Consequential Impact of Rising Interest Rates; Inflation and Unaffordable Housing.

Mortgages The Driver Behind Most Real Estate Deals Except When It Is Not. 

Consequential Impact of Rising Interest Rates; Inflation and Unaffordable Housing. 

The classical supply demand dynamics are at work in the Toronto GTA (Canadian) economy and it seems no matter what the Bank of Canada tries to do with their drive to increase rates neither demand for housing or employment is being reduced. As neither of these at the basic level are discretionary desires or expenditures, everyone needs a home and a job (business activity, employed doing something productive or of interest, with hopes of earning at least a basic income to sustain themselves) .

Basic theory was that there is a direct relationship between real estate and interest rates, however the reality is, except when there is a shortage of supply. Then the theory doesn’t seem to hold true. There may be a lag effect but that will only put more pressure on increasing housing costs/prices as supply will be further constrained by buyers and builders not wanting to take the risk of building more stock with rising costs and uncertainty. Adding to the dilemma is the long time required to plan, build and deliver a completed housing project. With reduced building activity, price pressures on real estate will only go up. 

Population growth of approximately 1.2 million individuals over the past year pushing the Canadian population over forty million plus for the first time. With stagnant, slow to no significant expansion of the housing stock, the result possibly overlooked by policy makers and planners of our cities and towns is a dramatic shortage. 

A demand-supply imbalance that will take years to correct, with aggressive building, government incentives (tax incentives to build, reduced interest costs or loan guarantees)  and reduction of red-tape at all levels. Importing craftsmen and trades to actually build these residential projects. And then maybe we can achieve an equilibrium that could present affordable housing solutions. It will require building and intensification along established transportation routes.

The escalating interest rates are simply adding to the corrosive nature of inflation, the monster that they are trying to tame. 

Inflation being bad for every saver and worker as it erodes purchasing power however its ironically good for government deficits in the long run (as it does have to pay more for the cost of debt), and maybe this is what Prime Minister Trudeau meant when he dismissively stated “don’t worry, the budget will take care of itself” about budget deficits and government debt.

And surprisingly the government did run a budgetary surplus for the first two months of their fiscal 2023-2024  of $1.5 billion according to the Finance Department.

What do you and I  do with our Home Mortgage with rising rates? 

 Let’s start with a quick illustration that appeared on BNN last month with three examples and the impact of the trend on monthly mortgage payments. (Example Only, rates change, to be discussed with your lender based upon your credit score, employment income, other income).

Mortgage –             Prior to March 2022      After June 7’s Rate Hike    Negotiated Rate

Home/Condo Price:	$ 800,000	$800,000	$800,000
DownPayment *	$80,000	$80,000	$80,000
Mortgage	$ 742,320	$ 742,320	$742,320
Term/ Type / Rate	5 yr Variable 1.55%	5 Yr Variable 6.05%	5 Yr Variable 5.80%
Monthly Payments	$2,968.28	$4,805.49	$4,692.44

* Plus legals, LTT,  closing costs and title insurance (would typically be added here)…

Home Price (Avg)	$1,530,000	$1,530,000	$1,500,000	$1,500,000
Downpayment (35%)*	$ 535,500	$ 535,500	$ 535,000	$535,000
Mortgage Amount (65%)	$ 995,000	$ 995,000	$ 995,000	$ 995,000
3 year Fixed (ex.) Term/Type	5.25%	5.25%	5.25%	5.25%
Amortization	20 years	25 years	30 years	30 years
Payment #/year	52	12	26	12
Payments per period	$1,537.45/ weekly	$ 5,929.38 /monthly	$2,516.91/every 2 wk	$ 5,459.65/ monthly
Total Interest Costs for Term (3 years)	$147,844.27	$ 150,374.85	$ 151,492.20	$151,720.72
Est. Balance, end of Term	$ 903,002.07	$ 931,917.17	$ 950,173.22	$950,173.32

*Plus legals, LTT, closing costs and title insurance (would typically be added here)…

Ultimately it is for you and your lender to determine the best option and payment arrangement for your specific situation, the above is only a sample of what can result given an average property with a three year fixed and negotiated mortgage based upon a hypothetical borrower with qualifying credit and support documents and at the lender’s set mortgage rate, subject to change from time to time. Always quickly changed when the Bank of Canada seems to move on interest rates when increasing them. 

Options that can affect monthly payments:  

Fixed or variable?

One to five years, 25 to 30 years Amortization?

Payment options; Monthly, Bi-montly or semi-monthly, Weekly, for example (payments maybe the same but the results will be different based upon when payments were made, thereby reducing cost of interest on the loan and more being applied to principal reduction over the term of the loan.) 

 What is your goal with this financing? 

Can you make lump-sum payments to reduce this mortgage balance each year, 10-15% ?

Remember to maintain a safety margin, a little reserve balance for the unknown events of life.

Good luck with your mortgage negotiations, remember to run the numbers to see if it all make sense and it is something your household can manage. 

The above discussion and illustrations are fictional for discussion purposes.

Envoy Capitol Realty Inc., Brokerage and our team of associates would love to assist you, your family and your business / corporation with all your real estate needs from residential to investment to commercial.

