By | 04/12/2021

# 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. š

## Quick summary

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. š

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. š 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
*Insurance \$384

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. Iā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. š

## 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. š

### 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. š

### 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. š

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. š

āāāāāāāāāāāāāāāāāāāā
Random Useless Fact:

Social interactions can be draining.

Author: Liquid Independence

Editor in Chief at Freedom 35 Blog.

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Jay
04/12/2021 9:01 am

Awesome post, Liquid! Love the detailed write up.

Iām in a very similar situation to you (age wise, married, and in Vancouver exploring moving to suburbs).

For that reason, Iām curious, if youāre comfortable answering – what suburb you chose to live in and why? Weāre exploring Port Moody.

All the best,
J

9volt
04/14/2021 9:58 am

What’s wrong with south of the fraser? There is a ton of great areas, Delta, South Surrey, Whiterock? These areas give you awesome bang for your buck and just a short drive to down town Van (if needed)

04/13/2021 5:15 am

I think at the end of the day it still comes down to the numbers to see if it’s worthwhile in owning a rental property. My parents are looking to move down to BC to retire in about a year or so and they are stuck on buying now to rent it out then move in when they officially retire. It’s not a bad idea but if your mortgage on the thing costs \$1,600/mth and you rent it out for \$1,700/mth… then I don’t see the point of going thru all the hassle just for \$100 gain however, I do personally much prefer REITs over owning actual real estate but that’s just me. The biggest part is not even any technical investment analysis, it’s just purely I don’t like others living on my property LOL

Oceanbluejewell
04/14/2021 3:50 am

I don’t see land transfer fees and legal fees for title and registration? These are substantial in first year – I have been rental land owner for > 25 years and never seen such a high first year operating profit. Please clarify. Thanks

[…] real estate prices soaring in Canada, Freedom Thirty Five Blog highlighted how his rental property is doing. He makes a good point when it comes to holding real estate citing a Globe and Mail […]

04/17/2021 10:51 pm

Interesting! Thanks for sharing the numbers, as always. So you live in Burnaby area? This is embarrassing but I have never been up to SFU, haha!

Sometimes I wonder if it would have been better had I not sold my apartment in a depressed RE market but for me not having the hassle of dealing with tenants and rentals and having that cash ready for the market in March worked out better.

04/18/2021 12:34 pm

Great post, Liquid! It’s nice that you are beating your 15% target. Seems like you bought at the perfect time. I don’t currently own a property but those sound like great tips. I like number 2 and 4. If I ever was in position to purchase a rental property, I would likely use a property manager instead of dealing with it myself.

05/17/2021 8:30 am

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