Thoughts on Income Properties

I don’t have a TV or cable right now but boy do I like HGTV streaming online. And I especially like Income Properties.

Truly, I’m a fan, I’ve probably watched every episode and some twice. I’m a big fan but for maybe a different reason.

I love watching the costs of these ‘investment properties’ soar out of control and then have the ‘magical math’ at the end of it pretend like it was all worth it.

For the uninitiated, Income Properties is a reality show where an individual, couple, family or business partners look for a income property and renovate it to make it a viable investment. They are often shown three houses to choose from and then given 2 renovation designs to pick in an effort to either reduce their mortgage or create the most cash flow. The renovations are usually amazing and way better than any rental unit I’ve ever seen.  It’s a great combination of design porn and personal finance porn.

Granted, I’m guessing the majority of these homes are in the Greater Toronto Area, which is notoriously ridiculous for housing prices at the moment, see: FML Listings.

Here is a typical example:

Harry and Larry are looking to buy their first house in Toronto. They have a budget of $600,000. Note: they never say what they had as a down payment and instead list the maximum amount of mortgage they were approved for. I have seen multiple episodes where you can see when you really look that they have $30,000 and a $570,000 mortgage planned! Let’s say Harry and Larry are in that sad camp.

The host shows them three houses:

  • House 1: 1960s style backsplit with a basement with no windows and wood paneling but potentially close to something cool downtown: $580,000, needs at least $40,000 renovation, potential for $1400/month rental
  • House 2: New build in the suburbs, huge 4 story, 4 bedroom, unfinished basement house: $450,000 but the couple always freaks out about driving on a highway to get to see the house, needs $20,000 renovation, potential for $1000/month rental
  • House 3: Century home that has existing rental unit on the third floor but is a DIY job and falling apart overall and likely has ‘knob and tube wiring’: $620,000 , needs $45,000 renovation, potential for $1800/month rental

Of course all of these renovation budgets are estimates and even the host states that these ‘represent the best case scenario if nothing goes wrong.’ Good TV means something always goes wrong!

Couple picks house 1: $580,000 house and magically comes up with another $40,000 for a renovation, putting their initial investment at $620,000.

$20,000 over budget before any additional costs come up. Already the show estimates their mortgage not including the reno, in this example, over $2900 a month in mortgage payments!

No one ever laughs hysterically at this which I still cannot believe.

Then invariably the $40,000 budget balloons to 45, 50, $55,000 because of unforeseen costs. Now thankfully there are some humans on the show who rightfully start freaking out the moment the renovation budget goes over by $1.

For Harry and Larry they have some problems like mold that is uncovered, some crappy electrical stuff and oh whoops there’s no window so we have to cut through the foundation. Their budget goes up to $50,000.

Their investment now sits at $630,000

The show never discusses how people finance these renovations. Some are savvy and buy a house cheap enough so the renovation budget is rolled into the mortgage budget, but many don’t and are seen talking to a financial adviser about a line of credit. Even with good rates, a $30,000 line of credit, to pay it off in 5 years is $539 a month.

This brings their monthly housing cost to $3439!

TV magic then happens and their basement is transformed into a beautiful 2-bedroom apartment, estimated by a local agent to go for at least $1500.

The happy couple comes to see it and are overjoyed about finally getting some money.

In this situation, even if they end up renting it for $1600/month, that leaves their monthly costs to $1839! Granted much better, but mostly it is just now a normal mortgage.

They always fail to mention that it would take over 31 months- with no vacancies or further renovation costs just to pay off the renovation.

Yes, the show also always talks about how much the house has appreciated since the renovation- often by $50-70,000. This is a nice improvement, but house appreciations are unreleased gains until you actually sell the house! And who knows when this bubble will burst.

Great for TV, not so great for personal finance.

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2 thoughts on “Thoughts on Income Properties

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