I think that when someone pictures a ‘Real Estate Investor’, they think of older generations, perhaps paying cash for an apartment building.
Did you know that surprisingly 90% of my investor clients are in their 30s and 40s and are purchasing either an apartment unit to hold and resell, such as a presale, or they are looking for a detached home that has the ability to add a secondary suite, and rent out both the main floor and basement suite. I absolutely love to see younger generations getting into real estate investing!
Every client has their own unique goals and situation, so every one of them has their own reasoning for whichever route they take with investing, whether it be short-term investing, long-term investing, or mixed.
Buy and Hold [ A Long-term Investment Technique]
Today, I’ll review an investment strategy called ‘Buy and Hold’.
You purchase a property, find a tenant, ensure that you are as close to break even as possible (it is Vancouver/The Lower Mainland after all)…(but I can show you areas that will cash flow!), then you sit on the property for years or even decades).
The entire time, your mortgage principal is being paid down by the tenants (for my own portfolio, about $9,000 per year, per home) and they have covered much of your other carrying costs. You are left with an apartment that has gained value over the years and can be sold for a much higher number than when you bought it.
Which city should you buy in? Here’s the fun part! I’m a Realtor that includes real estate searches in other areas of BC, besides Vancouver and the Lower Mainland, because most of my portfolio isn’t even here locally – It’s held in the Okanagan and Vancouver Island.
When people hear that I mainly invest outside of our local market, they usually ask “How come?”, or say “Hmm, I never thought of doing that.” To clarify, I do hold one property locally. But the other 5 rental suites are either in the Okanagan or Vancouver Island.
The answer to those questions are coming up.. Hang on while I first explain about the data that I use…
Data Collection
Every year, I take a week to scrape through the plethora of Craigslist rental ads and compile a spreadsheet of 1 bedroom rentals and 2 bedroom rentals. It’s a music-cranked, loads of coffee kind-of-a-week. I then compare those current rental market figures with recent stats of how much a 1 bedroom home and a 2 bedroom home would cost to buy. Ta-da! We can compare all cities and all rental incomes equally. Of course, there are further carrying costs to be included for expenses, so the figures I’ve calculated are Cap Rates and not Net Operating Income numbers. *
I have included 25 different cities in my search which include: The Interior, Okanagan, Vancouver Island, Fraser Valley, and Metro Vancouver areas. The results may surprise you.
How to get a higher Return-On-Investment
Some of the less expensive cities to purchase in, only have slightly lower rental rates than a city like Vancouver. So while their rental rates are only slightly lower, their purchase prices are tremendously lower. This generates higher returns for investors. As long as there is demand for their rental unit, they will cash flow heavily in comparison to Vancouver.
The part where investors get ‘stuck’ in their thinking, is they say: “Well Vancouver has the opportunity to appreciate more in value”. While that may be true and has happened in the past, right now, if you are holding a Vancouver condo, you have seen it drop in value more than almost any other city.
Meanwhile, many long-term homeowners that have owned in Vancouver for decades, have made quite a hefty profit on their home. So they sell, relocate out of Vancouver, and help drive up demand in other cities and other markets.
Nobody has a crystal ball and knows when the market will increase and by how much, let alone when they should time it right to sell. So instead, why not use actual hard, reliable numbers, such as the cashflow and perhaps there is a chance that the small city you invested in will also appreciate at a healthy rate, just as Vancouver may do.
The Findings
Below are the average rental rates, average purchase prices, and cap rates for 25 BC Cities. This may not come as much of a surprise to you, but Vancouver is ranked near the bottom of the list.
*Cap Rates (Capitalization Rates) show the potential rate of return on the real estate investment. The higher the capitalization rate, the better it is for the investor. Net operating income, one of the metrics to compute the cap ration, is found by deducting the operating expenses from the gross operating income.
The operating expenses can be property taxes, maintenance costs, strata etc. Operating expenses however does not include depreciation. Capitalization rate gives teh first hand indicator of the investment worthiness of the asset. however, it in not an exhaustive measure by itself. – credit to Economic Times; economictimes.indiatimes.com/definition/capitalization-rate
If you have any further questions or want to learn more on how to get started in real estate investing, please reach out! I’m always happy to help: sold@danielleroyrealty.com.
