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Positive Cash Flow on an Investment Property

Posted by on Wednesday, April 16th, 2014 in Victoria Real Estate News

Positive Cash Flow on an Investment Property

Unlike Vancouver with their souring prices, increased sales and increased building starts, Victoria is still lagging behind like most cities across Canada. Victoria had a small increase in sales in March, but still trails the 5 year average. Listing inventory has dropped slightly, but still only 1 in 8 homes are selling per month. Overall prices are down as well, but in most regions, the drops have been significantly higher than the statistics are showing. The saving grace so far has been continued low interest rates, combined with these lower prices, creating a fairly stable Victoria real estate market over the last few years.

When will the next upswing begin in Victoria? This is a good question. Sales should continue to increase this spring and prices will probably stay fairly stable, and the market will not change much in the coming months unless we see a significant reduction in the overall listing inventory this summer. If inventory remains high, which it probably will, then the market should remain the same for the rest of 2014 and into 2015. If listing inventories are significantly lower in the summer and fall, then the result could be a shift away from a buyer’s market towards a seller’s market, which usually creates the supply demand ratio for prices to slowly start increasing. And if sales also increase, then this supply demand effect always creates further upward pressures on pricing. Eventually this will happen, and the big question is still when. Most experts are not expecting this to begin in our region until 2015 or even as far out as early 2016. We will see. However, when it happens, it usually happens fast. In the meantime, there are still a lot of good real estate deals in Victoria.

This leads me to one investment scenario. There are some really good deals in the market if you are looking for a revenue property. I will give you an example of a condo that I currently have listed for sale on Bear Mountain. It is a small 1 bedroom listed for $176,800. As an investment property, you would need the required 20% down for a second property, as this is required if the purchase is not your principle residence. This would equate to about $35,000 down, plus about $5000 for closing costs. The mortgage would be about $140,000, and the monthly payment would be about $588 if you obtained a mortgage for 2.99% for a 5 year term, with a 30 year amortization period. The strata fees are $168 per month, and insurance is about $40 per month, and taxes are about $75 per month, for a total of about $870 per month. This condo rents right now for $900 per month. Based on these numbers, this condo would actually provide a small positive return, coupled with the fact that you have a tenant paying down your mortgage each month which lowers your principal amount owing on your mortgage. As a bonus, if real estate prices increase, you are further building your cash equity in your condo which leads to a substantial equity portfolio increase over the course of the 5 year mortgage term. This investment condo would actually work. There are a number of examples like this throughout Victoria, and it has been years since you could buy a property and not have a negative cash flow on a monthly basis, so this is a good thing.

However, low prices and low interest rates will not last, as history usually repeats itself, and during the course of a natural economic cycle, which usually lasts about 7-8 years, the markets usually turn in one direction or another. And as most experts are predicting we are slowly moving towards the end of the current slowdown which started in the summer of 2008, the next upturn could be arriving sooner than later. The US economy is showing improved numbers not seen since 2008, so this usually results in a positive spin for the Canadian economy as well. Once this begins, interest rates and prices usually start to increase, and the investment property example above would immediately have a negative monthly cash flow. For example, an increase in interest rates of .50 percent alone would increase the monthly mortgage payment in the above example to about $628, which is an extra $40 per month, which turns the above scenario into a monthly negative cash flow of about $10 per month. If prices go up 5%, the same happens above. These interest rate changes can happen overnight, and the price increase can also happen quickly once the market starts improving.

Having said all of the above, I think we are still about a year or so away from seeing interest rate or price increases, so there is still a good window of opportunity for real estate deals to be made. Again, we will see…

In the meantime, here a few few links to various real estate sources that may be of interest to you:

– To stay informed on my listings and local real estate information, click on this link and hit “like”: VictoriaBCProperties

– Click for details of my Spring Newsletter:  Newsletter

– For the latest historical statistics from the Victoria Real Estate Board, click here: VREBStatistics

– Search for listing at my Victoria BC Properties website: DaleSheppard.com

Have a great Spring and I will be in touch this summer for another update.

Dale.

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