REI in Canada = Not profitable? (BP #214)

31 Replies

Hi there -

Just listened to podcast episode #214 of the podcast and was surprised by Joel Sherlocks statement that REI in Canada didn't made much sense for him/his company so they went to the US/Arizona instead..

We're currently located in Munich, Germany but have been all over the place in the past, spent a couple of years in NZ, and are now seriously thinking about moving to Canada (BC) and starting to invest in real estate (small rentals) there.

Any insights from local investors much appreciated -
Does it make sense to invest in real estate in the BC/AL area these days, i.e. are there good deals to be found..?

Cheers,
Jan

Hi Jan,

How old is the podcast that you were listening to?

I know a few years back (when the dollar was on par and the U.S. Economy was low) there were some very good deal down that way, but with the exchange rate where it's at and the rise in real estate south of the border it a bit tougher.

As for BC/AB - Alberta is at a low - not sure if they have moved into their recovery cycle yet.

For most parts of BC, especially here in the okanagan we are definitely in our boom cycle.

That being said there will allows be decent real estate vehicles to use as an investment - what I would say is more important is what type of return are you looking for and building a plan around that and long term goals.

There are good purchases you just have to be ps isn't and ready to act when the right one comes up!

Hope that helps a bit.

Typical big city Canada is highly over priced for landlords to buy in now. I often see listed property at over 200x monthly rent. For example a townhouse you may want to buy to rent in calgary would cost 5-600k yet rent for 2500/month (if you're lucky enough to get a tenant of that calibre they can easily buy so why would they rent). Take out 250$ condo fee and 4000$ tax bill and these properties can't cash flow.

Investors have better luck buying older homes and suiting them. Even this is tight. Older multi family buildings again are laughably over valued vs cash flow. Often times the buildings are valued at 200k per door for a 50 year old building.

I have a development property where it is valued at more than 500x monthly rent. These are big time money losers to hold because the value is all on the land. There are other strategies where building to rent may be better than buying existing stock.

To many investors I've suggested that buying a reit would provide a lot more passive income than a rental property in calgary. If you factor in cap ex and management the listing agent pro forma would show a cap rate in the 2-3% range. Ugly returns on that type of product.

@Jan B. - in the Toronto area, where I live, the market has been pretty hot for a couple of years, recording 25 to 30% increases in price y-on-y. Makes very little sense for a landlord in the Greater Toronto Area too. In the past few weeks, the Government announced measures to cool the market due to extremely poor affordability. These measures, combined with a seasonal inflow of new listings, seems to have taken some heat off the market. However, prices are still at an all time high.

Canada, and particularly cities like Toronto & Vancouver seem to have a number of factors at play that are increasing prices: (a) low interest rates, (b) steady flow of new immigrants, (c) foreign investors, (d) lower supply than prior years and (e) sought-after country to move to.

Although your question was BC/AL, hope this gives you some added perspective on ON (Ontario) as well.

All the best.

@Jan B. - Canada is a huge and diverse market - it's really hard to say anything of use when drawing with such a broad brush. Places like Toronto and Vancouver are very expensive (think New York and London). Investors in these cities aren't pushing for cashflow, if they can even find it, more than wealth preservation or relocation. 

Where in BC would you be looking to invest? Kelowna has been all over my news feed these past few months as investment hot spot, but I don't have any expertise there as I'm focused on Toronto.

@Jan B. If your goal is to have rentals, I would strongly reconsider doing rentals in BC. They are very left-wing tenant friendly. It's extremely difficult to get a sub par tenant out (not necessarily evict, but say if they were pushing things enough that you can't evict them but you don't want to renew the lease) because the laws are in the tenants' favour. BC also has some additional land transfer taxes that AB does not have (or a far smaller percentage) and you have an extra 7% provincial sales tax where applicable. They also have rent controls and strict rules on precisely which forms you must use to serve notices. There are several reasons why I personally won't invest in rentals in BC, too many risks and the law might not back you up. 

