Hi BP Canadian community,
I am researching my first property. I have been running analyses and looking at deals in Alberta and Ontario. I am mainly looking at SFR. There is one topic that truly puzzles me and I wonder what the experienced investors would say about the 1% rule. More specifically:
The purchase cost for A-class single home family is likely to be above $300k in today's market. 1% rule here requires 3k rent, which is not realistic unless we start to include a separate unit in the basement. Even then meeting 1% rule is still unlikely.
Do most Canadian investors forgo the 1% rule, put down 25%+ DP, and tweak operating costs to make positive cash flow?
Not sure if it's allowed to post property links here so I won't do that, but the cities I looked into so far are: Airdrie, Calgary, Edmonton, Cochrane, Saskatoon, London, Kitchener-Waterloo, Brantford, GTA.
Thank you!
Negative cash flow is never an option. Banking on appreciation is gambling
Hi BP Canadian community,
I am researching my first property. I have been running analyses and looking at deals in Alberta and Ontario. I am mainly looking at SFR. There is one topic that truly puzzles me and I wonder what the experienced investors would say about the 1% rule. More specifically:
The purchase cost for A-class single home family is likely to be above $300k in today's market. 1% rule here requires 3k rent, which is not realistic unless we start to include a separate unit in the basement. Even then meeting 1% rule is still unlikely.
Do most Canadian investors forgo the 1% rule, put down 25%+ DP, and tweak operating costs to make positive cash flow?
Not sure if it's allowed to post property links here so I won't do that, but the cities I looked into so far are: Airdrie, Calgary, Edmonton, Cochrane, Saskatoon, London, Kitchener-Waterloo, Brantford, GTA.
Thank you!
@Eagle Yeh the 'rule' hasn't been relevant for some time in Canada. Rents do not keep pace with increases in property values in most jurisdictions. Do a quick search for "price to rent ratio" in Canada to get a sense of where we're at. I can buy the house next door to mine for $1.5M, but it would likely only rent for $3,500 per month. Huge disparity...
@Eagle Yeh the 'rule' hasn't been relevant for some time in Canada. Rents do not keep pace with increases in property values in most jurisdictions. Do a quick search for "price to rent ratio" in Canada to get a sense of where we're at. I can buy the house next door to mine for $1.5M, but it would likely only rent for $3,500 per month. Huge disparity...
Hi @Account Closed, I suppose this is when investors have to get creative in creating new streams of income, i.e. laneway house, walk-out/separate entrance basement, garage rental, etc.
It would be interesting to see the spreadsheets for investors these days buying $1M+ properties...are people buying into the appreciations so much that they are willing to take negative cash flow?
Negative cash flow is never an option. Banking on appreciation is gambling
I wouldn't worry about the 1% rule. Our taxes are quite different than in the US. Run the actual numbers and see where you land. I do 20% down and still cash flow in AB. If I was to buy my places in BC that I bought 7 years ago today, I wouldn't cash flow now because prices have doubled.
You can still definitely cashflow on properties in Canada, however your cash-on-cash return often won't be as good as our American counterparts because you'll be getting less rental income in return compared to what you put down on the property.
One of the only ways to hit and maybe surpass that rule a little is to develop alternate income streams on the property, which you already alluded to. Developing a secondary or carraige suite will yield your biggest gains. Some districs will even allow you to develop both on the same property. Rent out the garage on that property and you now have 4 separate income channels on a SFR lot.
@Eagle Yeh cash flow is a function of risk and effort - higher risk and higher effort markets yield higher cash flow. The risk can be in the form of low appreciation potential, crime, lower quality tenants, etc.
Markets with strong fundamentals will attract investors, thus people will compete and drive returns down. So if you’re looking for a 1% market, it means you’re looking for something that requires more work or has more risk. Nothing wrong with it, but just need to set expectations accordingly.
