QUOTE (afshinrein @ Oct 23 2010, 10:00 PM) Ok. I heard it. I think it is fare to give you the whole picture as is.
The value of properties I get is around $300,00 this gives me $1500/month of rent, base on 35 years amort. with variable rate and I put 20% down. Do the calculation. You should have $150 to $350 positive cash flow. These houses are 2 to 6 year old. Tell me what is wrong with this sweet, high appreciation deal. By the way, I agree with buy and hold (a fool will sell in 2 years). If you know of a better deal, please let me know.
Hi Ashfin,
First of all, why did you start this post? Is it to promote Milton with investors or is it to ask the opinion of REIN members on this board on your deal?
If you screen the above numbers on gross rent, I calulate that you collect 12x1500= $18000 gross rent annually (not counting vacancies). That means a gross rent/purchase price ratio of 6% which based on REIN`s initial screen criteria is too low (requires 8 to 10%).
Also, since you do not report monthly operating expenses, we cannot estimate what your NOI and cap rate are. For Calgary right now, you may buy condominium apartments and townhouses with a cap rate between 3 and 4%. Not spectacular but in light of Calgary`s average annual appreciation of between 6 and 8% not unreasonable.
In Eastern Canada, cap rates are usually higher, if I understand correctly they are closer to 5 to 6%.
Why are cap rates important? Well you can then very easily check them against mortgage rates. If the cap rate is higher than the mortgage rate your leverage will increase your cash flow, while when lower it will reduce cash flow. If you, as many REIN members suspect, that interest rates are likely to rise over the coming 5 years, say by one or 2 % so to an interest rate of 4.5 - 5.5%, then chances are that you will generate negative cash flow.
If you already start out with moderate cashflow, like $50 dollars per month your chances of turning to negative cash flow are high. If you have high leverage (LTVs of 20% or less) and amortization of 35% with very low interest mortgages (variable rate) then you are likely to be exposed to significant negative cash flow pretty soon when rates rise.
This affects an investor`s discretionary income as well as his ability to raise future mortgages. To protect yourself you should consider locking in (a 5 year mortgage is currently pegged at 3.5%) and reducing your leverage say to 30 or 35%. This should bullet prove your cash-flow for the future.
Cash flow is ensuring you being able to finance future opportunities and to build a reserve fund against unforseen renovations. It will prevent your investors from a forced sale. Creation of tax losses is a bad investment strategy - any investment should be able to fly on its own merit and it should be self-funding (i.e. the investor does not have to add capital) over the life of a project.
The overall merit of the investment is also measured using the ROI (return-on-investment) measurement, how much is your initial investment increasing per year. It comprises positive cash flow plus appreciation (and mortgage pay down). The anticipated appreciation comprises a significant speculative element. Cash flow determines the capacity to hold on to a property without a forced sale while ROI determines your anticipated total profits.
Your project does, at first sight have very marginal cash flow (how are you financing an unexpected reno of $5000.00 or an increase in interest rates?). Nor, with 5% annual appreciation does your ROI make a 15-20% ROI something most of us are aiming for. Hence the skeptic response by many posters.
