 4% or 4.5% .. then it won't be so sexy assuming no appreciation ..



2nd comment: the formula assumes no reserve which is also unrealistic !



I use this formula:

(CAP - i + a) / (d + r) ..



where



CAP is CAP rate

i is interest rate

a is appreciation (on average over a 5 or 10 year term)

d is downpayment % (% of purchase price) .. usually 20-25% these days on a multi

r is a % of purchase price .. say 5% as a decent rule of thumb



Example 1 (rising market, like BC, SK or AB:



CAP rate 6%

interest rate = 4%

down payment = 20%

reserve = 5%

ROI is

(6% - 4%) / ( 20% + 5%) = 2% / 25% = 8% assuming no appreciation

or

(6% - 4%+4%) / ( 20% + 5%) = 6% / 25% = 24% assuming 4% appreciation

or

(6% - 4%+6%) / ( 20% + 5%) = 8% / 25% = 32% assuming 6% appreciation



Example 2 (flat market, like ON or Europe):



CAP rate 8%

interest rate = 4%

down payment = 20%

reserve = 5%

ROI is

(8% - 4%) / ( 20% + 5%) = 4% / 25% = 16% assuming no appreciation

or

(8% - 4%-2%) / ( 20% + 5%) = 2% / 25% = 8% assuming -2% decline

or

(8% - 4%+2%) / ( 20% + 5%) = 6% / 25% = 24% assuming 2% inflationary appreciation



The key factor is often the going in CAP rate which must be higher in a flat market like Ontario than in a growth market like W-Canada or TX .. but often is not .. or shall I say: not yet !



So even in a flat market you can make decent money if the going in CAP rate is high enough, in other words the asset price is low enough !



more thoughts here and more results of using this formula in flat, rising or falling markets, i..e equity gain not the only way to make money in RE: http://myreinspace.com/public_forums1/Real_Estate_Discussion/62-10711-Equity_is_not_the_only_way_to_make_money_in_real_estate.html

 

[aiden1983]

QUOTE (thomasbeyer2000 @ Aug 16 2009, 11:09 AM)
indeed .. with the comment that 2.5% interest is an unrealistic figure to use .. more like: 4% or 4.5% .. then it won't be so sexy assuming no appreciation ..



2nd comment: the formula assumes no reserve which is also unrealistic !



I use this formula:

(CAP - i + a) / (d + r) ..



where



CAP is CAP rate

i is interest rate

a is appreciation (on average over a 5 or 10 year term)

d is downpayment % (% of purchase price) .. usually 20-25% these days on a multi

r is a % of purchase price .. say 5% as a decent rule of thumb



Example 1 (rising market, like BC, SK or AB:



CAP rate 6%

interest rate = 4%

down payment = 20%

reserve = 5%

ROI is

(6% - 4%) / ( 20% + 5%) = 2% / 25% = 8% assuming no appreciation

or

(6% - 4%+4%) / ( 20% + 5%) = 6% / 25% = 24% assuming 4% appreciation

or

(6% - 4%+6%) / ( 20% + 5%) = 8% / 25% = 32% assuming 6% appreciation



Example 2 (flat market, like ON or Europe):



CAP rate 8%

interest rate = 4%

down payment = 20%

reserve = 5%

ROI is

(8% - 4%) / ( 20% + 5%) = 4% / 25% = 16% assuming no appreciation

or

(8% - 4%-2%) / ( 20% + 5%) = 2% / 25% = 8% assuming -2% decline

or

(8% - 4%+2%) / ( 20% + 5%) = 6% / 25% = 24% assuming 2% inflationary appreciation



The key factor is often the going in CAP rate which must be higher in a flat market like Ontario than in a growth market like W-Canada or TX .. but often is not .. or shall I say: not yet !



So even in a flat market you can make decent money if the going in CAP rate is high enough, in other words the asset price is low enough !



more thoughts here and more results of using this formula in flat, rising or falling markets, i..e equity gain not the only way to make money in RE: http://myreinspace.com/public_forums1/Real_Estate_Discussion/62-10711-Equity_is_not_the_only_way_to_make_money_in_real_estate.html




How did you guys come up with the deposit for investment properties when you first started? Did you start with a duplex and move up from there?

 

[Thomas Beyer]

QUOTE (aiden1983 @ Aug 16 2009, 05:30 PM) How did you guys come up with the deposit for investment properties when you first started? Did you start with a duplex and move up from there?
own cash .. then friends & family cash, then JVs, then syndications .. yes I started with a condo in 1997, then 2 more in 98 and 99 .. then one more and a 15 suiter in 2000 .. then a 20 suiter in 2001 .. and a 24 suiter in 2002 ..

hard to convince others to invest with your if you have no track record .. plus in 2000 you could buy assets in Edmonton in the 30`s/door for 15% down .. those would be worth 70`s to 100`s/door today .. and buying those today requires 25% to 30% down ..

more here:
5 ways to make money http://myreinspace.com/public_forums/General_Discussion/61-3347-5_ways_to_make_money.html

How to get started http://myreinspace.com/public_forums/General_Discussion/61-4391-How_to_get_started_.html

 

[aiden1983]

Thank you

 

[Nir]

Thomas, even using your formula and your numbers, change just (d+r) to 10% - possible for a new investor buying a 4-plex, and you get 32%.
Close enough to `MONEY``s number. Remember: reducing the down payment by half almost doubles your ROI. I agree a requirement to put down
20% or more does not allow such ROI.

