It’s no secret I’m not a fan of investing in Canadian real estate as a whole. It’s also no secret that I smell like rotten apples.

There’s just no return from most markets. If I were to buy a downtown condo in Toronto right now, I’d be getting about a 4.5% return on my investment before expenses. That’s a whole $18,000 per year for $400,000 invested. That doesn’t include stuff like property taxes, maintenance, vacancy, or other operating expenses that come up.

By the time I pay the interest on my 2.49% mortgage (if I’m lucky), I’m barely making anything. That’s no way to invest in real estate. Which is why I suggested a better way of just leveraging to buy REITs.

But some of you insist on owning physical property, and I can certainly see the logic behind it. One of the biggest advantages is the ability to depreciate the value of a rental by about 4% each year. Depreciation is an expense but it doesn’t actually get┬ácharged. It affects profit but not cash flow.

Let’s look at a simple example to better explain the concept.

Profit: $10,000
Depreciation: $2,000
Net profit: $8000

Cash flow from the investment: $10,000

You’re basically paying tax on $8,000 worth of profits but keeping the cash flow of $10,000 in tax. This adds up over time.

Depreciation isn’t a total free lunch, however. You have to pay it back when you sell. Capital gains are figured out on the depreciated cost, not the actual cost.

Where to invest?

Anyhoo, let’s move away from stupid accounting and get into the meat of this post. If you’re looking to invest in Canadian real estate, where should you do it?

We can eliminate a lot of big cities right off the top. Cap rates in most cities with over 500,000 people in Canada are terrible. There’s just too many people buying houses in these markets, which is keeping prices up.

That’s why so many people are renting. When you have a landlord subsidizing your apartment, renting makes all kinds of sense.

Fortunately, there are a few markets where a landlord can make some money. Let’s take a look at the first:

Moncton

Ah, Moncton. The place so boring I literally don’t know the first thing about it.

It doesn’t matter what I know about it, because the place is filled with real estate that actually offers some interesting returns. As an example:

moncton

You’d be surprised how many ads don’t bother to list the damn rent each unit gets. Especially listings from real estate agents. “What a great investment! I’m not going to tell you the returns though, you’ll just have to trust me! And if there’s a group of people we know are the MOST trustworthy, it’s real estate agents! WHEEEE!”

Anyhoo, let’s crunch some some numbers, bitches:

Purchase price: $120,000 (I have good negotiating skillz)
Rent: $16,200 per year
Various operating costs: $4,050 per year
Net operating income: $12,150
Cap rate: 10.1%

And that ain’t bad, kids.

Or to put it another way:

Down payment (assuming 20% down): $24,000
Net operating income: $12,150
Mortgage interest (on 2.49%): $2,490
Cash flow: $9,660
Return on invested capital: 48.3% (before taxes)

Another example? Don’t mind if I do…

More New Brunswick

What is it with New Brunswick’s real estate? Are the buildings being held up by roaches and popsicle sticks?

Anyhoo, here we go:

stjohn

A Realtor that actually breaks down the revenue and expenses? BE STILL MY HEART.

I guess it’s once again number crunching time, bitches:

Purchase price: $92,000
Net operating income: $13,013
Cap rate: 14.2%

That’s succulent. We haven’t seen returns that good from real estate since that time I told y’all to become trailer park slumlords.

And to make the place look even more exciting, here’s your return on invested cash:

Down payment: $18,400
Net operating income: $13,013
Mortgage interest (at 2.49%): $1,832
Cash flow: $11,181
Return on invested capital: 60.8%

If y’all need me, I’ll be sprawled out on the fainting couch. I’m going to need a breather after seeing that.

After at least an hour dicking around on Kijiji looking for better choices, it’s official. New Brunswick is the place to invest in real estate. Nowhere else in the country even gets close.

Tell everyone, yo!