Email : capitalmoves@gmail.com Toronto Brokerage Line (416) 441-6163

Rising Cost of Capital and Deleveraging Remedy

The headlines read : “News from the Commercial / REIT world –

Allied to Sell $1.35 Billion Toronto Data Centre Portfolio to KDDI

“The portfolio includes freehold interests in 151 Front St. W. and 905 King St. W.

and a leasehold interest in 250 Front St. W.

The agreement comes five months after Allied (AP-UN-T) announced its intention to sell

the properties, which comprise a major hub for Canadian internet operability.

KDDI is a Fortune Global 500 company which owns and operates data centres in Asia,

Europe and the United States through its subsidiary Telehouse.”

[ sourced from Don Wilcox’s article in RENX.ca ]

We are seeing more of this type of real estate strategy of de-leveraging. Why?

The main reason would be rising interest rates, requiring real estate asset managers and

investors to reconsider, refocus and refine their business holdings and

practices to maximize shareholder values.

By selling off non-core assets for a profit and paying down debt that is increasing

each quarter the cost of capital.

Therefore to prevent the possibility of ending up underwater from a debt and cash flow

perspective the wise move is to reduce and marginalize costly capital and maintain positive

cash flow for each property and overall for the portfolio of investment properties.

Imagine a picture of three individuals ; One is standing in ankle high water, they are generally

comfortable as the debt represented by the water level is not harmful and can be managed.

The second image is a person standing in waist high water, less comfortable but not life threatening.

The third image is a person standing in water that is over their heads and they have to

bob up and down to catch a breath, this situation is not sustainable and may lead to

complete ruin.

Urgent action is required to survive this predicament.

In elementary real estate finance we are taught that leverage is the key to enhance and amplify yields.

However, over leveraging a property or a portfolio followed by rising cost of

capital (i.e. interest rates) can be a ruinous and terminal situation for most

investors and asset management, short of injecting cash from other profitable

assets or sale of properties or diluting shareholder interest by issuing more stock and

bringing in other investors to inject cash into the project.

Being meaningful and understanding the properties’s cost of capital and cash flow

capabilities may give the investor the ability to steer and navigate the challenges..

We at Envoy Capitol Realty Inc., Brokerage have a team of professionals that can assist property owners,

asset managers or prospective investors / buyers in reviewing, advising, negotiating acquisitions and sales.

We understand property ownership and its challenges with our forty plus years of hands on experience.

Let’s have a coffee and discuss the opportunities.

Envoy Capitol Realty Inc., Brokerage (Toronto) 416-441-6163

Email: capitalmoves@gmail.com

REIT Investing & Valuation Metrics

REIT VALUATION METRICS SUMMARY

Why do we invest? What do we expect when we invest? Are good questions to keep in mind as we explore any presentation of an investment opportunity. In order for the emotional / irrational tail not to wag the head of the thinking / calculating investor, we need to establish valuation metrics with reasonable standards of our expectations. 

                              Know what you want in order to work towards it.

Why consider including REITs in your investment portfolio ? 

Unlike direct real estate investment ownership, an investor can buy and sell they anytime from the comfort of your home or poolside patio, with your online trade being executed within seconds of the Ask and Bid price connecting.  REITs offer relatively quick and easy liquidity – access to your money. And with most of these online investment platforms you get summaries of historical performance, dividend yield, P/E Ratio, the market capitalization, the trends, the next scheduled/declared  dividend payment. And the investor hits the ground running being accretive typically in 30/60/90 days with cash flows. And for most of us that is a beautiful thing. 

However REITs are affected by market sentiments and gyrations with their prices being volatile and therefore not for everyone.  Yes, REITs are in and of the stock market and so there is volatility daily, weekly, month and over time. Dividends can be cut and are cut affecting cash flow and impacting valuation, although the underlying asset’s value may not have changed. Best to consult with an investment professional before investing.  

When the investor buys a REIT they are handing over their money and the control of the daily management of the asset to the management team. The management is one of the most important aspects of the REIT, who they are and what they have accomplished. Are they working for the best interests of the owners / shareholders or for themselves? The management can add value or erode it, and the investor will only know after the fact as the investor has given a long leash and ultimate operational control to management, with a once a year review. However the investor has the power to sell and move their money to another more promising investment.

During the 40-year period through to June 2020, “REITs delivered an average annual total return of 11.38%. This compares closely with other indices’s returns during the same period” according to Nareit (website). 

So what’s the difference with REITs and other investments? 

REITs have “unique benefits that include merely modest correlation with other asset classes, less market price volatility, more limited investment risk and higher current returns.” (Brad Thomas)

Starting from the premise that REITs (Real Estate Investment Trust) are more than the buildings and properties in the portfolio, therefore we shouldn’t simply use real estate valuation metrics to determine either the worth or performance of the asset as we would if we were acquiring the real estate directly as we did in previous articles in this series. Like the utilization of the implied capitalization rate (cap rate) of an income property being the expected unleveraged overall return on the income property. Further the location of the property, the quality of the building and the tenants/leases/security of rent payments/ NOI / cost of capital/ mortgage term matures /cash flow/etc add another dimension to the analysis of the property or the properties in the portfolio. 

