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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