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Here’s a detailed example of a land acquisition and submission of a proposal for a new purpose-built 5-plex under the CMHC MLI Select Program, incorporating all associated costs and financial considerations.
Project Overview
- Location: Winnipeg, Manitoba (affordable land and rental market).
- Land Purchase Price: C$150,000.
- Development Plan: Build a 5-unit rental property (targeted to meet CMHC's affordability, energy efficiency, and accessibility requirements).
- Estimated Construction Costs: C$850,000.
- Total Project Cost (Land + Construction): C$1,000,000.
Step 1: Land Acquisition
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Land Purchase Price: C$150,000.
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Closing Costs:
- Legal Fees: C$3,000.
- Land Transfer Tax (Manitoba): ~1% of land value = C$1,500.
- Survey and Zoning Review: C$2,500. Total Closing Costs: C$7,000.
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Down Payment (5% on Land):
- C$150,000 × 5% = C$7,500.
Total Initial Costs for Land Acquisition:
- Down Payment: C$7,500.
- Closing Costs: C$7,000.
Total: C$14,500
Step 2: Development Proposal Submission
Key Costs Involved in the Proposal Process:
- Architectural and Engineering Fees:
- Site Plan, Design, and Building Permits: C$20,000.
- Environmental Assessment and Soil Testing:
- Phase I Environmental Assessment: C$5,000.
- Energy Efficiency Consultant:
- Plan for exceeding provincial energy codes by 15%: C$3,000.
- Accessibility Features Design:
- Barrier-free unit and common areas: C$2,000.
- CMHC Submission Fee:
- Processing fee for CMHC MLI Select application: C$1,500.
Total Proposal Submission Costs:
- Architectural and Design: C$20,000.
- Environmental/Soil Tests: C$5,000.
- Energy Consultant: C$3,000.
- Accessibility Design: C$2,000.
- CMHC Fee: C$1,500.
Total: C$31,500.
Step 3: Construction Costs
- Hard Costs (Materials & Labor): C$750,000.
- Soft Costs (Permits, Insurance, Contingency): C$100,000.
- Energy Efficiency Upgrades: C$20,000 (e.g., high-efficiency HVAC, insulation).
- Accessibility Features: C$10,000 (e.g., barrier-free entrances, accessible washrooms).
Total Construction Costs: C$880,000.
Step 4: Financing
CMHC MLI Select Terms (Based on Meeting Criteria):
- Loan-to-Value (LTV): 95% of total project cost.
- Amortization Period: 50 years.
- Interest Rate: 4.0% (below prime).
- Total Project Cost (Land + Construction):
- C$150,000 (Land) + C$880,000 (Construction) = C$1,030,000.
- Down Payment (5%):
- C$1,030,000 × 5% = C$51,500.
- Mortgage (95% LTV):
- C$1,030,000 × 95% = C$978,500.
- CMHC Insurance Premium (3.85% of loan):
- C$978,500 × 3.85% = C$37,663.
- Total Mortgage: C$1,016,163.
Step 5: Operating Financials
Rental Income:
- Market Rent (4 units): C$1,600 × 4 = C$6,400/month.
- Affordable Rent (1 unit): C$1,300/month.
- Gross Monthly Rent: C$7,700.
- Vacancy Deduction (3%): -C$231.
- Net Monthly Rent: C$7,469.
Monthly Expenses:
- Mortgage Payment (50-year, 4% interest): ~C$3,815.
- Property Tax (1.2% of project cost/year): ~C$12,360/year (~C$1,030/month).
- Insurance: ~C$300/month.
- Repairs & Maintenance (5% of gross rent): ~C$385/month.
- Property Management Fee (8% of gross rent): ~C$616/month.
- Utilities (common areas): ~C$400/month.
Total Monthly Expenses: C$6,546.
Cash Flow:
- Net Monthly Rent: C$7,469.
- Expenses: -C$6,546.
- Net Cash Flow: C$923/month.
Step 6: Return on Investment (ROI)
- Annual Cash Flow:
- C$923 × 12 = C$11,076/year.
- Initial Investment (Down Payment + Proposal Costs):
- Down Payment: C$51,500.
- Proposal Costs: C$31,500.
- Total Initial Investment: C$83,000.
- ROI:
- Annual Cash Flow / Initial Investment = C$11,076 / C$83,000 = 13.3% ROI.
Yearly Appreciation and Sale Value
Assumptions:
- Annual Property Appreciation Rate: 3% (conservative).
- Holding Period: 20 years.
- Initial Property Value (Land + Construction): C$1,030,000.
- Selling Costs: 5% of the final sale price (real estate agent fees, legal costs, etc.).
Future Property Value After 20 Years
Using the formula for compound growth:
Future Value = Initial Value × (1 + Appreciation Rate) ^ Number of Years
- Future Value:
C$1,030,000 × (1 + 0.03)^20 = C$1,858,512.
Selling Costs
- Selling Costs (5% of Sale Price):
C$1,858,512 × 5% = C$92,926.
Mortgage Balance After 20 Years
Since the property is financed with a 50-year amortization, the principal is not fully paid off after 20 years. Using an amortization calculator:
- Initial Loan Amount: C$1,016,163.
- Interest Rate: 4%.
- Amortization Period: 50 years.
- Remaining Balance After 20 Years: ~C$854,750.
Net Sale Proceeds
- Future Property Value: C$1,858,512.
- Less Selling Costs: -C$92,926.
- Less Remaining Mortgage Balance: -C$854,750.
Net Proceeds: C$910,836.
Total Return Over 20 Years
Cash Flow During Ownership:
- Annual Cash Flow: C$11,076.
- Total Cash Flow Over 20 Years:
C$11,076 × 20 = C$221,520.
Total Gain:
- Net Sale Proceeds: C$910,836.
- Total Cash Flow Over 20 Years: C$221,520.
Total Gain: C$1,132,356.
Initial Investment:
- Down Payment: C$51,500.
- Proposal Costs: C$31,500.
Total Initial Investment: C$83,000.
Overall ROI After 20 Years:
ROI = (Total Gain / Initial Investment) × 100
ROI = (C$1,132,356 / C$83,000) × 100 = 1,363%.
Annualized ROI
To annualize the ROI:
Annualized ROI = [(1 + Total ROI)^(1/20)] - 1
Annualized ROI = [(1 + 13.63)^(1/20)] - 1 = ~15.3% per year.
Summary
- Future Property Value (After 20 Years): C$1,858,512.
- Net Sale Proceeds: C$910,836.
- Total Gain (Cash Flow + Sale): C$1,132,356.
- Initial Investment: C$83,000.
- Overall ROI After 20 Years: 1,363%.
- Annualized ROI: ~15.3%.
Key Insights
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Leveraging CMHC Program:
- The low down payment (5%) and 50-year amortization significantly improve affordability and cash flow.
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Affordability and Energy Efficiency:
- Incorporating affordable rents and energy-efficient upgrades secured favorable financing terms.
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Scalability:
- With lower upfront capital requirements, the investor could replicate this model across multiple projects.