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30 Second Real Estate Analyzer

8.02.2007

30 second real estate evaluation calculation

Disclaimer: Don't bet the farm on this method, however it is a simple approach to weeding out bad real estate investment deals and identifying which deals you should investigate further. We'll tuck this one away in our 'general rule of thumb' category.

Scenario: "lovely 5 bdrm duplex for sale in downtown area. close to all shops, offices, tim horton's, and zellers. act now, before it's gone. asking $150,000 firm. rents are 500 2bdrm, 600 2bdrm, and 350 1bdrm"

Apply 30 second calculation in 3, 2, 1...go!

Step 1. Take asking price and divide by 10
150,000 / 10 = 15,000

Step 2. Take the expected monthly income and multiply by 12
(500 + 600 + 350) * 12 = 17,400

17,400 > 15,000 ; therefore investigate further.

If the expected yearly income from the investment property is less than the expected expense then this should raise a red flag and you should re-evaluate this real estate investment opportunity. Remember, that this does not take into account the potential value of the unit.

1st investment property deal!

Well, here we are. Put up or shut up as they say. Here's the lowdown on our first real estate investment property.

2 bdrm condo located approximately 15 mins from downtown Ottawa, near numerous key amenities such as city transit, schools, daycare, shopping, library, skating rink and even a wave pool. The unit is already rented for a newly signed one year lease at $1000/mos with both first and last month rent paid up. The condo fees cover all utilities. The unit has indoor parking, pool, sauna, hottub, and a games room. Other 2bdrm's in the building are going for $120k - $140k, however they have had some work done to upgrade the units.

Asking price: 112,500
Condo fee: 394/mos
Properyt Tax: approx 100/mos
Insurance: approx 50/mos

As of August 2nd, 2007 a competitive 5 year fixed mortgage rate would be 5.79%, however the unit had a locked in rate of 5.25% for a 5 year fixed.

So, if we offered $105,000 then we'd have to decide between 0%, 5%, 10% or 20% down. Let's break down the numbers.

A. 0% -- I don't really like this scenario because my goal is get more equity in the next 2-3 years to reinvest again, and this would mean that my monthly payments are comprised of interest.

B. 5%
105,000 - 5250 = 99,750

99,750 mgt amt. @ 5.25 % = 594 / mos / 25yr amtz
99,750 mgt amt. @ 5.25 % = 494 / mos / 40yr amtz

$494 /mos
+394 /mos
+100 /mos
+ 50 /mos
---------
$988

That leaves $1000 (rent) - $988 = $12.00 profit (good for 1 foot long club, 2 cookies and large chocolate milk at Subway + tip)


C. 10%
105,000 - 10,500 = 94,500

94,500 mgt amt. @ 5.25 % = 563 / mos / 25yr amtz
94,500 mgt amt. @ 5.25 % = 468 / mos / 40yr amtz

$468 /mos
+394 /mos
+100 /mos
+ 50 /mos
---------
$962

That leaves $1000 (rent) - $962 = $38.00 profit.


Both B. and C. show minimal profit, however they are a profit and the initial price point of the condo is fairly affordable for the Ottawa market. Three key features for me are the locked in rate of 5.25%, the initial price point, and the fact that it is rented and in my opinion a rentable area of town.

Evaluation: This property meets my financial evaluation and I'm also prepared to take a monthly rental loss if required. This would go against my net income and the expected monthly loss is manageable for 2-3 months if some unforseen situation occurs.

I've decided to proceed with my second viewing and continue my evaluation of the area and the building itself.

In our next post I'll introduce a quick calculation to help you evaluate real estate investment deals.

Multiple Egg Baskets. What a dumb name!

Why did I choose that title? Simple. I don't claim to be a financial guru or a wizard with numbers, however I have learned a few simple rules of personal finance that have served me well so far. The first motto of personal finance being -- don't put your eggs all in one basket!

Case in point: Let me take you back to the year 1999. I was drafted into the technology sector on the promise of riches and travel. Everyone was talking about their large signing bonuses to this IT company or that IT company, and the goal was to get in on some tech stocks and set sail. Well, just like an old Batman TV show shown on CBC's Switchback, all that you heard was Bang-Zoom-Biff-Zap-Crash as the market dropped and everyone that invested all their savings in one stock suddenly started to weep.

If Aesop was alive today then we'd be reading a personal finance story about a little bull that put all of it's eggs in one basket and then lost them all to some bear or even some tax man. (Note: did you catch the animal symbolism??? Who needs Animal Farm)

I plan on using this blog to help you learn from my personal finance lessons learned while I strive to make the million before the age of 40. Here's how George from The Hour would break down my bio:

Name: (I'll leave that for later in case I get sued for some reason)
City: Ottawa, Ontario, Canada
Age: 31 (9 years 'til goal, if not sooner!)
Occupation: Federal Civil Servant
Education: Bachelor of Business Administration
Family: Common-law partner, and 1 child
Objective: expand personal level of wealth through diversification and passive income assets

For my initial personal finance entry I just wanted to introduce myself and set the stage. Here's what coming up:

* Learn as I go through the process of acquiring my first real estate investment property.
* What is an RRSP Mortgage?
* Realtors -- Can't live with them and do I really need them?
* What can the Ab Lounge, Magic Bullet, and Jessica Alba teach me?
* Real estate analysis. The 30 second calculation.
* Mortgage + Condo fees + Property Tax + Insurance + Backup Plan Fund = Rental Loss. Did I sign up for that?
* Plus lots more of solid gold material.....minus the solid gold dancers.