Does .6% rule profitable in Ontario

Question

I know the 1% rule is the ideal case, but that is no longer practical for most parts of Ontario especially Toronto GTA, is there anyone who has experience with renting with .6% or even less yet having positive cache flow? assuming 20% is the downpayment.

Kiril Nikolaev · Answer

@Sam Hanaa I bought my first property in Brampton 4 years ago. It did not follow the 1% rule. I didn't even know the rule back then. I just created a spreadsheet and ran the numbers. If it looked like it's at least breaking even I went for it. It was a single-family semi-detached house. I build a separate unit in the basement myself with friends to cut down the costs. At the end here's what the numbers looked like:

• Purchase price: $500KDownpayment: 20% ($100K)
• Closing: $10K
• Renovation: $5K

• Monthly Avg. Cash Outflow:
• Mortgage payment: $1,531.
• Property tax: $300.
• Utilities: $250.
• Avg. maintenance allowance: $167.
• Home insurance: $125.
• Vacancy allowance: $100.
• TOTAL MONTHLY CASH OUTFLOW: $2,473.
• Rent: $2,600.
• Utilities: $250.
• TOTAL MONTHLY CASH INFLOW: $2,850.
• Monthly Free Cash Flow = Monthly Cash Inflow – Monthly Cash Outflow
• Monthly Free Cash Flow = $2,850 – $2,485
• Monthly Free Cash Flow = $377
• NOI = $22,900
• Cap Rate = 4.58%
• Assumed Annual Appreciation: 5%
• 1st Year Net Worth Increase (Total Return) = $23,740
• Annual ROI Year 1 = 23.74%
• Annual ROI Year 2 = 40.66%
• Return on Equity (ROE) Year 1 = 23.74% (same as ROI)
• Return on Equity (ROE) Year 2 = 30.29%

• Mortgage payment: $1,531.
• Property tax: $300.
• Utilities: $250.
• Avg. maintenance allowance: $167.
• Home insurance: $125.
• Vacancy allowance: $100.
• TOTAL MONTHLY CASH OUTFLOW: $2,473.

• Rent: $2,600.
• Utilities: $250.
• TOTAL MONTHLY CASH INFLOW: $2,850.

• Monthly Free Cash Flow = Monthly Cash Inflow – Monthly Cash Outflow
• Monthly Free Cash Flow = $2,850 – $2,485
• Monthly Free Cash Flow = $377

As you can see, this is about a 0.6% deal and I still made a bunch of money from it. It's now worth $700K or so. I refinanced and took all my original investment out. It still cash flowed (kind of), but I did have my fair share of bad tenants. This year, the basement tenant took full advantage of COVID and hasn't paid for 7 months during the eviction freeze. He now moved, so it's back on track, but these things happen. That's the risk we take. The risk is higher when it's not a 1% rule property.

I wrote an article about this deal specifically if you want more details on how I calculated these numbers. Just DM me (I'm not sure if I am allowed to post value-added links in this forum since they can be deemed "advertising")

Ryan Kirk · Answer

Hi Sam,

I think it's possible to cash flow a little bit, but it's tight.  If you're in it for the long haul and aren't looking to live off the cash flow month-to-month...it could still be a wonderful investment.

I've got a property in Hamilton that was recently valued at $610,000.  The basement rents for $1175 and upstairs for $1875 including utilities for a total of $3150.  $3150/$610K = 0.516%.  I've had a rough couple years because I had to evict a tenant, which added legal fees, I've had abnormally high turnover, and I also replaced a fridge.

$1893 = Mortgage payment (25% down)$298 = property tax$255 = property management (2018 & 2019 average)$111 = insurance$271 = utilities (2018 & 2019 average)$63 = lawn care (2018 & 2019 average)$10 = advertising on kijiji (2018 & 2019 average)$212 = maintenance, repairs, banking fees, travel costs (2018 & 2019 average)

$37 Cash flow.  I've included EVERYTHING here.  Basically the place breaks even from a cash flow perspective during the tougher times, and cash flows really nicely when all runs smoothly (Averaging $800+/month for 2020 so far).

The nice thing is it was valued at $405 less than 4 years ago, so $1000/WEEK of appreciation makes it all worth it. However, if you're hoping to replace your income in the near-future...getting closer to the 1% rule will ensure more cash flow, and less dependence on long-term appreciation.

Sam Hanaa · Answer

Great post thanks, I am planning to do similar, but most likely in cheaper places like Windsor, GTA now is out of my range.

JD F. · Answer

Thanks everyone! Great insight. @Melissa Scott do you have any expertise on creative financing? Any brokers you deal with specifically? Would love to work with you buying properties in Hamilton, St. Catherine's and/or KW.@Melissa Scott

Tyler Stiller · Answer

@JD Ferrari

Talk to @Melissa Scott

She can guide you in Hamilton market. Knows what areas to avoid

JD F. · Answer

Hi all! Has anyone invested in Hamilton in the last 6 months? I'm an investor in Ontario with a property in Oakville and Burlington. Looking to buy in cheaper regions to increase the number of properties I have, and so I can be approved by banks here in Canada. I've heard Hamilton can be a rough place for investors with tenants often not paying. Are there certain neighborhoods/types of homes you recommend?

Jay Styles · Answer

I don't know what to say about this thread..??!!

Sam Hanaa · Answer

Thanks @Ryan Kirk for your honest opinion, hopefully we can connect to learn more . I am not planning to live off my rental property at least not within 10 years, it is more for investment and trying to get into real estate investment business.

Does .6% rule profitable in Ontario

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