I don't think the 1% rule is easy to achieve in Canada and I wouldn't worry about that. However you should definitely worry about having a cashflowing property and that is definitely feasible and somewhat easy in Canada.I personally don't buy anything that doesn't cashflow minimum $500/month after all costs including repairs and capex and usually aim around $1000. In a market where appreciation is expected to be stronger I think it is ok to accept lower cashflow but I would never go cashflow negative and I think you should always have some buffer built in so that if rents go down (yes it does happen sometimes) you're still cashflow positive
I don't think the 1% rule is easy to achieve in Canada and I wouldn't worry about that. However you should definitely worry about having a cashflowing property and that is definitely feasible and somewhat easy in Canada.I personally don't buy anything that doesn't cashflow minimum $500/month after all costs including repairs and capex and usually aim around $1000. In a market where appreciation is expected to be stronger I think it is ok to accept lower cashflow but I would never go cashflow negative and I think you should always have some buffer built in so that if rents go down (yes it does happen sometimes) you're still cashflow positive
Do you include the mortgage payment into that calculation? ie. The mortgage is principal and interest. Do you take that full amount out of the cashflow calculation?
Of course, cashflow is after mortgage payment (interest and principal) vacancy, insurance, condo fees (if applicable) city taxes, utilities (if not paid by tenants) maintenance/repairs and capex
Hey @Eagle Yeh
I see you are living in the GTA and had it listed as one of the markets you are considering. Nearly impossible in the GTA. I had an off market Triplex come up in the GTA. I would need to get a REALLY cheap seller financed mortgage, vacant possession to renovate all units and a good PP. Even then the numbers are not great in my opinion. More or less a POSSIBLE appreciation play at that point.
Of course, cashflow is after mortgage payment (interest and principal) vacancy, insurance, condo fees (if applicable) city taxes, utilities (if not paid by tenants) maintenance/repairs and capex
Yes and I have for 10 years, not $500-1000 a door but $500-1000 per house. All my rentals have basement suites and one has basement suite+garage suite
Yes and I have for 10 years, not $500-1000 a door but $500-1000 per house. All my rentals have basement suites and one has basement suite+garage suite
The utilities are in my name, main floor pays 60% basement pays 40%, I send them the bill at the end of each month with how much they owe, it's worked really really for me with all my tenants
The utilities are in my name, main floor pays 60% basement pays 40%, I send them the bill at the end of each month with how much they owe, it's worked really really for me with all my tenants
@Eagle Yeh Hi Eagle (cool name). I like to point out that there are a few things to consider (admitting right away that I am not an expert on Canadian rules) when it comes to residential real estate investing, asset appreciation, and rent-to-purchase price ratio.
You can choose to look for gains from appreciation in the value of a property or you can look for properties that provide positive cash flow.
In an ideal world, you would want to have both. That's where the 1% rule has its origin, according to my research. If you find two properties that are equal in size and quality and are both in the same general location with the same appreciation of value over time, up would pick the one with the higher cash flow. The 1% rule helped to limit those properties to A and B class neighborhoods. Yes, you can get (theoretically) even more than 1% in rent but then your neighborhood would be C or D or even E class and the appreciation would typically end up being lower.
The time when this was all possible is about 10 years ago. First, it was no longer possible to get the 1% rule in A-class neighborhoods, so people were willing to accept it for properties in B and C+ class neighborhoods.
Then the value increase of properties that you have seen in Canada and to some lesser extent we have seen in the US has made it less and less possible to reach the 1% rule at all.
That's why I say you need to make a decision these days. You have to decide if you have the goal to develop income or develop asset value.
If you decide you want to develop asset value, you would keep your investments in Canada and find properties that allow you to at least break even, meaning the rent income covers the mortgage, taxes, insurance, and property management. It's not the 1% rule but probably the 0.65% rule :-) This works well as long as the prices/valuation keep increasing. This strategy would also include that you check your properties every 18-24 months and the ones that have increased in value a lot are ripe to get a HELOC so you can use that money to buy more of these appreciating properties. The risk is that if prices ever stagnate or even go down, you might be over-leveraged.
The other option, which is what I help my Canadian mentoring clients with, is to invest in well-performing properties in the US. The goal here would be to develop a portfolio of properties that have good positive cash flow and built a passive income flow that will always be in place for you, no matter how the value of the properties develops.
We struggle to reach the 1% rule in A and B class neighborhoods here as well, but we can still get close and it is likely that we will get back to that ratio in the near future. Here is why: The asset valuation has grown much faster than the rent price inflation. As wages are increasing now, triggered by overall inflation, the rents will come back to improve the ratio in the next few years. With a starting point closer to 0.85% it is reasonable to invest and get to the perfect situation of balance between asset value growth and positive cash flow reaching again 1%.
