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Note: This column was written in 2001, so the dollar figures are out of date, yet the points certainly still apply. -Gerald
It's no way to get rich quick, but buying one or several condominium homes as investments can be part of a larger strategy to increase your wealth faster than working only for an hourly wage. Don't take my word for it. Let's listen to financial planning columnist Brian Costello, who writes regularly in the Calgary Herald.
"Many people are aware of the strategy of highly-financed rental real estate," Costello wrote in a recent column (Herald, Dec. 24, 2000). "You make a very small down payment with a huge mortgage. The rents cover the cost of servicing and managing the building but, if they don't, you get a tax writeoff for the difference. You increase the rents, pay down the debt, and hopefully sell at a profit."
Costello's passing reference was part of a column focused on other investment tools. His-and my--first advice would be to consult a professional financial planner. If that advice supports a real estate investment, consider the range of options in Calgary, from single-family homes to duplexes and four-plexes, individual condominium apartments or townhouses through to entire rental apartment buildings.
The average working stiff isn't able to swing the purchase of a multi-suite rental property, either in terms of the cash needed or the hands-on maintenance involved. For those of us who must start small, or who want to diversify a little after being rattled in the stock market, one option is single condominium units, be they brand new (perhaps not yet even constructed), or older condo homes in established neighborhoods.
Calgary is blessed in that rental vacancy rates are low, with newcomers and locals clamoring for good-quality rental accommodation. These are often hard-working people who will some day buy for themselves but, meantime, need a decent home without coming up with a down payment. Yet Calgary is not an over-priced real estate market (Hello, Vancouver!). For less than $100,000 an investor can shop well in our city for condominium homes that will return rents of $700 to $800 or more per month.
While there are formulas for calculating rates of return, a simple rule of thumb is to target a one per-cent of purchase price return in rent per month. Thus a modest $75,000 condo townhouse in north-east Calgary should return you $750 per month in rent. If not, remember Mr. Costello's comments about the tax write-offs. In lower-priced real estate markets-and neighborhoods in the city-rents can match or exceed the one per-cent target. In classy neighborhoods, in new buildings, or closer to downtown, they may not meet that criteria, but those are also likely to be appreciating more quickly.
Let's use one of my own recent investments as an example. I just bought a one-bedroom, downtown-view, condominium apartment in a concrete building for just over $90,000. The seller allowed me to assume the mortgage, and I paid the $13,000 difference in cash. The rent of $800 per monthly matches almost to the penny the initial monthly mortgage payment, the condo fees and the taxes. Maintenance of the suite and management of the tenant I do myself at virtually no cost.
Close-in suites like these have been appreciating at more than five per cent annually in recent years-compounding. Rents have been rising to keep pace. Each year, then, five per cent of $90,000 is $4,500, which works out to a 34.6% return on my $13,000. As well, the mortgage principal is declining. A higher rate of inflation would amplify my progress. Mr. Costello is starting to make sense.
Mind you, there are any number of complications that could arise. Market values may not continue to increase as they have in the past. Quality suites with large assumable mortgages can be hard to find. Slowing in-migration and completion of several multi-family projects could ease the rental demand. Interest rates could be higher when you need to renew the mortgage. Just like the stock market, there are up sides and down sides. Does that keep us out of mutual fund and equity investments?
Regardless of the possible bumps on the road to greater wealth, condo investment is at least an easily-understood investment tool that most of us can handle. 'And you'll work for the money. Like in any business, there are hands-on aspects some will not prefer. There are duties to tenants and to condo corporations that landlords must perform if they are to be successful. But in my experience, the payoff is there to be had. Consult your financial planner. Then consult a qualified Realtor who him/herself has condo investments. Finally, you and your Realtor can open the Condo Guide and the MLS service-it's time to go shopping.
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