     “The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operation results of his companies.” – Benjamin Graham 

Here we wish to cover or at least summarize some of the leading valuation methods as discussed in the book “ The Intelligent REIT Investor Guide by Brad Thomas (2021, Wiley) and “Educated REIT Investing; The Ultimate Guide to Understanding and Investing in Real Estate Investment Trusts” by Stepanie Krewson-Kelly and Glenn R. Mueller (2021, Wiley). 

Investors after determining their appropriate discount rate or premium, “taking into account the rate at which the REIT will grow its NAV, FFO, or AFFO relative to both its peers and a purely passive investment strategy…Like NAV, they’re problematic by themselves. But they can be useful when comparing REITs with each other or their own historic averages.”

Why consider NAV? Brad Thomas says “ It can keep investors from becoming excessively  optimistic during the occasional period of unsustainable FFO growth.” With high occupancy rates and increasing rents the FFO will go straight up and the reverse is true with high vacancy rates and lower rents the FFO will decline, depending on the economic cycle this could be dramatic in either direction.  (Brad Thomas) 

Sometimes stating the obvious is a refresher, before we get caught up in the weeds of analysis.

“When assessing the financial health of any real estate company or REIT, investors may want to remember one truism:             

                                         More Debt = More Risk”   ( Educated REIT Investing)

                                           Value = Equity + Debt

And the idea of a “Margin of Safety” , a buffer for the investor or the lender(s). 

Net Asset Value (NAV) : 

                  NAV = ( Assets – Liabilities – Preferreds )  /  Number of share outstanding

Stock Price of REIT Above NAV =  Green Light on Growth

Stock Price of REIT Below NAV  =  Red Light on Growth

P/E : 

Price to Earnings Ratios :  P/ E ratios  [  a form of multiples to value ]  (And the inverse of cap rates.)

                 Price / Earnings = P/E Ratio

P / FFO :

                Price / Funds From Operations =  X   ( a multiple to value ) 

P / AFFO : 

               Price / Adjusted Funds From Operations =  X  ( a multiple to value ) 

In  chapter 14 entitled “ The Quest for Investment Value”, Brad Thomas presents a graphic table  with 

Property Sector P/FFO as a sample with corresponding multiples for each category of property type,  sourced from FACTSET (these are U.S. based numbers). 

Here are a few highlights from that table of historic average multiples  :  

Property Sector :                           P/FFO : 

Office ………………………………………..     11.0

Shopping Centers  ………………….       12.0

Health Care  ……………………………       15.3

Apartments  ……………………………        17.5

Industrial  ………………………………         22.6

Cell Towers ……………………………         27.1

The direction of short-term or long-term interest rates, supply-demand dynamics, inflation, the direction of investment/ commercial real estate prices, these forward looking issues that must be considered to make a relevant selection of any multiple to value.

PEG Ratios (price multiple to earnings growth) may be a “better indicator of how much an investor is paying today for a company’s expected earnings growth. PEG ratios for REITs are calculated by dividing the price/FFO multiple by expected future growth in FFO. 

An example to illustrate this ratio, If a REIT’s FFO multiple on next year’s estimated FFO is 8.5X, and its FFO per share is expected to increase 7% next year, the PEG ratio for the REIT is 8.5 divided by 7, or 1.2143 . This is calculated ;

REIT’s PEG ratio = next year’s FFO multiple / next year’s expected growth in FFO per share 

Isolating the growth component of value, PEG ratios provide investors with an “understanding of how much they are paying today for future earnings. Assuming comparable risk profiles among REITs, lower PEG ratios represent better relative values to investors.” Cautions aside, as all metrics have some sort of shortcoming; such as assumptions, estimates and flat or negative earnings growth. “PEG ratios should be calculated using a long-term (3 to 5 year) estimate of earnings potential for each company.” (Educated REIT Investing)

Discounted Cash Flow and Growth Models : DCF – to estimate the Present Value of the expected (projected/forecasted) future free cash flows as a favoured method among more sophisticated investors and analysts. 

We can obtain an approximate present value of “all future free cash flows by beginning with the current or 12 month forward AFFO; estimating that growth over the next 10 , 20 or 30 years , and discounting the value of all future AFFOs back to the present date at a selected interest rate (anticipated growth rate).” (Brad Thomas, Intelligent REIT Investor Guide). 

A lot of the acronyms in many of the books, articles, blogs and podcasts that cover this topic seem different but are referring to the same things that we have covered previously in this Blog series. If you understand the simplified financial worksheet, NOI, Cash Flow (before and after tax), PV, to name but a few you should be good to follow along and engage. 

REIT valuation constant awareness of the business and economic cycles, cost of capital, government policies, rules, regulations and taxes, supply and demand factors,  both on a macro level and the micro level (geographically knowledgeable as to where the properties are located and what could impact them negatively or positively on a timely basis.)

The above was a presentation of the most popular methods of REIT valuation, some analysts may from time to time develop hybrid models and techniques that may work more efficiently or be favoured by them. We will discuss some of them in future articles or you can explore and discover them yourself in the wide array of financial and investment articles, books, blogs, podcasts and YouTube.

Envoy Capitol Realty Inc., Brokerage we can assist you with your family business office’s real estate holdings, investment property portfolio creation, review, refine and with any of your buying, selling or leasing needs in Ontario. We are located in Toronto but we can meet with our clients virtually anywhere.

