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My new investment property with 15% expected annual return

Mar 092020

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!

Mr. Krabs is my role model

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.

Low rise condos have higher cap rates than high rise condos

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.

An investment property in the prairie provinces would have a high cap rate

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. 🙂

finding the right investment property requires a good realtor

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.

Burnaby has about 250,000 residents and the population is growing fast

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.

Make financial decisions easier through patience

Advice 7 Responses »

Nov 182019

Time + Ownership = Financial Freedom

When financial writer David Bach was just 7 years old his grandma took him to McDonald’s and explained to him that there were 3 types of people in the world: The minimum wage employees working there, the consumers who pay money and eat there, and the owners who aren’t there but can still make money from the restaurant. David’s grandma helped him buy 1 share of McDonald’s, and taught him how to read and follow MCD’s stock chart.

The next time they went to a McDonald’s restaurant she told him, “now you are not just a consumer here, you are also an owner. Every time you eat here you are paying yourself.” It’s a brilliantly simple concept; easy enough for a child to understand. Yet it’s an inspiring and powerful idea. David became hooked on investing. He bought other stocks over time to eventually become a millionaire. 🙂 From the time he bought his first stock to today in 2019, MCD shares have increased in value by over 250 times! But it didn’t happen overnight. It took decades.

inflation has eaten away at the value of money over the last 45 years

McDonald’s menu in 1973 when David Bach was a kid.

Fortunately anyone can become an owner by investing in established companies like McDonald’s. And the best part is you get to earn all your money while you sleep. 🙂

It all comes down to saving a percentage of your income, and investing it on a consistent basis. And then simply wait. The longer you wait the more your money will have time to compound and grow exponentially. Although you can schedule to invest every month, or every quarter, studies suggest you should invest as soon as possible to maximize potential returns.

“People who try to get rich quick stay broke long.” ~ David Bach

If we understand that financial success requires patience, then investing will appear to be easier and less risky. For example, imagine if 2 investors held 2 different views about buying a house.

Investor 1) I’m afraid prices might drop in the next year or so. 🙁 And it’s a rather large investment so I question if now is a good time to be buying.

This mindset makes it difficult to pull the trigger when a good opportunity comes. We act based on what we believe. If we believe prices may fall then of course we will experience more hesitation and concern when buying a house. But let’s look at the second mindset where patience is paramount.

Investor 2) I have the patience to hold this property for at least 7+ years. So after the year 2026, based on macro trends, house prices will probably be much higher than it is now. Most likely rent in the city will be higher as well. Therefore buying a house now and locking in a mortgage balance is probably better than buying a house later and risk taking on an even larger mortgage.

The first person is thinking about the short term, while the other is thinking only long term. The second investor has a better chance of putting his intent into action because his long term perspective provides him with more investment certainty. That’s because it’s hard to know what the market will do next year. But due to inflation and urban densification, it wouldn’t be hard to predict that Vancouver’s home prices will trend upwards over the long run.

Worst Case Scenario

Confessions 15 Responses »

Mar 142016

I think believing in superstitions is bad luck. But bad things can happen to anyone. So one way to deal with unexpected situations is to be like Batman and have a contingency plan for everything. 🙂 I’ve recently updated my stress test page to reflect my current financial situation, which has improved since last year. A stress test removes uncertainty and doubt about our finances so we can sleep better at night. 😉

A Worst Case Scenario

Just for fun I have created a hypothetical worst case scenario to see if my finances could survive it. Consider the following events.

The economy contracts. People panic. The Canadian real estate bubble bursts and prices drop by 40%. Stock markets also fall 40%. Jobless claims skyrocket. I get laid off from both my jobs on the same day without notice. On my way to the employment insurance office I get T-boned by a distracted driver and my car is written off. The next day a devastating 7.5 magnitude earthquake hits Vancouver hard. My apartment building suffers heavy structural damage and is deemed unsafe to live in.

