We all know that with any investment we should buy low and sell high but without the benefit of a crystal ball it is almost impossible to know the perfect timing! In fact, many of the new condominiums currently listed are owned by investors who could not have known when they purchased their yet to be built condos that the market would correct. So how do we know that the current market is as low as it is going to go? We don’t! Just like we didn’t know when the boom market was going to end. What we do know is that investors who try to perfectly time their “buy low sell high” usually wait too long! While we don’t know exactly what will happen next year we do know that all markets are cyclical and that the market should eventually recover.  So if one were to buy a property today even if market values dropped another 5% next year it is probably safe to say that in 5 years they still would be making money on their investment. Especially when considering current interest rates and revenue properties where the tenant is servicing the debt!

 

The following model is an approximate estimation of potential future gains assuming a purchase of a 2 bedroom condominium in downtown Calgary with an interest rate of 5% for a fixed 5 year term with a 35 year amortization. The way to achieve the best return as shown in these examples is to divide the monthly mortgage payment to make 2 payments per month and with a tenant servicing the debt.

 

Purchase Price	$225,000.00		Mortgage Pmt	$984.00
Down Payment	-33,750.00		Approx  Condo Fee	+300.00
	$191,250.00		Taxes Monthly	+110.00
CMHC Insurance	+3,730.00		Monthly Cost	$1,394.00
Total Mortgage	$194,980.00		Vacancy Allowance	+116.00
				1,510.00

 

Rental Income to cover costs $1,510 per month. Tenant to pay utilities not covered by the Condo Fee

 

Original Mortgage Balance	$194,980.00
Mortgage Balance in 60 Mos with Bi-Monthly Payments of $ 492.00	-$171,934.00
Reduction of Principal	$23,046.00

 

After 60 months:

 

Assuming no change in market value;

 

Total Investment	$33,750.00		Potential Profit	$23,046.00
Return on Investment	68.28%		Or	13.66% per Year

 

Assuming a 5% drop in market value in the 1^st year but a 2.5% increase in market value every year thereafter;

 

Total Investment	$33,750.00		Increase in Market Value	$23,940.01
			Reduction of Principal	+$23,046.00
			Potential Profit	$46,986.01
Return on Investment	139.22%		Or	27.84% per Year

 

Assuming a 5% drop in market value in the 1^st year but a 5% increase in market value every year thereafter;

 

Total Investment	$33,750.00		Increase in Market Value	$34,814.46
			Reduction of Principal	+$23,046.00
			Potential Profit	$57,860.00
Return on Investment	171.44%		Or	34.29% per Year

 

Obviously there is no guarantee that the market will perform as outlined above, however market value usually rises 3% to 7% in a “normal” market year.

 

Hope this helps!

 

Susanita de Diego