Monday, February 17, 2014

Real Estate in Calgary: Boring but quite profitable

I haven’t written a lot about real estate lately. Well the stuff is just boring…. but quite profitable.

 With Calgary’s GDP growth forecasted to be just shy of 4% and with population growth in 2013 at 18,000 and next year's growth forecasted to be around 15,000 what can one wish more? Oh, the unemployment rate is 4.5% or so.

These numbers and the above graphs are courtesy of CREB’s 2014 "Calgary Thriving on Growth" regional housing forecast. GDP growth and net migration are major drivers for future housing sales, rental rates and property prices. The forecast is a bit concerned that with the global economy improving, Calgary may not be that attractive any longer for new-comers. CREB (Calgary Real Estate Board) is also a bit concerned that apartments and townhouses may do better than single family dwellings in the near future as single family dwellings are a bit less affordable. They expect apartment prices to rise around 5.8%. WHAT? WOW! (that is me)

So you want to make a whopping 10% in the stock market next year? Hmmm Let’s do some math. Take the 2013 median apartment price at $250,000; property taxes are around $1200; landlord insurance $230 per year; condo fees around $325 per month or $4200 per year. Hmmm repairs? Only inside the unit (the condo corporation takes care of the rest): $500. Rents are: $1400 with vacancy rates 1.2% Yahoo! 

Based on those numbers. Net Operating Income (NOI) per year is $10,768 or a capitalization rate of 10,768/250,000 = 4.3%.  Add to that the annual appreciation forecasted by CREB of 5.8% and your total return on investment is 10.1%. These returns were calculated with the same spreadsheet as shown below using a Loan-to-value ration = 0 (no debt). 

Now, if you paid down 50% of the purchase price and borrowed the remainder using a 25 year, 5 year term mortgage at an 3.25% interest rate, then the spreadsheet below would calculate a return on your down payment (investment) after financing costs of 16.9%. Now with returns like that, who does need a stock market or for that matter a 5 year GIC that returns you barely 2% per year?


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