5% Down - Cash Flow Problem - 25 Year Amortization

[woodd8]

I am new to this, attending the ACRES session April 18/19 in Toronto. I`m starting out with minimal capital, and am considering the CMHC second property with 5% down. I`m running into issues to make any scenario cash flow, when I`m financing 95% and making mortgage payments over 25 years (required in the second property policy). Also, I`m considering the variable mortgage rate, which is currently around 3.1%, but inevitably will go up, so what number do I use to ensure it cash flows? I don`t want it to have negatively cashflow a couple years from now when Prime could ba back up around 6%. Is there a rule of thumb for what mortgage rate to use to ensure a property will cashflow (whether your initially take a variable or fixed rate)? Here are the numbers I`m working with as an example (no specific property yet).

Purchase Price $225,000
Monthly Rent $2000 (split into two units)
* This fits into the 10% rule that Don refers to in his book, so theoritically it could work

Property Taxes $2500/year
Insurance $1000/year
Repairs Fund $1200/year (5% of rent)
Property Management $2400/year (10% of rent)
Utilities $3600/year
* I also assume a 5% vacancy rate, so only using 95% of rent for cashflow calculations

Mortgage Payment $1050/month (3.1%, 25 years) negative $42/month cashflow
Mortgage Payment $1405/month (6%, 25 years) negative $400+/month cashflow

So I`m wondering where I might be doing this wrong? Am I overestimating expenses (tyring to be conservative)? Am I just financing too much to have positive cashflow? Do you need a 35 year amortization or interest only mortgage to create cashflow? Is the price of the home just too high?

Any help would be greatly appreciated.

Thanks,
Darren

 

[kboughen]

QUOTE (woodd8 @ Mar 23 2009, 08:15 AM) making mortgage payments over 25 years (required in the second property policy).
Hi Darren,


Congratulations on making the decision to attend ACRES in Toronto. I will be there as well.


5% down deals are hard to cash flow to begin with, especially if you are working with a 25 year amortization. Fortunately, 35 year amortizations are available for rental properties with 5% down. If you are concerned about rising prime, why not use a five year fixed rate at 4.1%. I recommend you get a Mortgage Broker experienced with investment real estate on your team, feel free to contact me for more information.

 

[invst4profit]

In my opinion the 10% rule is a bare minimum and may take 5 years to get positive cash flow.
Major problem I see is you are paying utilities. Although rent may be lower with utilities extra if it still meets a minimum 10% you would be better off in the long term.

My advice, unless rents are obscenely high to compensate , never buy any property that does not have separate metering for all utilities.

$225,000 is there asking price, offer a number that works for you, make a hundred offers that work until one gets accepted.

 

[PeterKinchMortgageTeam]

QUOTE (woodd8 @ Mar 23 2009, 05:15 AM) I am new to this, attending the ACRES session April 18/19 in Toronto. I`m starting out with minimal capital, and am considering the CMHC second property with 5% down. I`m running into issues to make any scenario cash flow, when I`m financing 95% and making mortgage payments over 25 years (required in the second property policy). Also, I`m considering the variable mortgage rate, which is currently around 3.1%, but inevitably will go up, so what number do I use to ensure it cash flows? I don`t want it to have negatively cashflow a couple years from now when Prime could ba back up around 6%. Is there a rule of thumb for what mortgage rate to use to ensure a property will cashflow (whether your initially take a variable or fixed rate)? Here are the numbers I`m working with as an example (no specific property yet).

Purchase Price $225,000
Monthly Rent $2000 (split into two units)
* This fits into the 10% rule that Don refers to in his book, so theoritically it could work

Property Taxes $2500/year
Insurance $1000/year
Repairs Fund $1200/year (5% of rent)
Property Management $2400/year (10% of rent)
Utilities $3600/year
* I also assume a 5% vacancy rate, so only using 95% of rent for cashflow calculations

Mortgage Payment $1050/month (3.1%, 25 years) negative $42/month cashflow
Mortgage Payment $1405/month (6%, 25 years) negative $400+/month cashflow

So I`m wondering where I might be doing this wrong? Am I overestimating expenses (tyring to be conservative)? Am I just financing too much to have positive cashflow? Do you need a 35 year amortization or interest only mortgage to create cashflow? Is the price of the home just too high?

Any help would be greatly appreciated.

Thanks,
Darren

In order to submit for approval under the second home program, it does actually need to be a second home - intended for residency by you or an immediate family member on a rent free basis. If it is to be a rental property, why not have it approved as a high ratio rental, you could then get a 35 year amoritization. The longer the amoritization, the longer it takes to pay off the mortgage, and therefor the lower the payment. With a lower payment, you have stronger cashflow.

 

[Thomas Beyer]

This is common if highly levered.


Solution:
a) more cash down, or
b) longer amortization, or
c) lower purchase price, for example in a smaller property or in a smaller town
d) lower expenses, e.g. tenant pays for utilities
e) higher rent (to purchase price ratio)
f) different asset class with a higher yield (apartment buildings, office tower, retail mall, campground, trailer park ..)

 

[woodd8]

Thanks everyone for your input. I now realize I CAN do this with a 35 year amortization, which makes the numbers work better. Also, I should have the tenants paying the utilities.

 

[invst4profit]

What province are you in?

If you are in Ontario it is advisable that you read and fully understand the RTA before venturing into rental properties.
Ontario is not landlord friendly and getting a bad tenant can be a long drawn out expensive process. There is much to learn about tenant rights that makes tenant screening crucial to success.

 

[MikeMcCrae]

If the property is a rental, do not try to buy it on the second home program. A rental is a rental!