What if you had $250,000 to invest..?
You’ve been planning for a long time, and you finally have $250,000 to invest in your real estate portfolio! Congrats! You’ve managed to do what most people haven’t managed to do in a lifetime!
Now, what do you do with that $250,000? Where do you invest it?
At current rates, you could invest the entire amount into a multi-plex, or you could spread it out and buy several houses. You’re probably used to buying single family homes already, so why not keep going with what you’re familiar with? Or… is it time to jump on a commercial deal?
Commercial vs personal lending rules are different… The following scenarios assume you have $250,000 to invest, and puts almost the whole investment to work. The only difference is whether you invest in a commercial property vs a typical home buyer mortgage.
Let’s dive in!
Scenario A, invests the $250,000 into commercial property, financing (5 units or more): lenders can finance up to 85% of the price because they lend on the building’s own income.
You put down 15%, $247,500, and keep $2,500.
Scenario B, invests your $250,000 in residential rentals, financing (1 to 4 units you don’t live in): lenders finance only up to 80%.
You put down 20%, using up the entire $250,000.
NOTE: Either scenario needs to plan for more cash for closing costs (land transfer tax, legal fees, inspection) since they are NOT included in the scenarios. Both scenarios assume rents are set at $2,500 per unit (again to keep the comparison simple). |
6-plex vs four townhouses, at $2,500 rent per unit
$250,000 to invest
$2,500/mth per unit
15% down (A) · 20% down (B)
5.25% qualifying rate
30-yr amortization
5% vacancy
10% management
3% appreciation
| Year 1, annual | A · 6-plex$1,650,000 · 6 doors | B · Four townhouses4 × $312,500 · 4 doors | Basis |
|---|---|---|---|
| The investment | |||
| Purchase price | $1,650,000 | $1,250,000 | Townhouses: 4 × $312,500, at market value |
| Cash available to invest | $250,000 | $250,000 | Same starting budget for both |
| Down payment | $247,500 (15%) | $250,000 (20%) | Cash invested (closing costs not included). The one financing difference: commercial lenders finance up to 85%, rental townhouses only 80%. |
| Cash left over | $2,500 | $0 | What stays in the bank |
| Mortgage | $1,402,500 (85% LTV) | $1,000,000 (80% LTV) | Townhouses: $250,000 each |
| Interest rate | 5.25% | 5.25% | Qualifying rate |
| Amortization | 30 years | 30 years | The usual maximum for rental townhouses; the 6-plex could go longer with insured financing |
| Monthly payment (P&I) | $7,700 | $5,500 | Townhouses: about $1,400 each |
| Annual debt service | $92,350 | $65,850 | Payment × 12 |
| Doors | 6 | 4 | Cost per door: $275,000 vs $312,500 |
| Step 1 · Quick look: rent minus PITI | |||
| Rent | $180,000 | $120,000 | $2,500 per unit per month × 12 (6 units vs 4) |
| Parking and laundry | $3,800 | $0 | $3,000 parking + $800 laundry |
| Gross operating income (GOI) | $183,800 | $120,000 | |
| Mortgage principal and interest | −$92,350 | −$65,850 | $1,402,500 vs $1,000,000 at 5.25%, 30 yrs |
| Property taxes | −$16,500 | −$12,500 | About 1% of the price |
| Insurance | −$5,000 | −$2,400 | Townhouses: $600 each; the condo corporation insures the building |
| Total PITI | −$113,850 | −$80,750 | |
| Cash flow on PITI only | $69,950 | $39,250 | $5,850/mth vs $3,250/mth |
| Cash-on-cash (PITI only) | 28.3% | 15.7% | ÷ down payment of $247,500 vs $250,000 |
| Step 2 · Add the costs that PITI leaves out | |||
| PITI only counts the mortgage, property taxes and insurance. But owning a rental costs more than that. Units sit empty between tenants, things break, someone has to collect rent and deal with tenants. In the 6-plex the owner pays for heat, water and keeping the hallways clean. In the townhouses the owner pays monthly condo fees. Each line below is a cost the PITI view ignores. Subtract them all and you get the money that actually lands in your pocket. | |||
| Vacancy | −$9,200 | −$6,000 | Rent you lose while a unit is empty between tenants. Budgeted at 5% of income, about 18 days a year per unit. |
| Management | −$18,400 | −$12,000 | A property manager finds tenants, collects rent and handles calls. Usually 8–12% of income; 10% here for both. If you do it yourself, you’re paying with your time instead. |
| Condo fees | −$0 | −$16,800 | About $350 a month per townhouse. Covers the roof, exterior, snow and lawn, and the condo’s reserve fund. |
| Maintenance and repairs | −$3,600 | −$2,400 | Leaky taps, broken appliances, paint between tenants. Budgeted at $600 per unit per year. |
| Heat | −$4,450 | −$0 | The 6-plex has one central boiler the owner pays for. Townhouse tenants pay their own heat. |
| Water and sewer | −$1,400 | −$600 | The city bills water to the owner, so the landlord pays in both cases. |
| Hydro (common areas) | −$1,750 | −$0 | Lights in the hallways, laundry room and parking lot. Townhouse tenants pay their own hydro. |
| Cleaning | −$1,800 | −$0 | Someone cleans the hallways, stairs and laundry room. |
| Snow removal | −$800 | −$0 | Clearing the parking lot and walkways. Covered by condo fees for the townhouses. |
| Lawn care | −$500 | −$0 | Mowing and yard upkeep. Covered by condo fees for the townhouses. |
| Accounting | −$800 | −$800 | An accountant to prepare the rental income tax return. Same cost either way. |
| Legal | −$500 | −$500 | Leases, landlord board filings, the odd legal question. |
| Advertising | −$100 | −$0 | Listing vacant units online. |
| Total costs PITI leaves out | −$43,300 | −$39,100 | All the lines above added together. |