AB on the other hand is quite a bit more landlord friendly, and fair to both parties. I have heard Edmonton has better cashflow opportunities than Calgary, but I can't speak to that personally. Calgary is going to be harder to cashflow in as rents right now are still fairly low, but house prices are as well. This doesn't necessarily mean cashflow though. @Sean Kollee mentioned some prices; I think prices are quite a bit lower than that, I sold a pretty average townhouse 2 years ago (when prices were still higher than they are now) for $286k. I would say townhouses $250-350k, a modest single family in an older-ish area (70's, 80's) would be $350k-$450k, and rents $1300-$1500 plus utilities for a townhouse/mainfloor/small house type of rental. My property tax bill on a $350k-ish house is around $2000 for the year. If you want to invest here, probably the only way you're going to see cashflow is buying an older (70's) home in a more affordable area, putting in a suite (or fixing it up to make the existing suite acceptable enough) and renting top, bottom, and garage if it has one, and putting 20% down on the property. But you're still not going to be making a ton of money so most likely better to look elsewhere. 

Exactly the high cost is why I'm right now starting a build to rent project with good numbers. I don't want a collection of mid 70's garbage properties spread out across the huge city. It isn't a scaleable model. It isn't how I want to spend my time to manage tiny cash flow properties. Prices are so high how does a person accumulate a portfolio? If you have the funds here to buy a portfolio you could get 10x the number of units elsewhere.

My second comment about buying here. If it doesn't cash flow now, why would it further appreciate? The next buyer would cash flow even worse than the 2017 buyer. I always look at my property market value and think 'would I buy this today at this number'. Generally the answer is no. Today is the time to be selling a portfolio not building it.

Thought I would share a very recent transaction.

On May 1st I closed on a 4-plex in Vernon BC.  It has all two bed, one bath units - all the same size.  Has a shared coin operated washer / dryer in the building common area.

It is in a C class neighborhood, built about 1970.

Purchase price was 470k,  plus about 10k in closing costs and I will put about 10k into repair/improvements.

At possession on May 1st only 1 unit was rented @ 800 - the tenant has been there 1.5 years.

I believe the market rent should be more in the range of $950.

I put an advert on Kijiji saying there would be an open house on May 4th and got about 35+ people replied.  I screened some of them out right away from their initial contact.

About 15 people completed applications for units during the open house and rented the three available units at the $950.

With the purchase price, closing and repairs it comes to about $122,500 per door.

The building is structurally sound, tenants all have separate power meters - I supply the water  in the rent (hot & cold), everything else is paid by the tenants.

Property taxes are about $3,300 and insurance is about $2,200.

So far I am very pleased with the deal, as long as I have picked some good tenants things should work out well.

That sounds attractive. In calgary that building would be an illegal suited duplex and be marketed for 850k or an actual legal building at 999k+, unless it was in a horrible blighted area. I'm sure your numbers will be good. But run them at 999k.... not so good.

You seem to be at that 1% monthly rent to purchase price valuation. I think that is great for a desirable community like southern interior Bc.

Here is a typical horrible calgary deal.

Killlarney area duplex with two suites. 1976 build. Great neighbourhood definitely a b or b+. Seller claims renovation has been done. No interior pics. Exterior is borderline to hideous. No rental data posted on ad. If there was rental data it would be hardly reliable given the realtor behaviour you see on these type of listings.
Asking 999. I would quote the address and mls # but that isn't allowed here. Let's just say it is on 28 st sw.

Not sure who would purchase this 'deal'. It won't be me! Good area to invest but at this valuation you need to be math challenged.

Hi

Prices have dropped in Edmonton as well but still they are not good even for 1% rule to work. I am looking for a single family house and a lot single family home from 1970, 1980 under 1300 sq ft are selling around 300k-325k and with garage around 325k-350k.

Area around 118 ave from 32 street to 66 street is really cheap but area is bad. 

