Investment Property Year 2 Update – 17% ROI

Steady returns in the real estate market

In early 2020 I bought an investment property in the lower mainland for $450,000.
It’s been 2 full years since I’ve owned it.

Let’s see the numbers for this past year.

 

Second year operating profit = 6.74%

My rental income was $1,800 a month or $21,600 a year.

The cost to manage the property was $11,900 in total, which include:
*Mortgage interest = $7,450
*Strata fee $2,460
*Property tax $1,600
*Insurance $390

So my net gain from operations is ($21,600-$11,900) which is $9,700/year.

 

Annual Profit = Net gain / Cost of investment

Net gain = $9,700
Cost of investment: $144,000 
(The initial capital I put into this property)

Annual Profit = $9,700 / $144,000 = 6.74%

Operating profit is only part of the story. I’m counting on price appreciation as well.

 

 

According to the most recent BC Assessment data, my investment condo is worth $750 per square feet. Up from $725 last year.

This puts the value of my condo at roughly $479,000. Which is $15,000 more than last year.

With my net operating income of $9,700 and an additional $15,000 of appreciation, my second year of being a landlord produced $24,700 of gains before taxes. 🙂

My initial investment was $144,000, so my ROI is ($24,700/$144,000) = $17.15 for 2021.

 

I’m pretty happy about the 17% return. This is slightly higher than the 16% return I earned in the previous year.

 

 

Year 3 Expected ROI = 18%

For this third year in 2022, I’m expecting the ROI to be 18%.

I don’t want to count all my chickens before they hatch. But there are a few reasons for this higher guidance.

  1. Lower mortgage expense. Every month my mortgage balance shrinks by roughly $900. This means my interest cost gradually decreases throughout the year.
    -In 2020 I paid $7,680 in mortgage interest.
    -In 2021 I paid $7,450.
    -In 2022 I expect to pay just $7,200.
    Every year this expense falls by a larger amount. I have a 5 year fixed rate mortgage at 2.44%.
  2. I’m raising the rent from $1,800 to $1,825 per month. I hope my tenant won’t mind too much. 😅
  3. Higher condo valuations in 2022. Prices of detached houses and townhouses increased a lot last year. Condo price growth lagged by comparison. I think this year is when condo prices will play catch up. So I expect at least 5% price growth for apartments in 2022.

 

As I’ve mentioned in previous posts, even in an expensive real estate market there are still profitable real estate investment opportunities. 🙂

That being said, there are a few important points to disclose. Most of my readers are too kind to voice critical opinions, so let me plays devil’s advocate.

 

Why real estate investing is not for everyone

First, the idea that you can buy a rental unit in the GTA or Metro Vancouver and earn 17% ROI is probably not going to happen, unless you’re willing to put in the initial work and planning. I don’t want to give the impression that you can buy any random listing on the MLS, and watch the money come in, lol.

In my case I was searching specifically for low-rise apartments with high cap rates. I then vetted many potential renters before choosing a suitable tenant.

If you don’t have the patience to put in tens of hours of initial work, then you may only get a 10% return on your investment property. Maybe that’s perfectly acceptable depending on your goals. 🙂

And if you work even harder than I did, and renovate/rehab an older unit, you can probably earn 20% ROI or higher. The real estate market rewards any investor who’s willing to put in the time and effort to learn how it works. Like any other venture, the more sweat equity you put in, the greater the financial benefits you will receive over time. 🙂

The second critique would be that despite a decent 17% ROI, I would have made more money had I just invested in a diversified equity index fund. Last year the TSX, Canada’s stock market benchmark, returned 22%. And the U.S. S&P 500 returned 29% completely passively to investors. Those are much better returns than what my investment condo produced.

I like to own both asset classes because I don’t want to miss out on gains either in real estate or the stock market, lol.

The third issue is the high transactional costs associated with real estate investing, which can be 5% to 10% of a property’s price. I have a personal policy of holding real estate for at least 6 years before selling, which helps to mitigate the friction cost.

