Saturday, January 25, 2014

Franklin: Time and residential real estate are a great pair

By David Franklin

The Bank of Canada, and most central banks in the developed world, inflates currency by 2% a year, and naturally they are not successful at keeping it that low, as we have always seen over a long term period. This is good news for residential real estate investors, especially those who use leverage to buy their investments. With only an increase of less than 3%, 2.82% compounded yearly, the value of a piece of real estate will double in 25 years. Incidentally, in the 15 years from September 1998 to August 2013, the Canadian cities tracked by Teranet have increased more than four times in value. Victoria 229%, Vancouver 249%, Calgary, since March 1999, 247%, Edmonton, since March 1999, 279%, Winnipeg 298%, Hamilton 216% Toronto 226%, Ottawa 228%, Montreal 261%, Quebec City 283% and Halifax 220%. See: http://www.housepriceindex.ca/

Let’s run a scenario. Assume:
  • A down payment of 20% of the purchase price,
  • A mortgage for 80%
  • An amortization of 25 years
  • No positive cash flow for 25 years from the investment (break-even)

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 25 years, the return on your investment is 10 times your down payment! If the amount invested was $100,000, the value at the end of 25 years, without taking into account any positive cash flow from the rent, would be $1,000,000. Not a bad pension amount.

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