To make this possible for Canadians, I have developed a package of info and resources to support the current tax and corporate structure as well as financing to take advantage of leverage, so it makes sense to invest in the US and live and enjoy Canada. Anybody who likes to learn more about it can just DM me and we can set up a call and discuss it in more detail.
I am in the same situation as you Eagle. We are in Gatineau, there are 1% rule income property (more of 0.6-0.8% per say), but these are buildings like build in 1920, or 1940 in not so great areas. Buildings looks really run down with requirement of significant work. Most newer property, single house/plex/condo, are at about 0.5 ration, so essentially it is barely break even, or you may end up paying out of your pocket for $100 a month. Even in areas an hour outside city, price is only about 50k less…so not good at all. Places like trois rivières, saguenay and Quebec City has some positive cash flow property, it again, they are 80-100 years old, as the first time investor, I just don’t have the knowledge or the courage to take on those project.
I end up buying couple small condo to test the water. I bought them directly from the builder, so I don’t get into bidding wars and pay insane price. They are about 10%-15% less than market listing price, I figure worst come to worst, I can sell it next year. I figure I gotta start somewhere, this may end up being an expensive lesson. My husband and I make good income, so we don’t mind small negative cash flow. We both very busy, so we thought condo might be a good place to start.
I am in the same situation as you Eagle. We are in Gatineau, there are 1% rule income property (more of 0.6-0.8% per say), but these are buildings like build in 1920, or 1940 in not so great areas. Buildings looks really run down with requirement of significant work. Most newer property, single house/plex/condo, are at about 0.5 ration, so essentially it is barely break even, or you may end up paying out of your pocket for $100 a month. Even in areas an hour outside city, price is only about 50k less…so not good at all. Places like trois rivières, saguenay and Quebec City has some positive cash flow property, it again, they are 80-100 years old, as the first time investor, I just don’t have the knowledge or the courage to take on those project.
I end up buying couple small condo to test the water. I bought them directly from the builder, so I don’t get into bidding wars and pay insane price. They are about 10%-15% less than market listing price, I figure worst come to worst, I can sell it next year. I figure I gotta start somewhere, this may end up being an expensive lesson. My husband and I make good income, so we don’t mind small negative cash flow. We both very busy, so we thought condo might be a good place to start.
You were smart not to buy 100 year old buildings to start. Condos will have condo fees that go up over time. With newer condos, the fees should be lower.
Also remember your rents will go up over time. Taxes will as well, but usually rents go up faster. Great deal getting them so far below market value.
Thank you. I am still very nervous, and worried about that I made bad decisions.
I compared condo fees between Ottawa and Gatineau. For buildings in 1970-1980s, the two bedroom condos cost about 5-800 in Ottawa, Gatineau they are mostly in 250-350 range. What I bought is 2005 and 2007 building. I think I will see some increase, but shouldn’t be too crazy. Of course, everything come risk and there could be unexpected repairs, only time will tell.
One of the only ways to hit and maybe surpass that rule a little is to develop alternate income streams on the property, which you already alluded to. Developing a secondary or carraige suite will yield your biggest gains. Some districs will even allow you to develop both on the same property. Rent out the garage on that property and you now have 4 separate income channels on a SFR lot.
In Edmonton a couple of years ago the city had a big initiative to increase population density. One of the results was that nearly all the lots (unless there was good reason not to) had the zoning set to RF3 by default. This means that in almost any residential lot you can have the main dwelling as well as a basement suite, garden suite, or a garage suite for a total one main residents and two secondary suites.
Of course, cashflow is after mortgage payment (interest and principal) vacancy, insurance, condo fees (if applicable) city taxes, utilities (if not paid by tenants) maintenance/repairs and capex
Anthony when people are talking about positive cash flows are you generally speaking of before tax? I would think that ideally to build a large portfolio you need to have positive cash flow after tax. Do you depreciate your properties to achieve positive cash flows after tax or do they cash flow without having to depreciate the asset?
You might want to look at Regina, it’s also a cyclical market however you can get close to 1% there.
I bought a turnkey 4plex in Regina (2004 built) for 500k which generates 4700$ pm, so close to 1% rule.
good part of buying with fundamentals is even now when my mortgage payment has ballooned on that property from 1400 to 2000$ it still cash flows :). And it’s completely hand off investment.