Updated: Jan 12
It is very clear that rental properties must be in the right location and with the right numbers and it may not work well without getting both of those factors right. And it is very easy to make a mistake choosing a Condo for Investment that might generate looses instead of the wealth you expect.
What do “right numbers” mean?
1. Using Condo asking price and price of that Condo rental, we can calculate cash flow.
2. Knowing Maintenance Fee, Property Tax, Insurance cost we can calculate (Rental Income or Cap Rate).
3. Also, we can find out the average price growth for a few years before and calculate an annual average Market Price Growth of the Condo or just last year growth.
Finally, we can calculate one of the major indicator that measures the total amount of return on a particular investment, relative to the investment's cost is ROI. ROI is the amount of annual Net Operational Income of Rental Property (or Cap Rate) and annual Property Value Growth divided by the current Market Value of the property.
If the numbers are not what we expected, like negative cash flow or Cap Rate (that usually 5-6 % but it is 4.5 % maximum (neglecting a mortgage interest and any alternative cost) for Downtown of Toronto now and if a total ROI is less than what we would wget from a savings account or from a mutual fund, we could just evaluate the factors involved in why this is. Is the asking price too high? Is the rent too low? Move on to the next and continue crunching numbers until they make sense as an investment. But it is too long annoying process and it might take weeks and months!
Famous investor Warren Buffett, who buys businesses for billions of dollars at a time, said:
“If you need to use a computer or a calculator to make the calculation, you shouldn’t buy it”… Any potential investor should be able to make a decision about purchase very quickly, spending 3-5 minutes for calculation on a napkin. We made some preliminary calculations that might help you to save your time.
Let's try to take a look at the main Key Performance Indicators for such kind of Investment. The indicators calculated based on annual data available to public (ww.realtor.ca, condos.ca, strata.ca and TREB's statistical reports). The Report Ranking Toronto Downtown Condos based on ROI shows that not all the Condos with the highest ROI (12 % - 15.6 %) are worth to buy. The first 10 Condo buildings have the highest MVG rank (within the first 16s positions) and those Condos Annual Market Value Growth (MVG) indicator is between 8.1 % - 12.4 %. Basically, such growth is a natural price behaviour for the first 3 year since Condo registration. Almost all of 10 high ranked Condos are new (2016 -17 years of registration) excluding just one - "The 393 On King" that is 2001 year registered.
But all those 10 Condos generate very low Net Rental Income (2.75 % - 3. 91 %). Taking into account that the breakeven point is 3.0 % and the main contributor to ROI is MVG (Market Value Growth) It means if the price stop growing up the investor has a high risk of losses!
Also, the data below shows that one of those 10 Buildings has RI 2.75 %/year (that is even lower than a breakeven point 3. 0% ) meaning that in the case a Property Market Value does not grow up it is a high probability to get looses from such Investment.
Let's rank Condos based on RI (Average Annual Net Rental Income). The chart below shows
that 10 the highest ranked Condos based on RI (between 3.83 % and 4.52 %) have Net Rental Income just a little bit higher (by 0.83 % - 1.52 %) than a breakeven point (3.0 %). It means 10 top ranked Condos might generate a Net Income that after mortgage expenses and after subtracting alternative cost (a bank deposit with 2% rate) - 0.83 % - 1.52 %. But those Condos have quite high average annual market price growth (4.02 % - 6.37 %). So, the Condo Investment becomes much more profitable in the case of positive forecast regarding Market Price Growth. But if the price is stop growing, we need to assess just Net Rental Income.
The interactive table below allows to rank Condos by any Indicator
Let's take a look at the full list of 350 Condos in 2 tables below. To understand what kind of KPIs combination would be helpful for Investor. The first one shows RI, MVG and their Maintenance Fees and the second chart show ROI and its structure (RI and MVG) and all condos MVG
Taking into account that the first 10 Condo in a rank based on RI shown a high annual Market price Growth 3.87 % - 6.37 %/year we could make a conclusion that RI is the best Indicator for decision-making for short-term investor that allow to have a reasonable insurance of Investment profitability.
For better understanding relation ROI, RI, MVG indicators and the current year price growth (the right graph) we could check the graphs below
Taking into account balanced indicators
- Rental Income
- Average Annual Market Price Growth and
- 2018 - 2019 year Market Price Growth
we could create a list of Condos that have a high probability generating the highest Net Rental Income.
Certainly, It is just an opinion and everybody making an individual choice. Hopefully, those Indicators might be useful for a decision-making process and make this process fast and pleasant for a potential Investor. And those decisions will serve Investors' goals perfectly!