Buying Investment Properties in Kitchener-Waterloo
Investing in real estate is an exciting option to consider. One of the most frequent arguments in favour of real estate is the fact that, as its name implies, it is “real.” It deals with physical properties and physical plots of land, which has great advantages in and of itself.
Namely, the tangible nature of these assets makes them fairly safe compared to other types of investments.
Consider a worst case scenario: different varieties of markets, and their associated companies and investments, can experience a sudden decline. Stocks can plummet in value, companies can go out of business, and consequently many investments that look solid “on paper,” so to speak, can ultimately turn out to be worth little more than the paper they’re printed on.
Real estate’s greatest benefit is that you own something physical – something tangible and real. So even if the local real estate market takes an unfavourable turn, you are still left with the physical property or plot of land as you purchased it.
This makes it incredibly versatile, because it can outlive a market downturn and eventually regain its value as the market enters a recovery cycle.
This is the main advantage of having a tangible investment, but real estate’s benefits don’t stop there. Going beyond worst case scenarios, real estate investments have amazing potential for growth. Just about everything people do – every activity or endeavour – ultimately relies on real estate.
Whether it’s for living space or for businesses big and small, there will always be a demand for plots of land and the wide range of buildings that sit upon this land.
To an even greater degree, as towns and cities continue to expand, and people increasingly transition from rural to urban life, the demand for certain plots of land or properties will correspondingly rise. This is why a strategically-chosen real estate investment is not just a safe bet, but also an excellent opportunity for growth.
Everyone needs real estate of some kind or another, so investing in such a crucial resource can be both lucrative and secure.
That being said, real estate investments can be costly, in terms of time and money. Real estate is not cheap, and investment properties come with an arduous to-do list of tasks and responsibilities. Maintenance, taxes, and a certain degree of risk will always be part of being a real estate owner.
Not only that, but your investment will also demand a degree of patience. Real estate markets tend to grow reliably, but this growth can take years. Mortgage loans can also take multiple years before they are fully paid off.
Therefore, real estate investments typically favour those who are persistent, patient, and in it for the long haul. You can make a very pretty penny, but not so much a quick buck.
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The Kitchener-Waterloo Market
So how do you make sense of it all? And where do you even begin? In this article, we’re going to take a look at investing in the Kitchener-Waterloo market. But while we’ll be referring to Kitchener-Waterloo specifically, the principles and ideas discussed here can be applied to just about any market.
KW is a rapidly growing region, with exciting developments on both the residential and the commercial front. Driven by three prestigious post-secondary institutions and a burgeoning economy, Kitchener-Waterloo is rapidly expanding in size and density, as well as in the realms of culture and available opportunities.
It features a diverse and enthusiastic demographic of students and young professionals, many of whom are either attending school, freshly finished their studies, or diving into the workforce. At the same time, we see an influx of people from the Greater Toronto Area moving here to work, live, and/or conduct business.
All in all, what was once a modest region is growing quite rapidly, and in a variety of ways.
We are seeing an increase in population numbers, an increase in population density, and along with these, an increase in human capital for businesses as well as an increase in demand for various products. This leads to accelerated business activity, a boost in culture, a refinement in quality of life, and ultimately, an increase in demand for local real estate (once again, whether it’s people wanting to live, work, or do business in the area).
So what can one expect when investing in Kitchener-Waterloo real estate? For this article, we are going to look at the residential side of things. A residential investment is fairly simple. You purchase a property, make sure it is properly maintained and fully functioning, and you rent it out for the benefit of those who wish to reside there.
The steps themselves are clear enough. But what can we expect in terms of numbers?
Looking at the cash flow (the amount of money coming in and going out) for your average residential investment in Kitchener-Waterloo, we can see that it is close to 0 or slightly below, meaning that there will be some additional expenses to cover.
That may seem startling at first, but don’t be discouraged: it’s actually part of the plan. Let’s briefly explain cash flow first.
When you buy a home, you have to make mortgage payments, and pay for maintenance costs (or condo fees if applicable) and taxes. If you are buying a home for investment purposes, you will face these same costs, but you will try to balance them against your income from rent.
So regardless of the number of units/residents you are dealing with, if your costs are $1000 per month and your rent income is $1100 per month (just to keep the math simple here), then your cash flow is positive at $100 per month.
If they are both $1000 per month, you would be sitting at $0 (or neutral) cash flow; if your total rent income is less than that $1000 per month, then you are looking at a negative cash flow.
In other words, negative cash flow means you have to pay from a separate source to ensure your total costs are covered. Many first-time investors tend to be discouraged by low, neutral, or negative cash flow.
This is understandable: the expectation of an investment is to make the most money in the long term, while incurring minimal losses in the short term. However, a negative cash flow does not mean your investment isn’t succeeding.
To demonstrate why this is, we need to look at the asset in its entirety, and over time.
When renting out a residential investment property, the fundamental benefit is that you own the property, whereas renters do not: their rent goes towards living space without the benefits of ownership. Ultimately, your mortgage payments will cease at some point, whereas rent payments can continue indefinitely (to the owner’s benefit).
This is also complemented by the fact that property values in a good market typically trend upward (and Kitchener-Waterloo is a good market). With a residential investment property, you stand to profit in two ways.
