Owning a piece of the suburb
The recent stock market mayhem is a crucial reminder of how important it is to maintain a well diversified portfolio. After selling my farm last year I was too overweight in stocks so I decided to rebalance. 😉 At the beginning of this year I welcomed a new investment property into my growing portfolio. 🙂 It’s a one bedroom apartment in a low-rise building – less than 10 years old. It features an open floor plan that measures about 650 sf, and has a large balcony.
In today’s post I will explain why this purchase makes financial sense for me, and break down the numbers.
Why invest in Vancouver real estate?
In a previous post I explained how to improve investment returns by primarily focusing on broad asset class trends instead of analyzing individual assets. In late 2019 I was trying to find the most undervalued asset class. At the time, stocks were at record highs. The expected return for the TSX index was just 5% a year. Likewise bond yields were a joke – and still is today. So nothing looked attractive. 🙁 I was starting to lose hope.
But then I looked at the real estate market. To my surprise the expected return was 10% or higher. Hey, now we’re getting somewhere. 😀 I have discovered an undervalued asset class with terrific return potential. Ka-ching!
The next step was figuring out where to buy real estate. For tax purposes I planned to stay within Canada. I also wanted to buy in a large city with steady population growth. After looking at Montreal and Toronto I ultimately decided to stay around Vancouver due to the following reasons.
- Prices in Vancouver recently pulled back about 12% from all time highs in 2018.
- The capitalization rate has greatly improved over previous years.
- Insanely low vacancy rate of just 1% helps keep rental rates high.
- Relatively high population growth.
- Home city advantage. I can manage the investment myself instead of paying a property manager.
Choosing the right investment property
The last step was to narrow down my choices by making a list of criteria – such as the price range, rental restrictions, building age, capitalization rate, etc. The capitalization rate is a measurement of profitability. It’s the net income generated from the property divided by the property’s price. A good cap rate in Vancouver is 3.5% or higher.
A couple of years ago Vancouver was a terrible place to buy rental properties because the projected returns were abysmal. According to Colliers International, the cap rate here was as low as 2%. Ouch. Here’s the data for Q1 2018.
However, things turned around over the next 2 years. By the end of 2019 the cap rate climbed as high as 4.25% in some segments of the market. 🙂 It’s still not as lucrative as in other cities, but it’s comparatively better than before. Here’s the data for Q4 2019.
At this point I knew exactly what I’m looking for. So I was finally ready to head out and find me some prime real estate. 🙂
I started searching in October on the website zealty.ca. I also hired a realtor to help me filter listings and write offers. By the way, if you’re looking to buy or sell I recommend finding yourself a British real estate agent. They’re all about the proper-tea. 😀
Anyway, in the beginning all my offers were falling through. Then one day in December I came across a very promising condo in Burnaby, a vibrant city east of Vancouver.
I attended the open house and liked the property right away. It satisfied about 90% of my buying criteria which was excellent. 🙂 The asking price was also reasonable. The market was heating up so I knew I had to act fast. I made an offer shortly after viewing the place. After some back and forth an agreement was reached, and I paid a small deposit – or as I like to say, a condo-minimum. 😀 I removed my conditions after getting a home inspection and mortgage confirmation. A few weeks later the property was mine. 🙂
Rental Property Criteria
So here are the reasons why I like this condo.
- Low strata (HOA) fee which works out to just $0.28 per square feet. (See fee schedule here)
- High cap rate of 3.6% to 4.0% range according to comparable rents in the area.
- Built by a reputable developer.
- High walk score and transit score – over 80% for both. This makes it easier to find renters.
- Safe neighborhood, with a relatively young demographic.
- Area has a high level of education and high median household income (~$110,000 according to StatCan.)
- Unit not facing south or west so it doesn’t become a sauna in the summer.
- No upcoming special assessments or deficiencies in the building.
- Friendly neighbors.
Now here are some things I don’t like the about property.
- The underground parking spot is a bit far from the elevator.
- Can be a little noisy due to construction down the street.
So there’s not much to complain about. Overall I’m very happy with this purchase. 🙂
In any case it was finally time to make some money from my new investment. Do you know how many ants you’ll need to fill an apartment? The answer is tenants. 😀 I showed the apartment to more than a dozen potential tenants. There were a few goofballs who didn’t show up to their appointments.
But eventually I found a young, middle class couple with a cat. One of them (not the cat) has a credit score in the high 700s, – surprisingly good for someone in his mid 20s. They moved in at the end of February and pay a monthly rent of $1800 – which they can easily afford on their combined gross income of $100,000/year.
This puts my rental unit’s cap rate at 3.9% – which is on the high side for a Vancouver area condo according to the Colliers table shown above. 🙂
Breaking down the numbers
From the beginning I wanted an investment property that would be cash flow positive. A conventional 20% down payment wouldn’t cut it. So instead, I decided to proceed with a 30% down payment.