Improving Real Estate Returns With $165,000 Of Investment Capital!

With $165,000, most investors would choose a condo which makes a decent investment. If you’re looking to improve your real estate returns, there’s another option if you’re willing to live in part of the investment property yourself. Watch this video to learn more!

Introduction

If you have $165,000, what types of Toronto real estate can you invest in? With that budget, most investors would choose a condo which makes a decent investment. The rent you get would pay for a big chunk of the mortgage payments each month and you’d benefit from gains when the condo appreciates. But if you’re looking to improve your real estate returns, there’s another option if you’re willing to live in part of the investment property yourself.

In this video, I’ll show you how different your returns can look like by comparing two options:

Investing and renting out a condo, then renting a separate place for yourself to live in
Investing and renting out a house, and living part of the house yourself – in the real estate investing world they call this house hacking.

Capital Requirements

We’ll keep this simple and look at turnkey properties that don’t require renovations. So the first part of our capital goes into closing costs, which includes things like legal fees plus land transfer taxes which is around 3.5 percent in Toronto but varies depending on your property’s value. The second part of the capital requirement is the downpayment. If it’s purely an investment property, then you’ll need a minimum of 20 percent as a downpayment. On the other hand, if you’re living in your property, then you can qualify for a lower downpayment by paying mortgage insurance.

Here’s how our investment capital breaks down for our two investment options.

Property one is our typical Toronto condo. We’ll look at a 1 bedroom + 1 bath condo that’s on the market for $700,000. Since this is an investment property, you pay a 20 percent downpayment plus closing costs so we’re looking at a total capital of a $163,000.

Property two is a house which that is priced at $900,000. Because you are going to live in part of it, you qualify for a lower downpayment and you decide to put in a lower 15 percent down. Then you add in closing costs so the total capital for the house is similar to the condo at a $165,000.

Cash Flows

The condo investment itself is already cash flow negative. After expenses and your monthly mortgage, you’ll have to pay out -$350 per month. On top of this, you need a separate place to live in and we’ll assume rent is $1,400 in rent a month for a basement apartment. So this means your total cash flow is -$1,750 per month after including in your cost of living.

Let’s look at the house. Because you live in one of the units which you would otherwise get $1,400 per month, you don’t get as much rent, but you also don’t need to pay for your own rent separately. If you didn’t live there, you’d be cash flow positive even with a bigger mortgage payment because your rent yields are better. In the current situation, your total cash flow is -$1,100, so it’s still better than the condo.

Appreciation

This one is more straight forward. You have higher leverage with the house, so that’s why you can buy a more expensive property. Based on a 5 percent annual appreciation, the higher priced property will mean more appreciation in dollar value. The condo gives you a total five-year appreciation at of $193,000 and the house gives you $249,000 …so the house wins.

Equity Paydown

The last part of your real estate returns come from equity paydown. This is a portion of your monthly mortgage payments and it’s proportional to your mortgage amount, so this is straight forward just like appreciation. The house gives you a bigger mortgage, and therefore a bigger principal paydown. So the condo’s total principal paydown is $76,000 and the house’s paydown is higher here as well at a $104,000.

Things To Think About Before House Hacking

Since the house beats the condo in all three parts of the total returns equation, house hacking generates the better returns – in 5 years time, the house has total returns of $268,000 compared to the condo at $150,000.

I’ll pay the bad cop here and give you 5 things to think about before you jump into house hacking:

If you want to maintain a more private landlord and tenant relationship, then you might not want your tenant to know where you live. So if privacy is important to you, house hacking might not be right for you.
When you house hack, you’ll likely be living in an older house and sound proofing isn’t the best. So even if you’re fine with a transparent relationship with your tenant, you’ll have to accept that living in the same house might not be as quiet, it won’t be have the same amenities as a condo, or in the case where you’re living in the basement, it definitely won’t be as nice living in a condo.
The best neighbourhoods for real estate investing might not be the best end user neighbourhoods. In nicer neighbourhoods, rent yields for houses are much lower so house hacking might not work for more expensive neighbourhoods with good schools and young families.
There’s higher expenses in condos because of condo fees but for the same reason, there’s also less active management. If you buy a house, you’re responsible for managing the property yourself, and this includes having to deal with bigger problems like the furnace breaking down or roof repairs.
Because house hacking allows you to buy a property with a lower downpayment, you’ll need to qualify for a bigger mortgage. In our example, you’ll need to have at $790,000 mortgage in order to make house hacking possible and this can price you out of house hacking if you can’t qualify for a big mortgage.

Do You Want To Learn More About Real Estate Investing Or House Hacking In Toronto?

We’d be happy to learn more about your situation and help you find the best investment opportunities for you.