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This is a real example based on a townhouse purchased in March 2005.
Purchase Price: $113,000.
Down Payment: 25% down. The fund is from equity line of credit. Interest only. Interest rate 4% anually. Annual payment: $113,000 X 25% X 4% = $1,130/year.
Mortgage: 75% purchase price. 25 years term. Three years fixed term at 3.6%. Principal is 1.7% of purchase price. Annual payment: $113,000 X 75% X(4%+1.7%) = $5,170/year.
Property Tax: $1,200/year
Strata Fee: $145.20/month => $1,743/year
Property Management: $50/month + 7% tax => $642/year
Repair: $50/month => $600/year
Rent: $900/month - 5% vacancy rate => $10,260/year
Total cost per year: $1,130 + $5,170 + $1,200 + $1,743 + $642 + $600 = $10,485.
Annual Cash Flow: Revenue - Expenses = $10,260 - $10,485 = (-$225)
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Two years have passed, and the interest rate has risen to 6% for the LOC part, and 5.2% for the mortgage part. Ignore the principal paydown, annual expenses increased by $1,243; rent increase from $900 to $950, for an annual increase of $570. This results in a negative cash flow of $898 per year.
P.S.: Notice a principal of 1.7% is considered an expense because this is a have-to payout for every month. This in reality is not expensed but sinks in as equity. This part is $113,000X1.7% = $1,921/year. If this is excluded from the expenses, then the property yields a positive cash flow of $1,023 every year.
P.S. 2: If you would purchase the townhouse today, you would have to purchase it at a price of $180,000. It is no longer possible to get a positive cash flow in either way.
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