Case Studies

Many of these Case Studies were originally published years ago, but we believe that the points and principles presented in them are relevant and apply today.  We have updated them in terms of their subsequent sales history and current values.


 

Case Study: Investment Property Equals Very Affordable Home!

The Property: A small, 3 level triplex (legal duplex with unauthorized basement suite) in the Mount Pleasant area of Vancouver. The building is approx. 2100 sq.ft., with 3 1 bedroom suites on a 40’ x 66’ lot. The condition is good, as the owners had done renovations during their 4 years of ownership.

The property generates rent of $1,750/month, with tenants paying heat and light. Taxes and expenses are roughly $350/mo.

The Sale: The property sold for $260,000 to an owner occupier planning to live in the smallest unit, and collect rent of $1,250 from the other 2 suites. Down payment was $65,000 (25%) and a 1st mortgage of $195,000 was arranged a 6.25% on a 5 year term, 25 year amortization. Monthly payments are $1,276 plus $90 net taxes. The selling Realtor observed that “Someone with a paper route could afford to own this house!.”

The Investment Analysis: For an investor, the initial “numbers” look like this: Down payment of $68,500, including property purchase tax and closing costs: 1st year net income of $16,800 less $15,320 debt service = $1,480 before tax. Assuming that net income will increase at an average rate of 3% year, the net income after 5 years will be $18,910, or $3,590 after debt service, and the mortgage balance would be $175,800. At a capital appreciation of 3% per year (very conservative), it would be worth $301,500 after 5 years. At that point, the investor could refinance or sell. If the property is kept, the monthly net income of $1,575 could support a new 1st mortgage for the balance of $175,800 to a rate of 11% - providing some interest rate “risk insurance” for the owner. If Interest rates stayed the same (6.25%), the income would permit the investor to “take out” his original investment of $68,500.

If the property is sold at $301,500, the net proceeds (after commission and mortgage balance) is $113,370. The internal rate of return to the investor for the 5 years (before tax) is 13.5%.

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