This is why you need to make a relatively higher return on real estate than for financial assets. For example, if you buy a stock and it goes up 10%, your after tax return might be 8% if you sell it. However if you buy and sell a rental property with a 10% price appreciation, your net return after closing costs, agent’s commission, and land transfer tax, might be whittled down to just 4% or 5%, depending on your holding period. 🙁

 

Elevated prices

Real estate prices look to be going higher over the next few years, especially in larger cities. The Bank of Canada had the chance to make the cost of borrowing more expensive last week and they showed their true colours. They left the benchmark rate unchanged despite inflation running at 4.8%, which is a 31 year high.

This is not a surprise. Many times I’ve mentioned the forecasted 3 to 4 hikes this year sounds way too optimistic.

Let’s not forget, the people who set these monetary policies have their financial assets in the stock market just like other investors. There’s no incentive for them to suppress the market by raising rates unless they really have to. Oh well. I don’t make the rules. I just play the game to win. 😉

Here’s a 5 year progression of my investment property annual returns.

  • 2020 – 16% actual
  • 2021 – 17% actual
  • 2022 – 18% expected
  • 2023 – 20% expected
  • 2024 – 22% expected

The next time I renew this mortgage I will probably go with a variable rate.

 

______________________________________
Random Useless Fact:

Emmanuel Macron’s stepson is older than he is.

 

 

 

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TY_
TY_
01/31/2022 10:46 pm

Thanks for the detailed post, as always. I find it very helpful as I have been looking for the right opportunity in Vancouver for some time. In your return calculation, don’t you need to reflect the principal component of the mortgage payment you make each month?

Graham @ Reverse the Crush
02/01/2022 6:10 am

Thanks for sharing the detailed investment property update, Liquid! I love how you break down the operating profit and guidance. It’s neat to see the incremental progress from year to year and how your returns increase. That random fact is wild lol

Moe (Moementum Finance)
02/01/2022 6:58 am

Thanks for sharing your return on investment from your investment property. You’ve managed to keep the costs quite low which is amazing. For my investment property, unfortunately the condo fee is very high. Add to that lower rents in Edmonton, resulting in currently negative returns. Though I must add initially I bought the condo as a principle residence and not as investment property. Keep it up, Liquid!

Moe (Moementum Finance)
02/02/2022 9:27 pm

Yeah, totally. Looking forward to your next post.

AnotherLoonie
02/01/2022 6:40 pm

Great update, Liquid. Happy to see your rental is doing great. Time for another soon? 😉

Paul
Paul
02/02/2022 2:13 pm

Love the blog!

Looks like you’re in a condo – any consideration for future maintenance costs?

Maria @ handfulofthoughts.com
02/02/2022 6:13 pm

Thanks for the transparency Liquid. As a fellow real estate investor I have a couple of questions:
– were there not any extra miscellaneous costs for this property? Cost to market for a tenant? Any minor repair costs? Others?
– have you factored in any increase in strata fees? They may not stay consistent over 5 years.

Just my 2 cents.

Rajeev
Rajeev
02/04/2022 3:44 am

Real estate is one of the best ways to make money. Stable and predictable cash flow is vital in times of volatility and uncertainty.

Ben @ Smart Borrowing
Ben @ Smart Borrowing
02/06/2022 8:09 am

You have amazing ROI considering how overpriced is real estate in most cities in Canada. I was looking for investment property in GTA, but I can’t find anything cash-flow positive even with 30% down. It is that bad!

AlW
AlW
02/06/2022 12:15 pm

I had thought about become a MURB owner over the years but could never really “get there”… but then along came 2021… In Feb 2021 I got there my father was completing a renovation of a MURB he had owned since the mid 80s – was just supposed to be a simple window replacement nothing too fancy, but then he had a major medical event and was in a coma/heavily sedated for several months. The building was torn apart, my mother didn’t want to take the project on so I started replacing what needed redone. There was some water issues leading to significant wall rot, once we got into it the larger it got. In May when my father came around conscious wise mom and dad agreed to sell the building to my brother and I for 75K, the amount that was owing on a HELOC. At this point we had already had probably more than 100K into the building and stuff was going full tilt ahead. We inherited 2 tenants and fixed the other 2 empty units, moved the tenants over to the new units and then fixed the other 2 (it was like musical chairs). New windows, new… Read more »

DivHut
02/21/2022 12:21 am

Great update. I like the idea of owning real estate. These days owning hard assets will ensure you can maintain or beat current inflation rates while generating passive income too. You are right… it isn’t for everyone but if you can manage the stresses that come with a property then go for it.