Old University is one of those areas in Guelph where real estate values have always shown an extreme demand for location.
One of the first things I hear many investors say is, “Walking distance to the University of Guelph”. Naturally, the Old University area comes to mind but with the incredibly hot real estate market Guelph had in 2016, plus this area of Guelph’s historically inflated sales prices, it has to make you wonder, “Is buying a rental property in Guelph’s Old University area still a good investment?”
I felt the only fair way to answer this was to back it up with some cold, hard data.
So without further adieu, here are the MLS sales stats for Guelph’s Old University area over the last 5 years:
It’s worth mentioning that this data only shows detached homes in the Old University area of Guelph under 1800 square feet. Sure, that’s going to knock out a few lodging houses, and you’re right this will affect the numbers a bit, but I felt there were more homes over 1800 square feet in the area that would not be used for investment purposes so I decided to eliminate them from the results.
Despite the limitations in the data I’ve presented, you can still see that in 2016 the average sale price of detached homes in Guelph’s Old University area under 1800 square feet took a massive shot upwards from roughly $430,000 to $543,000. This represents just over a 26% increase from 2015, which is arguably unprecedented in the history of Guelph’s real estate market.
The average sale price per square foot also shot up considerably, $92 per square foot to be exact, representing a 27.5% increase since 2015.
So with the values of detached homes under 1800 square feet in Guelph’s Old University going up by over 25% in only one years time, how does this affect positive cash flow on your typical investment property?
Let’s have a look!
Assuming you are purchasing a 2-unit investment property using 2016’s average sale price rounded up to $544,000 in Guelph’s Old University area, the numbers should look like this:
Purchase Price: $544,000
Down payment: $108,800
Additional Closing Costs: $9100 (Land transfer tax, lawyer fees, title insurance)
Mortgage Value: $435,200
Monthly Mortgage Payment: $1788 (2.8% interest, compounded semi-annually, amortized over 30 years)
Taxes: $455 (Based on MPAC assessment $440,000 and 2016’s 1.241067% mill rate)
Insurance: $150 (Estimated)
Utilities: $400 (Estimated)
Total Monthly Expenses: $2793
Total Monthly Income: $2850 all-inclusive (Upstairs $1650 per month all-inclusive, downstairs $1200 per month all-inclusive)
Total Monthly Positive Cash flow: $57
The surplus cash at the end of the month is lower than what I normally recommend. I typically suggest trying to get the positive cash flow somewhere around $200 – $300 per month if you can, but in a heated market such as Guelph’s right now and soaring home prices, sometimes you’re doing good just to break even in my opinion.
However, if you consider that your mortgage would be paid down around $9500 in the first year, spreading out that debt reduction over a 12-month period makes close to an additional $792 in equity increases per month back into your pocket, so to speak.
You could also consider that if between 2015 and 2016 prices went up by approximately 26%, and the market did that again, your home would be worth around $685,000 that next year – nearly a $141,000 increase in equity in just one years time!
But let’s not get ourselves too excited here…. Sure, having that happen again would be terrific, and in all likelihood it could happen again in 2017 with all things considered, but let’s just say you only experience a 5% increase in value, such is the case in normal market conditions. Your home would still go up in value around $27,000 in that first year alone, so even in normal market conditions one years appreciation can still be quite attractive.
Now, if you’re still not totally convinced this could be an investment that’s worthwhile, let’s be super-conservative and assume your homes value only goes up by 3% each year for 5 consecutive years. At the end of the 5-year period your home would be worth around $630,000 netting you close to $86,000 in increased value. Add in the $47,500 in mortgage reduction experienced over the 5-year period and you’d have approximately $133,000 built up in equity over that 5-year term.
Keep in mind a 3% increase in value per year is very, very conservative. Even if you were to bump that estimate up to a 4% increase in value per year, over the 5-year period the equity built up would then be approximately $165,000.
Clearly the potential for the homes value to appreciate higher than 3-4% each year is a possibility, and some may even argue it’s a probability, but I think it’s always best to base your numbers on conservative estimates so that anything on top of that can just be considered “Gravy”.
There are still a few ways you could increase your monthly positive cash flow as well, including putting more money down, or if you’re fortunate enough, finding tenants that are willing to pay more in rent, perhaps due to an extremely desirable location, layout, finishing’s or features of the home.
Although the monthly positive cash flow is pretty tight based on the figures above, all-in-all I’d say buying a rental property in Guelph’s Old University area is still a very worthwhile investment and can set you up nicely for considerable equity increases in as little as a few years time.
Until next time, Happy Investing!