 

[Thomas Beyer]

QUOTE (investmart @ Aug 17 2009, 08:23 AM) .. I agree a requirement to put down 20% or more does not allow such ROI.
keep in mind that 20% down is tough today with multiple`s .. and even with many singles ..

you can find better CAP rate buildings in smaller towns .. 8 - 10% is not so unusual .. harder in big cities where CAP rates are around 5-7% ..

downpayment is only one variable .. interest rate, appreciation and CAP rate are the other 3 key ones !

 

[MONEY]

QUOTE (thomasbeyer2000 @ Aug 16 2009, 11:09 AM)
indeed .. with the comment that 2.5% interest is an unrealistic figure to use .. more like: 4% or 4.5% .. then it won't be so sexy assuming no appreciation ..



2nd comment: the formula assumes no reserve which is also unrealistic !



I use this formula:

(CAP - i + a) / (d + r) ..



where



CAP is CAP rate

i is interest rate

a is appreciation (on average over a 5 or 10 year term)

d is downpayment % (% of purchase price) .. usually 20-25% these days on a multi

r is a % of purchase price .. say 5% as a decent rule of thumb



Example 1 (rising market, like BC, SK or AB:



CAP rate 6%

interest rate = 4%

down payment = 20%

reserve = 5%

ROI is

(6% - 4%) / ( 20% + 5%) = 2% / 25% = 8% assuming no appreciation

or

(6% - 4%+4%) / ( 20% + 5%) = 6% / 25% = 24% assuming 4% appreciation

or

(6% - 4%+6%) / ( 20% + 5%) = 8% / 25% = 32% assuming 6% appreciation



Example 2 (flat market, like ON or Europe):



CAP rate 8%

interest rate = 4%

down payment = 20%

reserve = 5%

ROI is

(8% - 4%) / ( 20% + 5%) = 4% / 25% = 16% assuming no appreciation

or

(8% - 4%-2%) / ( 20% + 5%) = 2% / 25% = 8% assuming -2% decline

or

(8% - 4%+2%) / ( 20% + 5%) = 6% / 25% = 24% assuming 2% inflationary appreciation



The key factor is often the going in CAP rate which must be higher in a flat market like Ontario than in a growth market like W-Canada or TX .. but often is not .. or shall I say: not yet !



So even in a flat market you can make decent money if the going in CAP rate is high enough, in other words the asset price is low enough !



more thoughts here and more results of using this formula in flat, rising or falling markets, i..e equity gain not the only way to make money in RE: http://myreinspace.com/public_forums1/Real_Estate_Discussion/62-10711-Equity_is_not_the_only_way_to_make_money_in_real_estate.html


If that formula works for you, then great!



I do not take appreciation into account when deciding what to offer. For the life of me I don`t know why you would. I base my offer on the value of the demonstrable cash flow.



Putting $100K into the deal and structuring it to return $36K per year on a property valued at $1.2M isn`t all that difficult once you get things in place. If they don`t generate cash, why do you have them?

 

[Thomas Beyer]

QUOTE (MONEY @ Aug 19 2009, 03:24 PM) Putting $100K into the deal and structuring it to return $36K per year on a property valued at $1.2M isn’t all that difficult once you get things in place. If they don’t generate cash, why do you have them?
less than 10% down .. where is this possible ?

36K / year cash-flow after mortgage payment on a 90%+ levered property ????

HARDLY today in a town with upside .. perhaps from a motivated seller in Windsor, ON or a pulp-and-paper town in BC .. where expected further depreciation of value is part of the price !

 

[MONEY]

QUOTE (thomasbeyer2000 @ Aug 19 2009, 06:10 PM) less than 10% down .. where is this possible ?

36K / year cash-flow after mortgage payment on a 90%+ levered property ????

HARDLY today in a town with upside .. perhaps from a motivated seller in Windsor, ON or a pulp-and-paper town in BC .. where expected further depreciation of value is part of the price !

My partners and I have a many year relationship with our private lenders and the deals are structured to benefit everyone involved.

If you haven’t already done so, you really should be developing some solid private money sources. Institutional lenders will just hold you back.

 

[Thomas Beyer]

QUOTE (MONEY @ Aug 19 2009, 07:10 PM) My partners and I have a many year relationship with our private lenders and the deals are structured to benefit everyone involved.

..
Why don`t you tell us a typical example or 2 you have done .. without devulging details on locations !!

 

[MONEY]

QUOTE (thomasbeyer2000 @ Aug 19 2009, 09:15 PM) Why don`t you tell us a typical example or 2 you have done .. without devulging details on locations !!
My thumbnail view of a deal is based on the demonstrated Net Operating Income, NOI.

The formula I use to determine my offer price is as follows:

NOI – Cash Flow = Max PI. From there I determine the maximum loan amount at my expected interest rate from my private lenders.

The offer price is the max loan amount + max down payment – estimated costs to me to close. Where (Cash Flow)/(down payment) gives the 3% or 36% ROI depending on whether we are using monthly or annual numbers.

If these numbers work, then the deal is worth pursuing. Otherwise, I move on.