First, you are using rent income to pay off (either in part or in full) a property that you will ultimately own by yourself, so you don’t have to put in all of the money out of your own pocket.
Secondly, that property (or the lot that it is in) will appreciate in value over time, which is a capital gain that goes to benefit you.
In essence, you profit by holding a valuable resource in a growing market (in this scenario, a residential property in a growing city) over several years, and at the same time you do not need to pay for the whole thing yourself (because you are providing a rental service to those who need it – perhaps those who cannot cover the upfront costs of ownership).
In the long run, you can either hold onto it after your mortgage payments have been paid off in order to enjoy a sizeable net cash influx through rent, or you can resell at any point after it has appreciated for several years so you can cash out on your investment.
Looking at The Numbers
Let’s take a look at some more specific examples and crunch some numbers while we’re at it. The chart below shows us the average home prices in the region over the last 5 years, along with their percentage of change year over year.
From here we can see that on average, the prices go up by about 8% per year.
As an example, let’s take a look at a property worth $450,000. The first thing to note is that you would need a downpayment of $90,000 (20% of the total price).
Next you will need to finance the outstanding balance with a mortgage. Using the 2017 average interest rate of 3.5% your monthly mortgage payments would be around $1,616, and your property taxes would come to $291 per month.
Once you purchase a home along these lines, you can expect to rent it out for around $1700 in the current market (as of late 2017, when this article was written). Doing the math, we see that this means you are left with a cost of $258.23 per month (mortgage payments +taxes – rent), or a total of $3,098 in extra expenses per year (negative annual cash flow).
But don’t worry, this is still in line with our plan. This is all outlined in the chart below:
Let’s take a look at what this means for buyers over time. The graph below outlines how this would look. It uses an average increase in property values of 4% per year (a conservative estimate that’s half of the typical 5 year running average of 8% – just to play it safe).
In 5 years, the $450,000 home should be worth around $547,493, generating an increase of $97,493 in terms of home value. If we subtract the yearly net cost of owning the property (mortgage payments +taxes – rent) over a 5 year period ($15,493 in total expenses) we are left with a total profit of $82,000.
The initial investment (your downpayment) was $90,000, which means you made a 91% return on this investment over 5 years, purely from the property appreciating in market value. This amounts to about 18% per year.
Not included in this number is the $49,392 of principal paid off of the property over 5 years (in other words, the amount of your mortgage you’ve paid off).
Adding the two amounts together we end up with a grand total of $131,293 that you would be cashing out as profit after selling the home in just 5 years, plus your initial $90,000 downpayment.
That’s a 145% return an investment, or 29% return on investment per year.
Holding a property for 5-10 years at as small a cost as possible is one of the best ways to make money in real estate investments in Kitchener-Waterloo. The local market here has proven to be quite safe, and it boasts a rapid growth rate, too.
For example, there are many companies choosing to locate or relocate here – including, notably, Google. In response to this, the city is investing heavily in its infrastructure in order to ensure it can properly accommodate the subsequent demographic growth that’s coming in tandem with this influx.
It’s a great time to invest in Kitchener-Waterloo.
Opportunities for Positive Cashflow
We’ve shown how short term negative cash flow can ultimately still lead to significant returns on investment over time (5 years, in our scenario). But what about positive cash flow earlier on – perhaps even a significantly positive cash flow?
In terms of a strategy to get positive cash flow in Kitchener-Waterloo, aiming to have your mortgage paid off as soon as possible is the surest method. Once your mortgage payments are out of the way, there will be significantly fewer costs to deal with, which should almost immediately push your revenue well into the positive.
This is certainly a viable course of action; many incur negative cash flow in the short term with a mind to ultimately rent out the property as relatively ‘passive’ income over time. However, this course requires either a substantial upfront downpayment, or a degree of patience and frugality as you pay off your mortgage as quickly as is feasible.
There are some locations in Ontario that might allow an investor to cover all of their costs (including mortgage payments) while also retaining a significant positive net inflow of cash. This applies mostly to markets that are very densely-populated, and particularly ones that are overcrowded.
However, such investments may be tricky to find or acquire. This is because it would require an opportunity where the cost of renting the property exceeds the cost of actually owning the property itself.
The challenge in finding this opportunity is simple to point out: if it’s cheaper to own a property than rent it, most people would choose to buy the property to begin with, rather than renting it from someone else.
The only factor that would prevent people from owning as opposed to renting, in such a scenario, would be barriers like upfront costs, and the ability to find the property itself. Again, in Kitchener-Waterloo the surest method is to accept low or negative cash flow early on in order to gain greater benefits over time.
For anyone interested in buying investment properties in Kitchener-Waterloo, now is very much an ideal time to do so. There are numerous opportunities to invest in real estate all throughout the region, and with patience, dedication, and diligence, investors stand to reap considerable rewards over time.
There’s always a degree of risk involved in investment, but the Kitchener-Waterloo real estate market has proven itself to be a safe bet with a very bright future. So if you see the patience, dedication, and diligence needed to succeed in yourself, then what you have before you is a lucrative investment, and a question.
When opportunity knocks, will you answer?