With single-detached homes approaching $2 million, can you generate positive cash flow?

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You’ll need to be inventive to find ways to rent to cover your property’s mortgage

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If you’re a real estate investor in Canada today, the phrase “cash flow positive” probably affects you the same way a dropped hamburger affects your dog. Both are rare and appetizing treats that should be swallowed immediately.

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In hyperactive markets like Toronto and Vancouver, where competition among buyers has pushed prices into the stratosphere, achieving positive cash flow on an individual property – where the income it generates each month is greater than its expenses – can seem impossible.

The average price for a single-detached home in the City of Toronto was $1.7 million in January, while it was $1.9 million in Greater Vancouver. With a 20% down payment, an interest rate of 2.44% and an amortization of 25 years, your mortgage payment on a property at this price would be over $6,000 per month, before the taxes and maintenance costs.

In a market where you can expect to get around $3,500 in rent, that won’t be enough.

Getting cash flow positive isn’t just a way for investors who buy million dollar properties to pay their huge mortgages. This is part of a well-rounded real estate investment strategy.

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When house prices rise, novice investors may think they can simply take advantage of Easy Street’s appreciation. If the value of your home increases by 10% or 15% every year, it doesn’t matter if your cash flow is negative, does it? Won’t you get it back when you sell it?

“You never, ever bet on appreciation. You have no idea what’s going to happen,” says Monika Jazyk, director of real estate education provider Real Property Investments.

So what can a cash flow hungry investor do? You will have to spend more.

Go big or go home

With prices as high as they are, investing in individual properties in Canada’s most expensive cities has become a pursuit for the already wealthy. But it takes even deeper pockets to make a single family home cash flow positive.

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In today’s market, you need your property to generate multiple revenues for it to have positive cash flow. This means converting part of the house into a rental suite.

Even though adding a suite to an individual property is a common investment strategy, it is still a complex project which, according to Simeon Papailias, investor-focused realtor and founder of real estate company REC Canada, is not for everyone.

“It’s definitely not a strategy for the first-time investor,” he says.

Papailias says a suitably equipped basement apartment will likely cost between $50,000 and $75,000. But it should also generate around $2,000 in rental income.

This still may not get you into positive cash flow territory. Jazyk says investors in municipalities that allow it should consider building laneway housing.

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It is a more complicated and more expensive process. Adding a residential unit to a detached garage is the easiest option for most investors, but if that’s not possible, you may need to build a garden suite or guest house. from zero. Jazyk says it could cost up to $250,000.

But the $2,000 a month generated by the new structure, combined with the $2,000 from your basement suite and the $3,500 you should be able to get for the main living space in your house, gives you access to positive cash flow.

And with the significant improvements you’ve made to your property, you’ll dramatically increase its resale value. Before you sell, you’ll have the option of refinancing it to its new high value while maintaining a positive cash flow.

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“You can use the money for another deal, or you can use it for another type of investment,” says Jazyk.

What you should not do

As you add units to your investment property, you may be tempted to cram in as many bedrooms as possible.

Jazyk thinks it’s a mistake. In addition to potentially creating parking and zoning issues, she says trying to fit too many people into your property can worsen the tenant experience, which could lower your rental rate.

“There are winning investment strategies for slumber traders,” Papailias says, “but that’s not what we recommend.”

Raising your down payment beyond the 20% required for investment properties and then lowering your mortgage payment is another route to better cash flow.

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But because it involves investing more of your capital in a property and decreasing your overall return on investment, it’s not a decision that Jazyk or Papailias recommend.

Alternatives

If you’re determined to secure a detached property in a rapidly appreciating market, it’s not as if Toronto and Vancouver are your only options.

If you’re not planning to live in the property anyway, broaden your search. In Ontario, you can find much cheaper single-detached homes in Durham Region that fetch rents almost as high as those paid in Toronto. The same dynamic applies to investors in British Columbia, where single-family homes on Vancouver Island averaged a sale price of just over $785,000 in January.

And if cash flow is more important than distance from neighbors, you can always explore the semi-detached market, as many semi-detacheds in Toronto and Vancouver have basements that can be converted into suites.

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Tractor-trailers in the GTA and Metro Vancouver currently average $1.1 million and $963,800, respectively. If you can find one under $1 million and you plan to live in one of the units, a 20% down payment will not be required.

Defense against a market correction

If the market ever begins to ease, the rental income you generate can act as a buffer against falling home values.

“A positive cash flow is the foundation of any real estate portfolio,” says Pasalias.

“It’s a strategy that doesn’t hedge market forces, which means a cash flow property can be a winning strategy in any market.”

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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