Monday, March 8, 2010

A Basic Residential Real Estate Investment Model

Executive Summary:

Our objective is to purchase and retain break-even or positive cash-flow residential revenue property in fundamentally strong markets – property acquired at or below market value, with expectation of a minimum 5-8 year hold. Strategic improvement and superior property management help to attract and retain desirable tenants.

Revenue producing real estate investment benefits from the prudent use of leverage secured against hard assets to achieve: income from cash-flow; reduction of mortgage balance; equity growth through appreciation; a hedge against inflation; and favourable (capital gains) tax treatment.

There is risk associated with all investment activity. One deterrent to would-be real estate investors is fear of having insufficient information, knowledge, and experience to find, acquire, and control consistently performing assets in fundamentally strong areas. There is significant difference between emotional speculation and a reasoned approach to investing. Seasoned investors learn to identify, mitigate, and manage risk.

Why Edmonton?

Looking to the future, resource-rich Alberta, and specifically working-class Edmonton, presents one of the most promising investment opportunities in the world. Here are a few reasons why:

  • Average income (percentage and net dollar value) is increasing faster than provincial/national averages
  • Population is growing faster than provincial/national averages
  • Job creation exceeds provincial/national averages
  • The city has a diversity of major employers
  • At 25.9% debt service to income, standard townhouses are well within the RBC Affordability Index’s ‘hot zone’
  • Edmonton is expected to benefit from an economic real estate ripple effect due to major investment in Alberta oil sands
  • Political leadership has created an atmosphere of economic growth
  • The Economic Development Office is progressive and helpful
  • Infrastructure is being built to handle expected growth
  • The area is attractive to baby boomers’ lifestyle
  • There is a short-term problem likely to disappear in the future: many large-scale energy infrastructure projects are temporarily on hold
  • Labour and materials costs are rising, driving up cost of new homes and consequently dragging along value of re-sales

Why Me?

I have been involved in the real estate industry for nearly 30 years, as an investor, agent, educator, or consultant. I have assembled an exceptional team of real estate experts to handle all aspects of each transaction. As a Real Estate Investment Network member, I have timely access to research and updates on real estate markets.

Why this property?

This property is a well-situated 2 story townhouse with front and rear yards, adjacent parking, 3 bedrooms, 1½ bathroom, 5 appliances, and in excellent condition. The complex has good management and this unit has a tenant already in place.

The calculations below assume purchase at market price and variable rate mortgage. This property is one of three to be purchased as a package.


Purchase price


Appraised value


Down-payment & cash to close (includes 1 month staying fund)


First mortgage (new financing at 2.25% variable)


Second mortgage (VTB)


Year 1 annual cash-flow


Year 1 mortgage reduction


Year 1 profit


Year 1 Cash-on-Cash return


Year 1 Return on Investment (assuming 0% appreciation)


Estimated 5-year value (5% growth/year)


Estimated 5-year mortgage balance


Estimated 5-year profit (Estimated 5-year Value + cash-flow – Mortgage Balance – Down-payment)


Estimated 5-year Return on Investment


Joint Venture Partner:

Joint Venture Capital Partners are invited to participate in these projects as outlined on the accompanying Classic JV Worksheet. As Managing Partner, I find, negotiate, and administer the investment from beginning to end. The Capital Partner supplies the initial capital and credit, is fully secured on title and, upon disposition, receives return of all funds invested prior to participation in 50% of all net profits.

Using the projections above, expected net gain is calculated as follows:

Estimated 5-year profit


50% of estimated 5-year profit


Divide by down payment & cash to close


Estimated 5-year return on investment


Some other things you may not know:

· There are no Land Transfer Taxes in Alberta

· There are no Rent Controls in Alberta

· All mortgages in Alberta are non-recourse

· In Alberta, all Condominium Corporations must commission an engineering firm to provide a Reserve Fund Study every 5 years

· Over the past 50 years, average residential real estate in Canada has appreciated by a compounded 6.4% annually (Alberta is expected to lead future growth)

· Vacancy rates in Edmonton Q4 2009 were 4%; CMHC projects 3.5% by Q4 2010

· Alberta is currently one of the few balanced markets in Canada

· Alberta has the second largest oil reserves in the world (after Saudi Arabia) – and arguably the most secure!