Reach out and let’s set up an appointment to meet, Email : capitalmoves@gmail.com / call Brokerage (416) 441-6163 or visit our website at http://www.envoycapitol.com

The above is meant for educational purposes and discussion and is not meant to provide investment, legal, tax, engineering or environmental advice. Kindly contact the appropriate professional before acting. Envoy Capitol Realty Inc. does not sell REITs or shares of public corporations, however we can assist with individual purchase/sale of property throughout Toronto GTA and Ontario and we welcome you to join us. Let’s talk real estate.

Quick Analysis with Projections

Analyzing an acquisition of a 25,000 square foot (sf),

multi-unit  industrial property  

with all leases averaging a  triple net  rent of $12.75 per square foot,

with escalations of 3% annual increases built into all leases

for the net rate plus TMI and HST. 

If an investor acquires it  in year one, and holds it for a period

of seven full years and sells it at a projected

terminal cap rate of 3.75%.

 What would the projected sale valuation be? 

STEP 1 : 

Calculate the annual net rent for the property, year one to seven year

with the given 3% annual increases year over year.

Rentable area 25,000 sf X $ 12.75 psf = $ 318,750  … Year 1

To fast track it and not having to do each year manually we can

use a financial calculator ( like the HP 10 BII ); 

To simplify our life and the calculation process…

Enter the following information, after setting

the calculator to one payment per period (annum / year) and therefore

the compounding is equal to one per year ;  1 P / YR . 

Enter : 7 into [ N ] 3 into [ I/YR ] 318,750 into [ PV ] 0 into [ PMT ] and

solve for [ FV ] = $ 392,022

Therefore the net income for the property in year seven should be $ 392,022 . 

STEP 2 : 

Using the direct capitalization approach to estimating value :  

V =  I / R ,

enter the appropriate information for the end of the seventh year of ownership of this property. 

  $392,022(net rental for year 7) / 3.75% (terminal cap rate)   =  $ 10,453,927.86 ( Value )

Therefore the sale value of this property at the end of the seventh year would be approximately 

$ 10,454,000  ( rounded to the nearest thousand dollars ). 

A quick analysis with tools of projection can help in

better understanding a prospective investment opportunity.

Envoy Capitol Realty Inc., Brokerage – assists our clients in both residential and

investment real estate make better decisions.

Reach out and let us assist you with different perspectives on cash flow, valuation,

reviewing a real estate portfolio, buying and selling, leasing,

recycling capital into more interesting real estate opportunities.

We are always interested in meeting with great real estate professionals

who are self motivated and can

work anywhere in the province of Ontario.

Let’s talk.

Email : capitalmoves@gmail.com [ send a request for a call / virtual meet up ]

Call for a real estate appointment : 416-441-6163 [ Brokerage ]

Check out our books at Amazon, available digitally ( Hard copies Sold Out ).

Envoy Capitol Realty Inc. @ 4 /28 / 2023

Price to Rent Ratio

Price to Rent Ratio    

 

To Buy or To Rent ? That is the question that keeps challenging our clients in real estate.

The Price to Rent Ratio is a relatively simple calculation with large significance to the typical buyer or seller (owner/investor) of real estate and is one more metric among the vast number of factors to consider in the evaluation of whether it makes more or less financial sense to Buy or Rent. 

Each buyer (renter) or seller (owner/investor) of real estate is unique with their own resources, strengths, limitations and priorities. In that light we do not want to come across as judgemental and definitive as to what someone should or should not do. This is but an academic exercise to provide the individual with a simple test that they may consider using in addition to obtaining appropriate professional advice. 

Quick sample example of the calculation :  Sale Price (divided by) / Annual Rent = Ratio

 If given the following information, …

Sale Price	Monthly Rent	Annual Rent	Resulting Ratio
$ 1,550,000	$ 4,565	$   54,780	28.30
$ 3,850,000	$ 6,800	$   81,600	47.18
$ 1,265,000	$ 3,650	$   39,000	32.44
$      72,500	$   850	$   10,200	7.11
$    328,500	$1,775	$   21,300	15.42
$ 1,625,000	$ 5,925	$   71,100	22.86
$ 2,179,000	$ 8,900	$ 106,800	20.40
$ 1,875,000	$ 8,995	$ 107,940	17.37

Graphically speaking when sale prices increase faster than the market rent for the real estate the ratio is higher and it is no longer favourable to purchase  real estate. It would be better to rent it until the ratio re-balances itself to a more rational number. All other considerations aside. As an exercise put the above numbers into a graph or in, increase – decrease order and see for yourself. (Try and calculate a Ratio yourself on a property you currently own or are considering purchasing. What do the results say?)

Overview commentary  from the above table, the lower the ratio the better for the buyer and the higher the ratio better for the seller. When the ratio is high it is better to sell the property (investor/owner’s/ seller’s perspective) and better to rent the property (tenant’s perspective). 

And the opposite is true.

Given a lower the ratio it is better to buy the property (tenant’s perspective, investor’s perspective and therefore competition for the supply available) and better to keep the property for now (owner/ seller’s perspective), and wait for appreciation (capital growth). 

Generally speaking some key takeaways and guideline suggestions not absolutes ; 

• The price-to-rent ratio is calculated by dividing the  home price by the  annual rent. 
• A price-to-rent ratio of 15 or less means it’s better to buy.
• A price-to-rent ratio of 25 or more means it’s better to rent.
• Use the price-to-rent ratio in combination with other factors/ variables when making a decision about whether to buy or rent a property, sell or keep a property. 