@Brianne H. Hi Brianne, my wife speaks canuck (Vancouver transplanted to Scottsdale) and she wants to own vacation property in Kelowna. I agree with the concept, but she and I both find the management and intrusions along with the taxes and fees of BC to be overly burdensome and quite annoying, not to mention unnecessarily intrusive. I'm wondering if you have any suggestions in AB that reflect the Kelowna area? I think we are much more AB at heart.

Hi @Jan B.
Depending on what your looking for and where, there are always deals to be had.

I invest in both short term house flip deals (with partners) and also long term cash flow rentals in Vancouver. I can tell you that we have been fortunate to be in a great place and there are certainly good investments here. The market supply has declined which is pushing Vancouver housing back into a sellers market once again and prices are on the rise again.

Wow, thanks for all the feedback!
Much appreciated - it's terrific to get such a diverse set of impressions from all across Canada!!

We realize that major cities are a tricky market (as in many locations all over the globe), we've heard some crazy Vancouver property market stories first hand from locals on our travels there.

Rentals with 200x monthly rent or more certainly don't sound super-profitable..
In BP tradition we'd be aiming at areas where 1% is feasible. So we want to keep an open mind and don't restrict ourselves to a specific area - especially not initially - but Vancouver Island would certainly be handy.
Thanks for the Kelowna hint, we'll look into that as well!

But anywhere else in BC or Alberta could work for us basically.
Priority for us is definitely cash flow, not appreciation.

@Brianne Hall , @Ken Min - thanks for the BC market insights, sounds tricky for landlords..

@Pawan J. Now that's interesting - would you mind telling what kind/size of rental properties in Vancouver you've invested in (and I suppose when you could purchase them)..?

Cheers,
Jan

@Jan B. As the saying goes... live in the area you love, but invest where the numbers make sense! As a Vancouver resident I'm biased in my opinion, but the living environment and lifestyle doesn't get much better than in southwest coastal B.C!

There are still deals to be had in the lower mainland, particularly further out in the Fraser Valley, however they have become much fewer and farther between with the hot sellers market we've been in the last couple years. Price point is definitely on the high end, so as some have already mentioned it depends on how and exactly what type of product you're looking to invest in. If you're looking for a buy and hold at a lower price point with high cash flow the lower mainland area of B.C. is going to be tough.

However, if the B.C. lifestyle really appeals to you you could still live here and invest in areas that might be more appealing such as Alberta, or even across the border in Washington state.

Vancouver Island is a beautiful place to live and there are still some decent deals to be found outside Victoria, particularly in Nanaimo. On the downside it can be a bit of a pain getting to and from Vancouver Island though, so if your investing on the mainland and your investment approach requires more hand on/in-person work that might be a difficulty situation. The island is also experiencing some spillover from people looking outside Vancouver though so prices are getting driven up there as well.

The Okanagan is another great lifestyle area that also has some appealing investment options. my parents live in Kamloops and there is definitely a lot of growth happening there. I know that  @SamPerren is quite active in the Kamloops area and might be a good contact there. 

All that being said, there can be deals found nearly anywhere in B.C. Our mentor/partner has been active in B.C. for over 20 years and has 300+ units spread throughout pretty much every corner of B.C., in every residential product category as well as some commercial, predominantly acquired through creative/low money down strategies. So if you're playing the long game and are willing to work hard and learn there is tons of opportunity here!

Best of luck!

It does not make a lot of scenes for those outside Canada to invest here. Yes there are some good deals but not really enough to make it attractive for any investor that is willing to put their money where it really works.

Most parts of the US are by far much more attractive than any where in Canada. Money has no loyalty to boarders so I suggest you look to the US to invest to get the biggest bang for your buck. If you can live anywhere find somewhere besides BC that appeals to you.  

This is all very valuable information for you @Jan B. in your decision to invest in Canada. I myself live in Toronto and I invest in the US. Mainly because the barrier to entry is a lot lower. Not to mention every deal I do I make 30% more with the exchange rate, 1 CAD = 1.30-1.35 USD, which is very attractive.

