Calgary Realtor - Karen Patterson

“Karen worked so hard to sell my home in Auburn Bay... even negotiated the deal while I was away in the States. Appreciate her communication, dedication and hard work!”  -Audra Zawada

Cell: 403-370-6442

Office: 403-259-4141

Email: karen@movingyouforward.ca

Calculating a Property Investment - it’s a buyer’s market, eh?

"Real estate cannot be lost or stolen, nor can it be taken away. Purchased with common sense, paid for in full, and managed with reasonable care, it's the safest investment in the world" - Franklin D. Roosevelt 

 



Not really news at this point, but we are definitely still in a buyer’s market across the city of Calgary, let a lone the province. I will speak of only Calgary as that is where I conduct my real estate practice, although I am licensed for all of Alberta. Just to review, a buyer’s market is characterized by the following:

 

  • High level of supply (inventory of homes to buy) with a low(er) level of demand (less buyers making offers);
  • Absorption rate: number of months it would take to sell off every property starting today if no new properties came on to market;
  • Seller might have to list at a lower price than during a seller’s market when absorption rate is high;
  • Buyers can be picky and choosy;
  • Buyers can / will wait for the right one;
  • Buyers have the negotiation power;
  • Buyers less likely to engage in multiple offer situations

 

What this can mean, depending on who you speak to, is that it is a great time to purchase properties, but not the best time to sell. So, if someone has the means to purchase an investment property or two, now would be a good time to do it. (I would strongly suggest first talking to your personal accountant/mortgage broker/bank before running out and adding stock to your property portfolio).

 

Perhaps you are a landlord looking to expand his/her rental property portfolio or would like to take advantage of the buyer’s market and start a property investment portfolio. With interest rates so low, it is a good time and lots to choose from, somewhat of a smorgasbord to choose from in terms of inventory, style selection, price point, locations, etc. However, property investors looking for new rentals should know that the high end corporate executive rental market has fallen off, it isn’t anywhere close to what it was in 2012-2014, or even 2015. Many landlords in Calgary have had to take a hit of 20-30% or so from rents asked 18 months earlier. Sure, the corporate market will pick up, however, when that happens we aren’t sure. You can go onto www.rentfaster.ca and see how many homes are for rent in a particular style or community.

 

Taking the balanced route is a good way to purchase in this market, especially as there is no real forecasted recovery in sight until end of 2017 or into 2018. Spread the risk in the mid level, where you capture the largest resale buyer audience and the rental market.  Kind of like playing a swift game of Monopoly = you don’t want to just end up with Park Avenue and Boardwalk, you want to spread the risk. Too expensive to maintain, where as other properties on the board are easier to maintain, and still reap rewards. Investing in the city during this market condition, or any market, isn’t much different. Let’s take a closer look at some useful calculation tools.

 

Loan to Value Ratio:

A ratio comparison between the value of your loan and the value of your home.  To determine your LTV, your lender will divide your loan amount by the lesser of the home's appraised value or purchase price.  For example: Buyer puts down $75 000 on a $500 000 home; LTV ratio would be 85% required loan to complete the purchase. The higher the LTV, the more risk involved for the lender.

The bank could ask for a home appraisal be conducted to assess the value of the home prior to providing financing. For more information or to calculate your LTV, contact your mortgage broker or banker.

 

The Capitalization Rate:

The capitalization rate, also known as the cap rate, is useful in evaluating and assessing a real estate investment. It is the rate of return on a real estate investment property based on the income that the property is expected to generate. The capitalization rate is used to estimate the investor's potential return on his or her investment.

 

Example one:

Detached Tuscany home sells for $545 000

  • •3 / 4 bedrooms, 1980 sq. ft., double garage attached, modern interior

$2400 (Rentfaster) x 12 = $28 800 rental income 

Expenses: taxes ($3500/year), maintenance, utilities, snow removal/lawn care, etc. = $20 000 NOI

CAP RATE = 20 000/545 000 = 3.67 CR

  1. The investor would make 3.67% profit each year
  2. Time to repay: 27 years (roughly)

Example two:

Townhouse Tuscany sells for $335 000

  • 1260 sq. ft., 3 bedrooms, double attached garage

Rental $1700 / month x 12 = $20 400

Expenses: taxes ($2050/year), utilities, condo fees ($184/month), HOA $189/year = $15 900

CAP RATE = $15 900 / $335 000 = 4.75 CR

  1. Investor would make a 4.75% profit each year

Time to repay: 21 years (roughly)

 

I hope that this article has been of help, and has armed you with some food for thought regarding how to make the most of your investments in our present market conditions. Feel free to contact me directly if you have any further questions or need more information, or would like a free home evaluation.

 

Thank you for your time!


 

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