Rental Properties (long term)
Tuesday, December 20th, 2011Rental properties can quite often make great long term investments. I myself own a few and plan to accumulate more in the future. Now there are many books out there that explain why its a good idea to buy rental properties, but let me save some time and summarize it for you. In its simplest form:
It is important to look at real estate in cycles – in every cycle there are ups and downs, but the longer you hold onto a property, the more likely it is to mediate towards the average (example – a cycle may see a period of growth of 10%, as well as a period of 0% but it would average as 5%).
Canadas houses have appreciated on average (depending on the area) 5 – 6% /year. That being said, Canadas average inflation rate over the last 100 years or so has been 3.26%. Now that extra 2% isn’t alot, but this isnt where the returns come from.
Say for example you buy a $200,000 condo with 25% down ($50,000 investment). You have an average 25 year mortgate at a rate of 4%.
From this you can expect to pay about $87,000 over 25 years in interest (or 290/month)
But say you rent your place for $1200/month. Subtract property taxes, insurance and the interest and you are still left with about $600/month going towards the principal balance. Over the course of 25 years that is almost $100,000 paid down on your principal.
This rental income would account for an extra $4000/year on your initial $50,000 investment (8% ROI + 2-3% annual inflation). Of course, repairs, rental vacancies, flucuating interest rates and other factors need to be considered, but if you look at this way – it can be a very safe long term investment providing a solid return on investment.
