I really believe that cash flow isn't everything. And when interest rates are low principal paydown can be quite high even the first year. Appreciation should also be a factor. How do you figure out your ROI based on those variables?
I recently bought in a neighbourhood that is newer, and is expected to triple in size in the next ten years. It breaks even only, but I put a downpayment of 15 K on it and its worth 300K so to me, even without appreciation, if the 300K is paid off in 25 years, I will have turned the 15K into 300K which is a great investment. And I do feel I have a pretty good chance of some appreciation.
Also, due to some government layoffs which happen here every 10 years or so rents have fallen by 100-150, they'll be up again next year (this is what always happens), so I do think I'll be able to get some cash flow over time.
Purchase price 287K (Current Value is 300K)
Initial Mortgage 272
Downpayment 15K
Mortgage at end of year 1 = 264
So I put 15K down but at the end of the year had 8K in new equity which to me is a 50% return on initial investment, plus it had gone up 13K, so essentially I turned 15K into 36K, which means I more than doubled my money.
Over the next 5 years I don't expect much appreciation but 8-9K will be paid onto the mortgage.
What are your thoughts on ROI?
I strongly disagree with your stance on cash-flow. Cash-flow is the only return that you can expect with reasonable certainty. Appreciation is a guess. From the start of the nineties, rental unit values did go down, then gained back the lost ground around 2002. This means 0$ price change after a decade, no inflation-following and certainly no real gain. For many landlords, that meant cash-flow did not cover DEPRECIATION for half a decade; many bailed out with losses. This was in a time when you could get a 7-year Canada Savings bond paying 10% with absolutely no chance of downside.
From the price and the location, I am guessing you have bought a small house or duplex. It's a riskier bet from a vacancy point of view (one lost tenant cuts revenue 50-100%), but any losses you will probably be able to cover with your salary income. That's a good thing.
As for the long-term return, you are a little off. As a canadian landlord, I can tell you what are the schedules for "big repairs":
- Roof : 15-20 years, cost: 5k$ for asphalt shingles(for a detached house), double for flat roof.
- Windows and doors: around 15 years, cost: around 1k$ per hole (window or door).
Because of our climate, these are unavoidable and predictable, NOT "unexpected".
I usually give kitchens and bathrooms a 15-25 year useful life. In my experience, these sell the rental and are well worth the hassle. I consider older ones to depress the rental price because you will have to endure lower-quality tenants and/or offer a bargain to keep the unit rented. That's just my personal policy; slightly worn countertops or cabinet doors will probably not be considered a problem for an already-installed tenant. Cost: around 10k$ per kitchen or bath for a "nice utilitarian" remake (no granite, but nice ceramic floors and new pre-made cabinets).
Moreover, you should factor a 5% vacancy rate to be cut from gross revenue and stashed, because when a tenant goes you could have to hold the bag for a few months, mortgage, heat and all. I am currently 5 months in for one of my units, and heating is not optional when temps go under 5C. I'm not sweating since I have lost no rent in the last 4 years and this is only one of my many units.
All in all, expect to add a few years to your mortgage payoff date, since you have absolutely no way to amass a reserve to pay these costs and will have to borrow. This investment will probably not bankrupt you, it will serve as training wheels. If you are planning on buying more units, you will gain a little freedom by using the revenue from one to offset the spending on the other.