Big Money In Investing

by Darrin DeRoches October 21 - 27, 2010

The investors put an offer in a great student house and then they started to rethink the total investment.  When figuring out their return, they started to second guess the deal itself until I had to break it down for them.     Let’s say you are buying a $300,000 investment home and you put down 20 per cent, so your mortgage Is $240,000.  So if you do a 35 year mortgage at around 5 per cent, you will be paying about $1,300 a month.  Gas, hydro, water and insurance will cost another $400, plus taxes at a max of $300, and you are into the property for $2,000 a month.  The six bedroom student house brings in $2,550, so you profit a big whopping $550 a month.  So what’s the big deal on the return?  You have a $300,000 house bringing in just $550 a month.     It is a 10 per cent return, for starters.  You invested $60,000 and are making over $6,000 a year – hence 10 per cent. Plus the house will grow in value by 2-3 per cent a year in Hamilton and after  five years you will have paid down the mortgage a little (depending on your terms), so that will account for another 2–3 per cent.  The reality is that you are making a 15 per cent return. Now it starts to sound like a great investment.  Tell me where else you are going to make a 15 per cent return and still have the potential to make more.     I sold a house in old Oakville three years ago for $400,000. They did a nice kitchen and bathroom remodel and they just had it appraised for $598,000. So take out the $50,000 for the work and they made $150,000 in three years. So figure out that return: depends what they put down, but they made $150,000 in three years.  Big money! You always hear these stories, but these were two that happened lately.     The moral of the story is quite simple.  Invest in real estate.  In everything there is risk and reward, but in real estate you can always make money in the long term. Sure, there are up and downs, but the risk is low and real estate in our area will always hold true. The beauty of the student rental is they can add one more room to the house and add another $5,000 in yearly income to bring it to almost a 20 per cent return, so you’d think the deal is a slam dunk.  I give it a 50/50 shot on the deal going through, since they are first time investors and if it was easy, everyone would have the stones to do it!  V Darrin DeRoches is a local real estate and mortgage broker. He can be reached to answer questions, comments or stories about real estate experiences through this weekly column at mail@uniquerealty.ca.