Factors that are generally NOT considered by this Ratio that are significant to real estate valuation and desirability and may move the nail higher on the Ratio when considered. In real estate one size does not generally fit all circumstances and locations. Here are a few to consider  ; 

Location , Supply and Demand factors, Trends in the area both in Prices and Rents, Appreciation, Rent control legislation that will artificially influence the Ratio, Inflation, Cost of Capital : interest rates and the availability of credit. Closing costs from legal fees to Land Transfer Taxes. All the other costs of property ownership from realty taxes, insurance, maintenance/repairs, taxes, Cash flows and Taxable Income, Development opportunities, to name but a few.

In major urban centers like Toronto, there is real local competition for well priced properties that are easily rented. Therefore renters hoping to be buyers are not only competing with other renters wishing the same thing, but investors who see value in acquiring the property to rent out for income and future capital appreciation and a hedge against inflation. 

Using the Price to Rent Ratio as a general guideline with the overall market is very useful to understand the market trends. Using the Ratio for a specific circumstance may be more challenging as long as the above cautions are considered before a final determination. 

The Ratio will tell you one thing, your insights and reading of all the other factors and numbers, savings, income, financial strength / limitations, credit availability, inspection of the property and location, desire to own property, proper advice should complete the analysis to buy or rent, to sell or keep in your portfolio. 

Envoy Capitol Realty Inc. Brokerage is well positioned to help you navigate the complex and dynamic real estate market in Toronto. With our team of experienced and knowledgeable real estate professionals, we can provide you with the expert guidance, insights, and support you need to succeed in this competitive and exciting market. Let’s connect and discuss your real estate needs.

Email or Call us directly for All your real estate needs from residential to investments / commercial properties, let’s set up a meeting and develop a relationship.

We are always looking for professional and ethical real estate salespersons to join and grow with us, give us a call we would love to discuss the future possibilities.

Email : capitalmoves@gmail.com. Brokerage line : (416) 441-6163

The above is for educational purposes, all characters are fictional and no legal, tax,

investment, engineering, environmental advice is meant to be given.

All real estate and investment decisions are unique kindly work with the appropriate

professional to achieve the best results for your unique opportunity.

Check out our books on Amazon: The Greatest Money Machine and Silver Bullet Investing

All rights reserved @ Envoy Capitol Realty Inc., Brokerage (2023)

Key Calculations for Valuation

There may be as many variations and approaches to estimating value as there are investors.

What really motivates an investor to agree to go ahead and make an investment based upon their

perception of value and the associated riskiness of the opportunity is again a unique relationship between the two.

As all investment opportunities are as unique as the investors considering them.

Here are several key calculations that the investor may consider before taking action with their surplus

capital or maximum utility of leverage and their cost of capital.

Consulting the appropriate professional who can assist in these calculation and discuss the individual

merits of the specific property is strongly recommended.

Envoy Capitol Realty Inc. Brokerage’s team are capable and competent to assist these

investor(s) with their property purchase or sale.

To preclude the Key calculations its important to consider all the other attributes that the unique property has to offer such as its location, topography, conditions of the property, neighborhood and infrastructure, market and developments trends, financing and cost of capital, the master plan for the area, the permitted uses of the property, rental rates and trends, demographics (is it an aging population or up and coming), etc. Safe to say the below calculation are one key part of the whole analysis.

1. Rent to value ratio (RVR) – This calculation helps determine the potential rental income from a property and how it compares to the value of the property. A higher RVR can indicate that a property may be overvalued, while a lower RVR may indicate that it is undervalued.
2. Capitalization rate (Cap Rate) – This calculation helps determine the return on investment for a property [ROI]. A higher cap rate means that the investment is expected to generate a higher return, while a lower cap rate indicates a lower return on investment. Capitalization Rate (Cap Rate): The Cap Rate is calculated by dividing the property’s net operating income (NOI) by its purchase price. The NOI is calculated by subtracting the property’s operating expenses (such as property taxes, insurance, and maintenance) from its rental income. The Cap Rate is a measure of the property’s yield and helps you compare the return on investment with other properties and investment opportunities.
3. Gross Rent Multiplier (GRM) – This calculation helps determine the value of a property based on its rental income. A higher GRM indicates that the property is likely overvalued, while a lower GRM may indicate that the property is undervalued. The GRM is calculated by dividing the property’s purchase price by its annual rental income. This calculation helps you determine the potential return on investment from renting the property.
4. Net Operating Income (NOI) – This calculation determines the amount of income generated from a property after all operating expenses have been taken into account. A higher NOI indicates a more profitable investment, while a lower NOI may indicate a less profitable investment.
5. Price per Square Foot: This calculation is simply the property’s purchase price divided by its total square footage. This helps you determine the market value of the property and compare it with other properties in the area.
6. Cash Flow: Cash flow is the difference between the property’s rental income and its operating expenses. This is an important calculation for real estate investors because it shows how much money is left over after paying for the property’s expenses, which can then be reinvested or used for other purposes.
7. Equity Capitalization Rate (ECR) ; This calculation involves taking the Cash Flow before Tax (CFBT) and dividing it by the Equity invested in the property the result is the investor’s Return on Equity (ROE) also known as ECR.
8. Internal Rate of Return (IRR): The IRR is a metric that measures the investment’s overall profitability by considering both the cash flow and the time value of money. It shows the rate of return you can expect from the investment over its lifetime. This calculation is usually accompanied with the NPV calculation [ positive, neutral or negative ] Net Present Value.
9. Cost Approach – This calculation involves estimating the cost of building a similar property from scratch and subtracting depreciation to arrive at an estimated market value.
10. Sales comparison approach – This calculation involves comparing the property to similar properties that have recently sold in the same area. [ CMA; comparative market analysis ]

These are some of the most important investment calculations to consider when valuing real estate and its performance.

