Variable or Fixed rate mortgage with my new deal?

Question

Hello BP Community,

I'm probably raising a question that may have been discussed in previous threads. In any case I was hoping to get some advice with my new deal.

I have the following 4 scenarios regarding going with a variable rate mortgage or a fixed rate mortgage. I believe I have my option selected with respect to the cash flow it provides me but I wanted some opinions in case I am missing something.

I'm using my HELOC for the DP at the interest rate there is 3.2%.

Variable rate is 2.55% 5 year, monthly payments 30 year amor

Fixed rate is 3.09% 5 year, monthly payments 30 year amor

All the numbers are based on receiving a rent of $1550, I'm hoping to get %1700. Cash flow includes CAP EX, vacancy, property management, mtg and property taxes.

Scenario 1:

75% purchase price at Fixed Rate

25% DP through HELOC

Monthly Cash Flow: 56$

Yearly: 668$

Scenario 2:

75% purchase price at Variable Rate

25% DP through HELOC

Monthly Cash Flow: 112$

Yearly: 1345$

Scenario 3:

80% purchase price at Fixed Rate

20% DP through HELOC

Monthly Cash Flow: 34$

Yearly: 413$

Scenario 4:

80% purchase price at Variable Rate

20% DP through HELOC

Monthly Cash Flow: 95$

Yearly: 1135$

Obviously the numbers suggest that scenario 2 and 4 provide the best returns. The only difference is that that 5% is equivalent to 13.5K, so I'm wondering whether the extra 5% from my HELOC warrants the 13.5K. Am I right in saying that since the interest i'm paying with the variable rate is tax deductible, that it doesn't matter what the rate is. I am a buy and hold investor, not considering any appreciation in the property but strictly cash flow.

Please let me know your thoughts!

Robin Valadares · Answer

@Andrew Postell and @Mike Oliveira thank you for your feedback and insight. I appreciate your perspectives!

Andrew to answer your earlier question, my CAPEX includes a monthly maintenance figure, I have also included my property management fees as well. Basically the end result of cash flow is considering almost everything I can think off and it leaves me with my bottom line. Mind you, if I do obtain my desired rent of $1700, my monthly cash flow will be boosted by $150 and yearly by $1800.

Mike, the property is actually located in the St. Catharines area. Rent prices are not on par with Hamilton's but I foresee an increase in market rents once there is further progression with the MetroLinx expansion.

Andrew Postell · Answer

@Mike Oliveira and @Robin Valadares I guess I should be very thankful of where I am at.  No wonder we have so many outsiders investing here.  If you are thinking of investing outside of the country keep us in mind.  Our rent market is one of the best.  Good luck with your search!

Mike Oliveira · Answer

@Andrew Postellthese scenarios are very common in the GTA(greater Toronto area) prices have gone up 20pecent since last year. the houses are very expensive and the rents are not going up enough to have good cash flowing properties.

@Robin Validates have you looked into student rentals if your looking for better cash flow or buy a house that needs work at a low cost renovate and then rent it out and your cash flow will be better. You can still find good cash flow but it is becoming difficult in the GTA. Look at smaller cities out a bit further like Brantford and London or St. Catherines and Niagara and you will find much better cash flowing properties. Just some suggestions, as for the scenarios you have provided I think scenario 4 is pretty good.

Andrew Postell · Answer

@Robin Valadares I think I'm missing something entirely here or maybe I just don't understand the market in Ontario but a $34 a month cash flow sounds insane!  Your best cash flow option is $112 per month?  What if ANYTHING goes wrong.  As in, what if that interest rate increases?? Or taxes increase next year?  Or the renter clogs the toilet?  Or ANYTHING!  Does your CAP EX including a monthly maintenance figure in it? I can't say I'm the end all expert to this stuff but I've never had a single investor give me numbers like this before and tell me that they were seriously considering going forward.  If you've got something else to share to help us better understand these figures please share but one service call in a year could wipe out all the profits you have on this deal and I would caution you against moving forward.