Also keep in mind that over time, repairs, vacancies, and other costs will typically eat up about 50% of your income from the property. Given the information you've told us, you're likely to see at best a 6% return, which is not markedly better than what you could achieve through stocks.
What are the landlord tenant laws like in Ontario? If they heavily favor tenants, you may want to consider that this could stretch out eviction times when you run into a tenant who doesn't pay rent. I know here in DC, it can take landlords months to evict a tenant who stopped paying rent.
This is very useful information. I was not aware of the high 'maintenance' costs associated with rentals. And yes, the landlord law (Residential Tenancies Act) strongly favours the tenant. If I remember correctly, the tenant can delay eviction for non-payment of rent for like 3 months.
Mega is taking the anticipated gross rent, multiplying it by 12 and dividing the result by the purchase price. That's not the capitalization rate, that's the inverse of the gross rent multiplier. The gross rent multiplier is 8.3, which is too high to attract my attention for that kind of neighborhood. The overall expenses will likely be at least 50 percent, meaning the maximum capitalization rate is 6 percent. Same result.
If you are going to work the marginal areas, you want two percent per month. You are working for cash flow, not appreciation here. Tryan does this and his numbers are right on. One percent for newer houses in nice middle class neighborhoods is the minimum most people will accept for that type of property. Less wear and tear, less vacancy, and a better shot at significant appreciation.
The one area I agree with Honobob is on the life insurance. I'm not interested in war zones, and I would want my spouse to be well insured if he or she wanted to buy in one.
Thank you for the clarification on the correct terminology. Based on a capitalization rate of ~6%, I would be better off buying a REIT yielding ~7%. As I said, I am a new Mustachian. Please note: Hamilton is by no means a warzone. Portions of it (the downtown mostly) are highly undesirable largely due to the proximity to the steel mills & other heavy industry. It is a far cry from Detroit.
My house (in neighboring Burlington) is worth approximately $400k, and can be rented out for somewhere around $2k/month. So houses in my area are clearly not worth purchasing to rent out. This is stupid valuation is quite consistent throughout all of the nearby cities in the GTA (Greater Toronto Area), except for Hamilton.
1. How did you jump to this conclusion? Ask yourself, what was my property worth 10 years ago? What would the rents be then?
Compare that to the Hamilton property over the same 10 year period. Then look forward 10 years and make a business forecast for rents and value. Unless there is a strong possibility of gentrification in Hamilton you'll probably be way better off investing in Burlington.
You make an excellent point. Not sure if you are from Canada/Ontario, but essentially house prices in the GTA are bat shit crazy (but not as crazy as in Vancouver). Think 2006 Las Vegas crazy (maybe not that bad, Florida might be a better comparison) Canadians barely dodged the housing price crash in 2007 (they did drop a bit), but prices have gone up by ~50% since then, without the required wage growth to support such prices.
For example, people are now asking $480k for houses with the same layout as mine. I paid $360K three years ago. A 10%/annum appreciation rate for a house is absolutely insane across an large region, unless there is some sort of resource boom (e.g. Alberta / North Dakota). I could rent my house out for around $2500, based on recent Craigslist postings. Looking at interest rates (3.29 - 6%) the mortgage would be between $1900 - $2500 @ 20% down. That does not leave very much for maintenance/vacancies/property taxes.
Note: In Canada, you are now required to put down a 20% down payment for a mortgage on a second property.
It is a sad world we live in where people buy a house based on the monthly mortgage payment, and not the total value of the house / interest rate risk.