It is also important to keep in mind that these calculations are not the only factors to consider and that local

market conditions, supply / demand ratios, cost of capital and other variables can significantly impact the value of a property.

As a result, it is important for those looking to enter the real estate market in Toronto to be informed, strategic, and proactive in their approach. Whether you are buying, selling, or investing in real estate, it is crucial to have a solid understanding of the market, the key players, and the latest trends and developments.

Envoy Capitol Realty Inc. Brokerage is well positioned to help you navigate the complex and dynamic real estate market in Toronto. With our team of experienced and knowledgeable real estate professionals, we can provide you with the expert guidance, insights, and support you need to succeed in this competitive and exciting market. Let’s connect and discuss your real estate needs.

[ The above was inspired by CHAT GPT. Envoy Capitol Realty Inc., Brokerage ]

Email : capitalmoves@gmail.com. Toronto : (416) 441-6163

3219 Yonge Street Suite 227, Toronto ON M4N 3S1

Eighth Wonder of the World

Albert Einstein once said “ Compound interest is the eighth wonder of the world.

He who understands it, earns it; he who doesn’t pays it.” 

Patience is a Virtue with Compounding Rewards : A Simple calculated example.

We should not generalize and assume that all real estate purchases are going to be profitable.

And what your client’s unique personal experience will be.

As it is said many time over ; “That past performance can not guarantee future results.”

No one knows the future, however our historical investment experience and perspective strongly

suggests that the trend line over a long time period is upward sloping.

You can or should be able to make a gain (be profitable) if you are indeed patient with the property investment.

This investment should be able to compound over time, incorporating inflation and cost of capital

in a reasonably attractive location have the benefits of supply and demand work in its favour to maintain price.

So it is not investing in real estate in a blind fashion, anywhere and anytime but with the appropriate level

of research and professional assistance, things could work out to a client’s long term benefit. 

Here is the example and set up of details for our calculation, based upon an

experience by one property owner in Toronto (GTA). 

A single detached home purchased in 1995 for $223,950 is sold in 2022 for $1,595,000.

What is the average annual compounded growth of this humble investment that was used the

primary (principal personal) residence of a Toronto family.

Using a financial calculator (ie HP10BII) we need the following variables (factors) to input: decide the

compounding period – in this case annual therefore one : 1 (P/YR)

1. Time (N) 
2. Initial Investment (PV)
3. Payments (PMT)
4. Future Value (FV)
5. and solve for the annual compounded growth rate ( I /YR) …

Once we gather all the relevant variables to input into our financial calculator from the above simple case example

we can proceed to figure out the average annual growth rate of this truly passive investment that was lived in over

the past 27 years.  

N       =   27                    [ 2022 – 1995 ]

I/YR   =   ?                      [ to be solved for ]

PV     = – 223,950  (+/-)  [ assume the initial investment was without leverage ]

PMT  =  0                [ assume zero, no other payments to the initial investment – kiss ]

FV    =  1,595,000     [ reversionary value, value at the end of the investment timeline]

Solution for I/YR equals 7.5420 % average annual rate of growth, compounded interest rate. 

Therefore this passive investment being the principal residence for a family grew

at a annual compounded growth rate of 7.5420% TAX FREE. 

In another quick real example from the 80s;

Client purchased a single detached property in 1982 for $ 72,000 sold it 1987 for $305,000.

What was the average annual growth of this investment in a primary residence?

Solve for I/YR ?

The set up on the financial calculator ; 1 P/YR , enter 5 into N : N = 5, PV= 72,000 [enter it as a minus] 0 into PMT, FV = 305,000

press I/YR to solve for it … display shows : 33.4730% annual growth rate.

Cautionary Note : If the property was used as a primary residence then this would be a tax free return.

Or an after tax return, compared to other investments that are taxed at the usual rate for the typical investor.

Times have changed, rules and regulations have changed. It is always advisable to consult a qualified

before taking any investment decision with potential tax consequences to be in full compliance of the requirements.

For the average Canadian household this is a wonderful investment that could fund their retirement and self care,

estate planning, gift giving and passing on to their children as desired.

Yes you can make and lose a lot of money with real estate, consulting a competent and experienced real estate professional

can help mitigate the associated risks with the investment and provide a qualified perspective of the options.

Envoy Capitol Realty Inc., Brokerage would love to work with you and your family, your business

and the real estate needs or portfolio review to restructure and recycle capital into more efficient and

productive real estate alternatives.

We can also assist you with your principal residential purchases and sales.

Want to speak about a career in real estate or join a dynamic real estate team?