Thinking in terms of cash on cash roi, the high prices in the Vancouver and Toronto renders these big cities undesirable. HOWEVER, I agree with the notion which says THERE ARE DEALS TO BE FOUND EVERYWHERE, I am currently looking to the outskirts of Toronto for properties and have found really good commercial deals with excellent long term leases with big time corporations. Some even have mixed use properties with residential units up top and commercial down below. If you willing to do the leg work to find the deal and your persistent, you will make money and achieve your goals!

GOod luck to you!

Kamloops BC is starting to boom.  Tons on jobs (5000 jobs over the next couple years, and a 30,000 job deficit over the next 10 years) and we're seeing increased rents/prices/investment as result.  The residential market is starting to see multiple offers and sales over list prices.   I just bought a 34 suite building with rents at 675/ea that should be $200 higher. We'll double our money there in 3-5 years.  Also bought a 4plex in Oct for $388k, put $40k into it.  Rents for $3800/mo.  

Still possible to buy a fixer upper below $300k and resell for $400k or more. 

Risk/reward ratio. Buy a REIT, it's easy and liquid but you're stuck with 6%. Buy in USA into a flipping model and you could earn 50% or more but now you have currency risk, construction(crooked contractor) risks. Buy in Alberta and you've got the swings of boom and bust....

There are deals everywhere but you need to be(or hire) an area expert.  

Hi @Account Closed , yes I agree BC makes it hard to invest in with the extra taxes, fees, and laws. I'm not terribly familiar with vacation properties and how profitable they are around here, but I'm sure the most high demand areas in AB would be Banff/Canmore, Jasper, and Waterton areas. Close to the mountains and National Parks for winter and summer activities.  Beyond that I'm really not sure what prices are like and how much demand there is. Have you considered doing vacation rentals in other areas closer to home? I've heard of people investing in vacation rentals in AZ or other southern states (and Mexico - though entirely new set of rules) and doing fairly well. 

@Brianne H. Scottsdale AZ is a huge vacation place, but since we live here we are looking for a "second" home for summer when it is typically about 108 F here or 42 C. We've hiked and camped in Banff and Jasper but I did not know about Waterton. Thanks. I'll check it out. Mexico has taken a turn for the worse and the US Govt has issued travel warnings. Lots of drug cartel violence in and around the resort areas.

Hello @Jan B.   Canada is a HUGE country and there are many opportunities to invest. What are your criteria for defining whether a deal is "good"? I live in BC but do all my investing further east. I focus on cash flow, and that really can't be found close to home.  There are many markets in Canada where cash flow is possible, you just have to do your homework and analyze markets to see what fits with you. Let me know if you have any questions... happy to help.

Hi there,

Again, thanks for all the great insights!

The general feedback sound like investing in BC is doable, however trickier than in other parts of the country. That's certainly good to know.

@Chris Baxter   Well, we're basically looking for cash-flowing properties as appreciation is sure nice but not the priority for us.. mind sharing the areas outside BC you're focusing on?

@Shawn Kelly Thanks for the insights - good to hear there's still ways to invest in BC

@Sam Perren Yes.. the Kamloops area came up a bunch of times - just revived the Kamloops thread so the info doesn't get lost here..

Lots of great information in this thread, I hope it's valuable to many potential investors!

Cheers,

Jan

@Jan B. Have a look at smaller markets in Ontario and Quebec, as well as large cities in the Maritimes (New Brunswick, Nova Scotia, PEI, and Newfoundland). My last purchase was a six-plex in Moncton (NB) and it cash flows nicely.

Hi @Roy Cleeves ... loaded question as cap rate is only as good as the expense data you chose to include in the analysis. We're at 6% using conservative vacancy and maintenance expenses. I personally focus on DCR and cash-on-cash return as my indicators when analyzing properties.

I see things are still hot in KW; I have a condo there as well and am finally seeing some appreciation on it.

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