Liquid’s rental property – 1 year update
About a year ago I blogged about selling farmland to buy a rental property in the Lower Mainland. I wrote that I expected a 15% annual return. In today’s post I’ll discuss how my 1 bedroom rental apartment is performing, and share 4 important lessons I’ve learned along the way. 🙂
I’m happy to report that things are going as expected. My 1 year ROI is about 16%.
The rental income has been stable with no missed payments. Phew. 😌
This must be why home prices have been on the rise. Despite the seemingly low capitalization rates, real estate investors like myself are still making double digit gains, even if it’s only on paper. 🙂 And this isn’t some fluke. I calculated the expected 15% return before I purchased the property. And other investors likely saw the same potential, adding demand to the market.
Let’s take a look at the numbers for my Burnaby rental property.
First year operating profit = 6.73%
Annual Profit = Net gain / Cost of investment
Net gain = $9,696
Cost of investment: $144,000 (The initial capital I put into this property)
Annual Profit = $9,696 / $144,000 = 6.73%
Net gain is my operating profit after subtracting any costs to manage the property.
These costs are $11,904 total, and include:
*Mortgage interest = $7,560
*Strata fee $2,410
*Property tax $1,550
My rental income is $1,800 a month or $21,600 a year.
So my net gain from operations is ($21,600-$11,904) which is $9,696/year.
Total ROI = 16% Woot!
Operating profit is only part of the story. I’m counting on price appreciation as well.
I had predicted a 2% to 3% higher price appreciation for Burnaby condos. But boy was I wrong.
According to Royal LePage. Year over year condo prices in the city have increased more than 10%. Wow!
But every neighbourhood is different. A comparable unit in my building recently sold for $725/square feet. Assuming this is a fair comparison, it would put my rental property at a market value of $464,000. This is $14,000 higher than my purchase price of $450,000.
So my total ROI including the $14,000 price appreciation is 16%. Yay. 😀
Lessons to keep in mind when buying rental properties
Lesson 1: Good investments don’t last forever
In late 2019 I explained why I was selling my Saskatchewan farmland. I predicted that the best days for farmland appreciation are in the past. It’s not that you can’t make money anymore from farmland. It’s still a profitable long term investment.
But there were just better opportunities in residential real estate in Toronto, Montreal, Ottawa, or Vancouver.
As predicted, 2020 was the worst performing year for Saskatchewan farmland over the last decade, although still not bad. This is according to FCC data.
Meanwhile, real estate prices in urban areas experienced higher double digit increases. Farmland had more potential for growth in the past, but not anymore. Plus, rent is usually higher in cities than in rural districts.
So don’t be afraid to change your financial strategy if you find better opportunities. It doesn’t mean you were wrong. It just means the world is constantly changing, and you have to adjust your plan accordingly if you want to maximize your capital. 🙂
Lesson 2: Get to know your rental property before you buy
If you are about to purchase a strata unit or something similar, check if the place allows rentals. If the building has strict rental restrictions then you should think twice about buying it. That’s because the property’s potential for price appreciation will be suppressed. And you will have fewer options when you want to sell it, or move out eventually (if you live in it.)
Also read through the strata documents to find any red flags like really high insurance deductibles, or any issues with the depreciation report. A trusted realtor can help you with this. Just don’t expect a hipster real estate agent to show you any riverfront properties. They’re too current. 😉
Lesson 3: Think very carefully before selling your property
As most of you know I plan to hold a property for a minimum of 6 years before selling. If you don’t have that kind of time horizon I would suggest you probably shouldn’t invest in real estate. But even after a long holding period, you still need a compelling reason before selling a property.
Too many home owners have made the regrettable financial mistake of selling too early. I’ve seen colleagues who sold their Vancouver home, only to buy back into the market a few years later after prices have increased. The transaction costs of real estate are also expensive af. 😞
To prevent making this mistake I suggest renting out your property instead of selling it.
Stock investors are always encouraged to buy and hold. Why should real estate investing be any different?
Most people I know who traded in and out of the housing market didn’t do so well. Even the country’s top financial columnist, the Globe & Mail’s Rob Carrick admitted that one of his biggest financial mistakes ever was not keeping his Toronto house when he moved to Ottawa in 1994.
When my wife and I moved into our new house last fall I could have sold my old apartment. I lived in it for over 10 years. But I decided to rent it out instead for $1,700/month. So far so good.
If you’re moving out of the country permanently or retiring for good then go ahead and list your property. Otherwise, do not sell prematurely.
Lesson 4: Consider using a property manager
If you don’t have the time or patience to deal with tenants directly, then hire a property manager. I don’t mind finding suitable tenants myself. But there are alternative ways to manage rental properties.
Wealth and rental properties
Famous philanthropist Andrew Carnegie said that “90% of all millionaires become so through owning real estate.” This isn’t a commentary on the own vs rent debate. You can always buy real estate purely as an investment. You don’t have to live in it.
Real estate is one of the most common ways investors can build wealth. You can make money through both price appreciation and rental income. 😉
Random Useless Fact:
Social interactions can be draining.