Let’s connect and discuss the possibilities without any obligation. Join Us.

Email us at capitalmoves@gmail.com or call us at (416) 441-6163 to set up an appointment.

Capital Gain Taxed

Capital Gain or Income ?                                                                        [ Part 1 ]

What triggers and defines capital gain versus income for tax consequences?

“The Income Tax Act does not specifically set out whether or not a gain or loss is capital in nature.

The taxpayer is responsible for reporting the gain (profit)as income or capital gain. This report may

then be challenged by the Canada Revenue Agency (CRA) with the onus of proof on the taxpayer.

Over the years, the determination has been made based on a number of factors such as the intention of the taxpayer,

relationship to the taxpayer’s business, number and frequency of transactions, length of time held, nature of the transaction

and objects of the corporation.

Should a debate proceed (between the taxpayer and CRA) to the Tax Court of Canada, the Court will

consider relevant factors concerning taxpayer conduct before, during and after the period under appeal.”

[ source OREA College text material REIA course pages 275-276, Required Reading ] (tax expert required here)

Why would the Canadian taxpayer want their gain (profits) from a sale be considered a capital gain?

With a capital gain, the taxes determine and payable would be half versus income that’s the reason.

We are lucky today, in that there is a lot of information online for  inquiring minds, however care must be exercised that you are reading the correct and most applicable information to you. Unless you are really specific in your search via Google, most results will yield information that is relevant to American investments and corresponding tax laws, rules, guidelines, rates and practices and are different for us Canadians. 

As these tax laws, rules and guidelines potentially change with ever government budget, finance statement or policy direction from either federal or provincial governments of the day a tax professional must be consulted in order to deal with the latest and most relevant information to the client and their unique situation. There’s your cautionary note, now we can try to explore this concept of Capital Gains or Income from a high level.

When a sale or implied disposition of an asset occurs it has potential tax implications.

We will stay with simple real estate examples here that deals with actual sale of 100% of an asset.

An investor purchases a commercial property with plans to hold for the long term and collect rental income from the property over their twenty year tenure of ownership. 

One day after many years of being a landlord of this commercial income property  investor decides to retire from active ownership and sells 100% of  the property. 

The marketplace enthusiastically welcomes the sale with a market high price and the investor makes a before tax profit after all associated costs and tax eligible adjustments  (ie CCA, Recapture, etc) of one million dollars ($1,000,000) that is declared  as their capital gain, having meet all the requirements according to their tax advisor accountant. 

In a word the investor’s before tax “Profit” is $1,000,000, their gain.

How that profit is dealt with is the discussion that follows in this fictional example.

In short the current regulations (always subject to change and it has changed from time to time) permits a rate of 50% to be applied to this capital gain amount resulting in a taxable capital gain of half the amount.

 Therefore ; take the above $1,000,000 if /when defined as a capital gain and apply 50% capital gains tax rate = $500,000 shall be the taxable amount. NOT the taxes due. 

The resulting (remaining) $500,000 is the taxable capital gain, meaning this amount will be taxed at the investor’s maximum marginal tax rate (but the amount of tax the investor will pay depends on their total income for their tax filing period). For our example here let’s assume this investor has no other taxable income, so only the $500,000 will be taxed. 

Therefore, $500,000 becomes tax free and the other half of the profit (gain) is determined to be the taxable capital gain $500,000 upon which the investor will pay taxes at the prescribed tax rate.

 Let’s also suggest this investor is an Ontario resident, therefore $500,000 x tax rate (53.53% combined federal and provincial on 2023 marginal tax rates, note this is the highest rate it is progressive lower for lesser amounts) = $267,650 Taxes due and payable.

Or 

Take the $1,000,000 before tax profit defined as capital gain and apply 26.76% for 2023 Taxable Income over $235,675, resulting in taxes due of  $267,600 approximately. 

Before any surtax that the taxable income may attract.  [ source for marginal tax rates in Ontario Canada ; www.taxtips.ca , also www.canada.ca (search income tax)   ]

To be continued … Part 2  : Capital Gains Taxed (Exemptions / Capital Loss / Operations Cash Flows … )  

In the meanwhile if you have questions kindly email them to us at  capitalmoves@gmail.com  and we will make an effort to answer them from a lay person’s perspective where tax information is concerned, we are not tax professional and therefore will not provide any tax advice (for tax advice consult a CPA or tax expert) however we are professional realtors and know where to find the answers to any real estate related questions. 

The above article is meant to be for educational discussion – information and is not intended to give

Financial, legal, tax, engineering, environmental advice. A tax expert should be consulted when appropriate.

 Please use the appropriate experts before investing your hard earned money.

All investments have risk and risk of capital loss is possible.

www.envoycapitol.com 

Envoy Capitol Realty Inc., Brokerage        Toronto, Canada. (416) 441-6163

Email : capitalmoves@gmail.com 

We are always interested in discussing real estate with you, or your client.

We are also interested in adding a few more great real estate professionals to our team.

Reach out and let’s start a conversation how we can help you and your clients get to the next level

in real estate ownership and performance. EMAIL : capitalmoves@gmail.com

Check out our books on Amazon ; 

                          The Greatest Money Machine    and   Silver Bullet Investing

Welcome to the Future of the GTA

The Future will be here before you and I know it.