Okay, so things may look bad on the surface. But it’s actually fine, because the whole point of creating a stress test is to protect ourselves against these unlikely what if scenarios. I may be frustrated after all the unfortunate events, but at least I’ll still be okay financially. 🙂 Here’s how things would play out:

My combined severance package would be about $10,000 of after-tax income, enough for 3 months of living expenses.
I would qualify for employment insurance benefits.
My dividend stocks would continue to pay out regular distributions like they did during the last recession.
I have a stash of gold and silver in case I need emergency cash.
Auto insurance will cover the car accident.
Earthquake insurance would cover the damage to my apartment. Strata owners would hold meetings with the property manager to discuss how to move forward using 3/4 votes as per the bylaws. The insurance company would pay our housing costs if we have to relocate somewhere else temporarily.

Luckily my finances would appear to still hold up through all the turmoil. I would have plenty of time and liquidity to get back on my feet.

How to Stress Test your Finances

Step 1: Make a list of all the risks, uncertainties, or potential issues that could effect your money or financial lifestyle.

For example:
Job loss, flooding, rising interest rates, upcoming major purchases, etc

Fool’s Game

Real Estate 16 Responses »

Feb 112016

House it Going in the Real Estate Market?

So this is the kind of house you can expect to buy in Vancouver today for about $1.19 million.

16-02-1million-dollar-house

16-02-1million-dollar-house-sale

To put this into context, the same $1.19 million could be used instead to create a dividend growth portfolio that would generate $40,000 each year of tax advantaged income for a lifetime. 🙂 Have homeowners completely lost their noodles in this city?

The economy has stagnated. The U.S. stock market is down about 10% over the last 12 month period. The TSX in Canada has seen worse, falling by 20% since this time last year. Canada lost more jobs than it gained last month, pushing the unemployment rate up to 7.2%. Low oil and commodities prices is costing us a lot of jobs not just in this country but also in emerging markets that export metals and other resources. Negative interest rates are as common as the flu. Asia’s growth is slowing down. U.S. Treasury yields have fallen from 2.0%+ to just 1.6% over the last 6 months. And as Lenore Hawkins, chief economist at Meritas Advisors, says, the slowdown of growth in “global trades is at levels we haven’t seen since around 1958.” It’s almost like the entire world is in recession.

But despite all the negative news and market volatility out there, local real estate as a whole has remained stubbornly bullish for the last 4 decades.

Foreign Investment in Canadian Real Estate

Real Estate 21 Responses »

May 132015

Not in my Backyard

I recently read an article about a lower mainland couple who doesn’t like how a neighbouring $2 million house sits empty all the time. The yard is unkempt, there are no cars in the driveway and the lack of human presence is “driving [the couple] slightly bananas.”

Sacré bleu! You mean to tell me that there are people who buy property only for investment purposes? How dare they offer above market price to purchase a house here, so that Canadians can unlock the full value of their real estate. What can we do with cash anyway? Buy a diversified portfolio of liquid assets like stocks and bonds to provide passive income for retirement? No thanks. I’d much rather put all my nest eggs into a single illiquid asset that produces no income, and lies on a major fault zone. 😛 Those pesky foreign investors who don’t even live here think they can just not contribute any waste to our sewage system, and not use the city’s garbage services, but somehow think they still have the right to pay the full brunt of utility tax and property tax. Some nerve! How dare those foreigners help fund our police, fire, and public education system when they don’t even have kids here to overcrowd our classrooms. It’s also unfortunate how quiet their house is all the time. Who would want to live beside quiet neighbours anyway? Not me. 🙄

Sarcasm aside, foreign ownership of real estate is a hot button issue around here. Should non-residents or non-citizens be allowed to purchase Canadian residential property?

There’s actually a petition to restrict foreign investment in Canada’s most expensive real estate market, which I’ve signed and shared on social media. To be frank I don’t believe this petition will bring about any meaningful change, but I think it’s an important discussion for fellow Vancouverites to have. 🙂

15-05-change-restrict-foreign-investment-real-estate

click on image to sign the petition

There will also be a rally outside the Vancouver Art Gallery on May 24th, to focus on the problem of affordable housing for young people in a city where the average house costs more than $1 million. Feel free to attend and take a stand if you believe in the cause. 🙂

Foreign Real Estate Ownership

Some believe foreign ownership drives up the cost of housing which makes it less affordable to live in the city. But I think that’s largely a myth. The amount of foreign owned property is just a fraction of the overall market. Foreign investment laws haven’t changed much in Canada over the last decade. However mortgage interest rates have been cut in half over the same period. Raise the interest rate and watch as prices correct overnight.

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