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Analysis: Secondary Suites vs Investments

Analysis: Secondary Suites vs Investments

Posted by: tyler hinrichsen
Category: Secondary Suites
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Secondary Suites vs Investments: ROI Analysis

One of the biggest decisions that Calgary homeowners make is picking the best investment vehicles to grow their money and retirement nest egg. The options are many and varied, but some make better financial sense than others. Here is a discussion of how an investment in secondary suites compares against some of the most common investments many people make such as mutual funds, guaranteed investment certificates (GICs) and savings bonds.

Mutual Funds: Inflation Adjusted Returns: 2.35%

Risk: Moderate

Mutual funds provide an easily assesible way to control your investments. With funds tracking markets of all types ranging from energy and oil & gas to indexes and commodities. Mututal funds also offer portolio stratagies aimed at specific goals, such as dividend income or high growth.

Overall Risk: Moderate

Liquidity: Moderate

In the event you need the capital you have invested into mututal funds, you can simply login to your online banking or contact your broker to make the sale. This process normally has the funds into your account in 1-5 business days. However something many people forget, mututal funds are front & back loaded, meaning there are fees involed during the purchase and the sale of each fund. Normally ranging from 0.65-3% in addition to the yearly management fee charged.
Overall Liqudity: high

Return: Low

Mutual funds are an attractive investment vehicle if you’ve done a good job of picking funds and maintain a nice portfolio of funds to balance risk and reward. Last year, the best Canadian Focused Equity and Canadian Equity category funds returned 35%. As you may imagine, some mutual funds – particularly those specialising in biotechnology or health – returned a lot less.
Based on an average of 35 Growth Mutual Funds ( Higher-risk Funds with emphasis on growth ) the average 10 year return was 4.01%. ( Based on CIBC 10yr Mutual Fund Data for Growth Funds ). Taking into account the average historical inflation rate of 1.66% over the last 10 years you can see these high return investments are only providing you 2.35% on average.
Overall Return: 2.35%

Savings bonds: Inflation Adjusted Returns: -0.96%

Risk: Very Low

If you’re seeking the lowest-risk investment possible, you should be willing to accept a low rate of return. This is how Canada Savings Bonds (CSBs) and Canada Premium Bonds (CPBs) work. Backed by the government, savings bonds offer next to nothing in returns, and that is not an understatement.
Overall Risk: Very Low

Liquidity: High

GIC are fixed term contracts and normally can not be redeemed prior to maturity. This means the funds are essentially locked in. Alternatively many companies offer redeemable or cashable GIC, however the option to cash out early doesn’t come free, as these GIC provide lower returns compared to their locked in counterparts. All GICs can be used to secure a line of credit, similar to a HELOC.

Overall Liquidty: Low

Return: 0.6%

Based on a Special offer GIC provided by CIBC, Investments up to $999,999 you can recieve a 2.25% rate on a 5yr GIC. Taking into account 10yr average inflation of 1.66%, you are left with a adjsuted return of only 0.6%.
Overall Inflation Adjusted Return: 0.6%

Secondary Suites: Inflation Adjusted Returns: 17%

Secondary Suites can be provided in one of two primary ways, a secondary suite normally developed in the basement of an existing residence alternatively a backyard suite or garage suite provides a rental detached from the primary residence for additional privacy.

Risk: Low

Similar to other the investments mentioned above, Secondary Suites & real esate in general are considered low risk. This is due to primarily to the fact real esatate is a tangible asset. Meaning the primary risks involved are losses due to fire, flooding or theft / vandilism, which are normally covered under an insurance policy. Unlike GIC, Bonds or your savings account where the initial investment is garunteed, the value of your house may fall below that of which you initially purchased it due to fluctuating market prices.
Overall Risk Rating: Low

Liquidity: Moderate

As with other investments such as mutual funds, GIC & Savings bonds. Once the investment has been made you are no longer have the funds available. This does not mean the capital is not accessable. By utilizing a HELOC the funds directed towards the development of the secondary suite become available through the equity created during development.
Overall Liquidity Rating: Moderate

Return: 17%

Based on the analysis of secondary suites provided in the following article taking into account the rental rate of over 350 Listings in Calgary. Secondary suites normally provide a return on investment of 15%. This takes into account the operational costs from the suite such as utilities and insurance. However unlike many of the other investments, secondary suites provide additional income through the appreciation of the house / suite itself. As stated in the article the appreciation rate of Single Family dwellings in Calgary over the last 10 years has been around 2%.

Overall Inflation Adjusted Return: 17%

Additional Factor of Saftey

Secondary suites provide additional value by providing a lower cost housing option in the event of job loss or injury. In the event your household income drops, you and your family can move into the secondary suite renting out the primary dwelling instead providing a monthly income of over double what the suite itself generates yearly. This provides an additional factor of safety that other investments cannot provide.

Winner: Secondary Suites - Low Risk, Moderate Liquidity, 17% Return

As you can see, secondary suites out perform the closest competitor by nearly 14.65% per year. This means based on a investment of $75,000.00 a secondary suite would provide an additional $10,987.50 per year. With the ability to rent the primary dwelling instead, it can transform the high return of 17% to over 35%, something normally unheard of outside of ponzi schemes.

Author: tyler hinrichsen

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