It is shaping up to avail us with more conveniences and more intimate proximity to our neighbours.

This is the growing urban landscape, as we open our doors wide to accepting more new Canadians

to fill all the openings in our economy with a side of entrepreneurial drive as a kicker and help backstop the

future pension demands of the country. Canada needs youthful talent in all streams of our workforce.

We, Canadians have not been doing our part in having a measurably significant enough number of babies to sustain and

maintain a healthy growth trajectory but we want a the lifestyles of a healthy mid-class economy with growth and strength enough

to support real estate prices that we have taken mortgages out against. along with the expectation of getting some pension money

at or near the end of our journey(s).

So it appears the planners of our economy at both the federal and provincial levels are doing their best efforts to

try to keep most of us economically satisfied and encouraging demand for our housing industry by inviting the

willing and able to come here, work, live and play here, pay their taxes here for the benefit of all in the long run.

There will be bumps along the way as it is rarely smooth the continuous road of modest prosperity compared to

the balance of the world that doesn’t seem to get an easy time of it as a surprise war breaks out or some crazed

political leader runs the country into the ground creating hardship for most of their citizens.

As our traditional growth engines of our country and its economy have and continue to rely upon the boundless natural resources

and draw of immigration, its only bureaucratic and political meddling that can disrupt the harmonious balance and flow.

Feeling the pulse of a growing Toronto GTA as retail Mall properties start incorporating tall high density

residential condos and creating more ownership opportunities to satisfy the demand for homeownership and wealth creation.

Know what is trending in locations of interest to you and your family by working with a professional realtor.

Envoy Capitol Realty Inc., Brokerage with our several realtor associates spread across the GTA and knowledgable about lands

throughout most of the province of Ontario can assist with most if not all your, your family’s and your corporate real estate needs.

And if we don’t have the answers or a solution for a real estate challenge we know were to find a professional that can help.

Reach out and connect with us because we would love to assist all your real estate needs and wants.

Email : capitalmoves@gmail.com Website : http://www.envoycapital.com

Check out our books for information and enlightenment at http://www.Amazon.com ;

The Greatest Money Machine. and Silver Bullet Investing

All rights reserved @ Envoy Capitol Realty Inc., Brokerage 2022

Write to us : 3219 Yonge Street , Suite 227 Toronto ON M4N3S1

Call us to request an appointment : (416) 441-6163

[ Street Picture Open to the Public and for Public view, thanks to Cadillac Fairview Corporation – owned by the Ontario Teachers Pension Fund, visit a Mall today because it will be much different tomorrow and beyond.].

(The above photo was taken at the Mall, November 2022)

An Estimate of Value

An Estimate of Value :  Income Approach Example

 If there were  three comparable commercial properties and an investor was trying to estimate the value

of the subject property using a simplified method of the income approach and selection of the appropriate capitalization rate.

The subject property is a 18 unit multi-tenanted building with a net operating income of $75,850.

 Given the following information;

The three comparables; 

   Sale      Sale Price      |     Net Operating Income

A.       $ 987,785             $ 79,985                        

      B.         $ 850,250              $ 68,775                        

      C.         $ 925,750              $ 74,950

What would the estimated value of the subject property be when using a select capitalization rate

based upon these recent sales comparable commercial properties?

Take a moment to do a few calculations before looking at the answer developed below.

[    Take 5 minutes and run your numbers …  ]

Using the three commercial comparables above, first determine the capitalization rate associated with each.

After the above step, look at the three capitalization rates and select the one that best represents the average market capitalization rate and the most recent sale (time factor) for the subject property, understand it’s location, age, quality of income, time on the market, etc… the economy is on a positive slight uptrend and there is low inventory of this type of commercial property (supply issues, while demand is relatively constant).

Credit and liquidity in the market place is tight with more lenders and investors taking longer to make investment decisions and commitments.

Sale      Sale Price   |  Net Operating Income  |           Capitalization Rate : 

                                                                             [NOI/Sale Price] (rounded to 2 decimal places) 

      A.      $ 987,785             $ 79,985                        8.10%

B.    $ 850,250             $ 68,775                         8.09%

   C. $ 925,750             $ 74,950                         8.10%

It may be appropriate to select a 8.10 % capitalization rate to determine an estimate of value for the subject commercial property, having been developed from the most comparable properties sold recently in time. 

Given an NOI of $75,850 for the subject property and using an 8.10 % capitalization rate we arrive at an estimate of value of …

Estimate of Value :    $ 936,419.75  =     $75,850 (NOI)   /   8.10% (Cap Rate)

Therefore the estimate of value for the subject commercial property is $936,420 (rounded).

All real estate transactions are unique.

The above was meant to initiate discussion, educational purposes and not provide tax,

legal, financial, engineering, environmental advice, the appropriate expert in each area

should be consulted before meaning action is taken with an investor’s assets.

Consider reaching out to us at Envoy Capitol Realty Inc., Brokerage to start

a discussion about your real estate needs and wants.

We are also growing our team of professionals to assist clients with all their

real estate brokerage service needs from residential to investments; sales / leasing,

asset and project management in GTA.

Check out our books at Amazon :

The Greatest Money Machine and Silver Bullet Investing

Email : capitalmoves@gmail.com

(416)441-6163

All rights reserved @ECR 2022