| Adjusted cash flow | $26,650 | $150 | The PITI cash flow from Step 1, minus these costs. This is what you actually keep each year. |
| Cash-on-cash return (true) | 10.8% | 0.1% | True cash flow divided by the cash you put in (your down payment). The townhouses roughly break even. |
| Step 3 · Plan for big repairs | |||
| The maintenance line covers routine repairs. Big, rare items like a roof or boiler need their own plan. The 6-plex owner saves a reserve out of cash flow every year. The townhouse investor can’t: the down payment used the whole $250,000, and the cash flow is close to zero. So most townhouse investors rely on a HELOC (a home equity line of credit on their properties) for emergencies. It costs nothing until you use it. Here we assume a $20,000 HELOC available from day one. | |||
| Emergency plan | Reserve saved from cash flow | $20,000 HELOC | A saves 3% of income each year; B sets up a HELOC on the townhouses |
| Set aside this year | −$5,500 | $0 | The reserve is still your money, kept in a separate account |
| Cash flow you can spend | $21,150 | $150 | True cash flow minus what you set aside |
| Cash-on-cash (after reserve) | 8.5% | 0.1% | ÷ cash invested |
| Things to know about a HELOC. The bank can lower or freeze the limit, often when money is tight for everyone. The rate goes up and down with prime. It is secured on the property, and lenders usually offer less on a rental than on a home you live in. And many lenders count an open HELOC against you when you apply for your next mortgage, even if you owe nothing on it. A reserve or a HELOC only buys time; what actually pays for repairs is cash flow. | |||
| Where NOI fits | |||
| True cash flow | $26,650 | $150 | |
| Add back mortgage principal and interest | $92,350 | $65,850 | NOI is measured before the mortgage |
| Net operating income (NOI) | $119,000 | $66,000 | = GOI − vacancy − all operating costs, incl. taxes, insurance and condo fees |
| Year 1 profit centres | |||
| Cash flow | $26,650 | $150 | True cash flow; any reserve set aside is still your money, so it counts here |
| Mortgage paydown | $20,000 | $14,250 | Principal repaid in year 1 |
| Appreciation (3%) | $49,500 | $37,500 | 3% of price |
| Total year 1 return | $96,150 | $51,900 | |
| Key ratios | |||
| Cost per door | $275,000 | $312,500 | Price ÷ doors |
| Gross rent multiplier | 9.0 | 10.4 | Price ÷ GOI (7–10 may cash flow) |
| Cap rate | 7.2% | 5.3% | NOI ÷ price |
| Debt coverage ratio | 1.29 | 1.00 | NOI ÷ debt service (lenders want 1.20) |
| Vacancy risk: one empty unit | 17% of rent | 25% of rent | One of 6 units vs one of 4 |
| Total return on cash | 38.8% | 20.8% | Total year 1 return ÷ down payment |
| What if? A $15,000 surprise in year 1 | |||
| The surprise | Roof repair, $15,000 | Condo special assessment, $15,000 | A pays for its own roof. In a condo, the corporation can bill owners for a big repair: here $3,750 per townhouse. |
| How it’s paid | $8,000 reserve + $7,000 from cash flow | $15,000 on the HELOC | A’s reserve: $2,500 left at purchase + $5,500 saved. B draws $15,000 of its $20,000 HELOC; interest about $750 a year. |
| Year 1 cash flow after the surprise | $11,650 | −$600 | A: $26,650 − $15,000. B: $150 − $750 of HELOC interest. |
| Still owing after year 1 | $0 | $15,000 | B carries the repair on the HELOC |
| Back to normal | About 7 months | Never, from rent | A’s cash flow is about $2,200 a month, so it refills the reserve within the year. B’s cash flow is about zero, so the HELOC gets paid back from your own income. |
| A one-time repair doesn’t change NOI. NOI measures a normal year of running the property, so lenders and appraisers leave big one-off repairs out. It does change what lands in your pocket that year, and that’s where the two scenarios split: the 6-plex earns the money back, the townhouses borrow for it. | |||
Why Scenario A outperforms Scenario B
- The bank lends more. Commercial financing covers 85% of the price, rental townhouses only 80%. With the same $250,000, A controls $1,650,000 of property and B controls $1,250,000.
- It pays you. After every cost, A keeps $26,650 in year 1. The four townhouses keep $150, about break-even.
- Lenders approve it on its own income. A’s debt coverage ratio is 1.29, above the 1.20 lenders want. B’s is 1.00, so the townhouses lean on your personal income to qualify.
- Less vacancy risk. One empty unit is 17% of A’s rent but 25% of B’s.
- Cheaper per door. $275,000 a door for A vs $312,500 for B, and no condo fees.
- It recovers from surprises. A refills a $15,000 repair from cash flow within about 7 months. B borrows it on a HELOC and pays it back from your own income.
- More wealth building. Total year 1 return, counting cash flow, mortgage paydown and appreciation, is $96,150 (38.8%) for A against $51,900 (20.8%) for B.
Where townhouses still make sense: they’re cheaper to get into, easier to sell one at a time, and the condo corporation handles the exterior. But four units that each break even still pay you nothing. More units under one roof, with better financing, works harder for the same $250,000.
Townhouses: condo fees cover the roof, exterior, snow and lawn; tenants pay heat and hydro; the landlord pays water. 6-plex: landlord pays heat, water and common hydro. Closing costs and land transfer tax are left out of cash invested.
PITI-only numbers flatter the townhouses most: they look like a 15.7% return until vacancy, management and condo fees cut it to 0.1%. At a 1.00 DCR they would also fail a commercial-style coverage test, where lenders want 1.20.