At What Rate do Operating Expenses Increase Annually in Ontario?

5 Replies

Rent increases at a rate of 1.6% per year. 

To calculate total accumulated cashflow, I calculate: income (+1.6% annually) - operating expenses (changing over time) - mortgage payments (constant). At what rate do operating costs typically increase? Does the cost of some expenses increase at a faster rate than others? Do utilities increase at a greater rate than, for example, property tax?

@Sam A.  

You could use the inflation calculator from the Bank of Canada website or lookup the Consumer Price Index for Canada.   For 2014, the BoC gives inflation at 2.03%, the CPI is presently pegged at 1.90%.

However, if you are performing discounted cash-flow analysis on a property you are analysing for purchase, I would encourage you to be ultra conservative:

a) assume no rent increase;

b) assume an operating cost increase of 2.5%;

c) assume no appreciation of property value.

If the numbers still work under the above assumptions, you should have a solid performer.  If they are marginal, you could change the rent increase to 1%, but you will be leaving yourself less of a buffer.

Perfect, thanks guys.

Here is a related question.

Do my expenses increase at the same rate as inflation? Say inflation is 2% over a year. Will my utilities increase by 2% that year? What about property tax? Other expenses?

@Sam A.  

The real answer is - it depends.   As you gain more experience and grow (economies of scale) you should become more efficient and lower your overall expenses so they do not grow quite at the rate of inflation (or above).    However, for budgeting it is best to be conservative and assume your expenses will grow at the rate of inflation.

For property taxes look at the historical data - both rate and assessments.  Here our tax rate has actually gone down, but assessments have been climbing 3-5%/year ... as the Federal and Provincial governments download more and more on municipalities, they become more cash starved.

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