Recently, I was asked whether it still makes sense to buy an investment property given the high interest
rates. My answer: absolutely yes, provided you
(1) find the right property (good location, well priced and with a good rent generating potential),
(2) are able to fund the down payment needed to reduce or eliminate any negative cash flow
(rent collected less mortgage payments, maintenance fees, property taxes and insurance), and
(3) can afford the negative cash flow, if any.
For example, a one bedroom condo purchased today for $700,000 with a 25% downpayment and a 5
year 6% fixed rate mortgage over 25 year amortization period, $2,800 monthly rent and $700 monthly condo fees, property taxes and insurance will mean $20,000 of net rental loss and $53,000 in repayment of the mortgage for a total
negative cash flow of $73,000 over five years or roughly $1,200 per month. To be conservative, I have
assumed the rent can be increased 3% per year and the condo fees, property taxes and insurance
increase by 6% per year.
If the value of the condo increases to $800,000 in five years (roughly 2% a year), the return on equity
(your down payment including property transfer tax) will be roughly 9% a year or 47% over the 5 years.
The point: The right property purchased in today’s interest rate environment can be a smart move
thanks to high rents and the magic of leveraging!