If Real Estate is Not Appreciating, is it Still a Good Investment?

Most of us have “heard a story”, or “know a guy”, who bought a house for $100,000 and sold it for $500,000 just a few short years later.   We don’t know all the details and don’t know how he got to this point, but all we know is that he had some huge capital appreciation.

So the question is….if real estate stops appreciating, is it still a good investment????

I won’t pretend to know the exact answer to this because no one can guarantee any investment…especially one that has so many external factors such as owning your own investment property, but I will try to crunch some numbers for you.

Take, for example, a student rental in Barrie, Ontario.  I will make some assumptions here for argument’s sake:

-          Typical homes near the college are selling in the $225,000 range.   

-          If there are 5 bedrooms, 400 + utilities per room is fairly typical.

Using these numbers, I have put together a pro-forma below.

Purchase price 225,000 Mortgage 180,000 Down payment 45,000 Land transfer tax 1,975 Legal fees, etc 2,000 Total investment 48,975 Mortgage pmt (25 year @ 3.2%) 870 Property tax 225 Insurance 150 Misc 200 Utilities 0 Total cost 1,445 Rent 2,000 Monthly cash flow 555 Yearly cash flow 6,660 Cash on cash return 13.6%

***Cash on cash return is calculated by dividing the yearly cashflow by the total initial investment***

The other thing to note here is that each month, a portion of the principal owing on the property will be paid down.  For this particular case, it would be approximately $300 per month ($3600 per year) on the conservative end.

This brings the yearly return to $10,260 per year.   This brings the yearly return to 21%!!!

Remember…..no appreciation!