We've had a good response on a previous blog which we shared a month ago so allow us to share with you another actual scenario of a condo unit in downtown Toronto:
Purchase Price on pre-construction: $252,900: One bedroom, approximately 550 sq. feet, no parking, 1 locker
A down payment of 20% of the purchase price: $50,580
A mortgage for 80%: $202,320
An amortization of 30 years
Small positive cash flow for 30 years from the investment: $100 per month
The tenant would have paid off your mortgage.
The return on your down payment is 5 times the amount you invested.
Now add to this that property values should at least double in 30 years, the return on your investment is 10 times your down payment! If the amount invested was $50,580, the value at the end 30 years, without taking into account any positive cash flow from the rent would be over $758,700. Not a bad amount you can add to your retirement nestegg.
Now, what if you don't have 30 years to wait to enjoy the above gains? Let's run another scenario:
***Similar unit is now listed by the builder for $315,000 so the value of the unit has gone up by $62,100 so the deposit you paid has doubled even before the building is completely finished.
***Assume that you rent it out for 5 years. Mortgage balance by the end of 5 years will be $179,125 so you've gained $23,195 with your tenant paying off the mortgage of your property. This is a return of 46% on your initial investment of $50,580.
***Assume that properties in downtown Toronto increase by 5% per year (after the initial jump to $315,000). By the end of 5 years, the value of your property would be $383,000 , leaving you with a profit of more or less $145,000 (gain in value, mortgage paydown by tenant and small positive cash flow of $100/month, minus expenses like commissions & legal fees). One thing to keep in mind that this capital gain is subject to tax but so is interest earned when you keep your money in the bank.
Not bad for an initial investment of $50,580!