Simple math on a good income property

While many factors go into what makes a good income property, there’s some simple math you can do to see if it’s worth considering further.  Here’s a real-life example of a property for sale that looks to be a great investment.

Listed in May, 2019 and still available as of October, 2019, this fourplex is located in Acton, part of the town of Halton Hills.  It’s located about an hour’s drive west from Toronto.  Acton has a population of around 9,500 and historically has been known for it’s tanning and leather goods industry.

This four unit property is located on a 60 x 88 foot lot near the major intersection of Main Street North and Mill Street East.  The list price is $950,000.

Each of the four (4) units has two-bedrooms, one washroom and their own separate entrance and single car parking.  All are currently tenanted.

Here’s what the income and expenses look like for the unit.

INCOME AND EXPENSES

We can see that at the current full occupancy and with the current expenses, we have free cashflows of approximately $4,300 per month.

With interest rates as low as they are, it makes sense to put as little down as possible on the unit and borrow the remainder of the purchase price.

If a buyer put down 20% and we paid the full asking price of $950,000, that would mean a down-payment of $190,000 and a mortgage of $760,000.

With current mortgage rates, it is approximately a $500 principal and interest payment per month for every $100,000 borrowed.  The $760,000 mortgage amount therefore works out to approximately $3,800 per month.

THE BOTTOM LINE

With our free cashflows in of approximately $4,300 per month and our mortgage of $3,800 per month, the property is generating about $500 per month in profit.

At current competitive mortgage rates (approximately 2.89% for a five year fixed term), the monthly principal and interest mortgage payment is more than half principal from the very first payment.  This means that of the roughly $3,800 per month in mortgage payments, $1,900 is in fact principal repayment.

With $1,900 in equity being added to the home each month and with free cash flows of $500 each month, we have an effective positive cash flow for the property of over $2,400 per month.  Every month that the owner has full occupancy and these costs, they are adding $2,400 to the balance sheet.  Not too shabby!

This simple math tells us that the property is worth considering further.  A more detailed analysis where vacancy and maintenance are taken into consideration is the next step before a purchase decision can be made.  By focusing on some simple math at the outset, investors can quickly decide if a potential property may be worth adding to their real estate portfolio.