Case Study: Real Estate is an Expanding Investment.

One of the most compelling reasons for buying and owning rental investment real estate is the phenomena of expanding value and expanding return on investment. This occurs as a well bought and well maintained property experiences income growth and decreasing debt over the investment period. 
As rents increase (modestly) year to year, and mortgages are paid down on a regular, escalating basis, the prudent and patient investor can watch while other people (tenants) work to pay off his property - bought (largely) with other peoples' (the bank's) money.

The following Case Study illustrates dramatically how this can be done. This analysis is of a property that I currently have listed for sale in Vancouver at 225 West 12th Avenue...

The Property: A legal 6-plex containing 3 - 1 bedroom suites and 3 bachelor suites in a well maintained building, with an area of approximately 3650 sq. ft. (including laundry, storage, mechanical areas etc.) It sits on a 50" x 124" RT-6 zoned lot approximately 2 blocks to Vancouver City Hall. The roof is newly replaced, the draintiles have been redone and an underground oil tank has been removed. There is a rear yard garage containing 3 separate single car bays, each with their own doors and electrical power.

The Income and Expenses: The current rental income is $4,030/month from the 6 suites, laundry and garage rental. This income may be immediately increased by renting out 2 of the garage bays (currently used by the owner for storage) for $125/month each.

Current expenses (adjusted for the latest Gas and Hydro increases) are $10,000/year, plus an additional $2,000/year for maintenance reserves. The Net Operating Income (NOI) is:

Rental Income (including garages): $4,280/month
Expenses (including reserves): 1,000/month
Net Operating Income (NOI) $3,280/month or $39,360/year. 
We are predicting that Net Income will increase at a rate of 3% each year over the 5 year analysis period. This assumption is supported by historical rental information from CMHC, and by the fact that Vancouver has been experiencing a flat rental (and real estate) market for several years, and is now poised for a period of higher demand. The rental increases may not be as "straight line" as the analysis shows, but will average out over the 5 year period.

At a purchase price of $450,000, the analysis for this property is as follows:

Investment Analysis for Legal 6-plex, 225 West 12th Avenue, Vancouver B.C.

Purchase Price: $450,000 Capitalization Rate: 8.75% 
Expense ratio: 23.4% 
Net Income (NOI): $3,280/mo. or $39,360/yr Gross Rent Multiplier: 8.76

Financing: Purchased with a $337,500 (75% loan to value) 1st mortgage @ 7% interest, 5 year term, 25 year amortization and payments of $2,364/month or $28,368/year...

Down Payment: $112,500 Net Income (yr. 1): $3,280/mo or $39,360/yr 
Closing Costs: 8,000 Less Debt Service: 2,364/mo or 28,368/yr 
Total Investment: $120,500 Before Tax Cash:Flow: $916/mo or $10,992/yr

The Mortgage Balances and the mortgage paydowns at the end of each of the 1st 5 years:

Year 1 Year 2 Year 3 Year 4 Year 5 
$332,257 $326,641 $320,624 $314,179 $307,275 
$5,243 $5,616 $6,017 $6,445 $6,904

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