1% Rule in Southern Ontario between Ottawa and Hamilton
Investor · Ottawa, Ontario · Member since 2015 · 63 posts · 4 votes
Hi,
I was wondering whether anyone has had any success finding properties yielding the 1% rule in Southern Ontario? Toronto is out of the question and I have had difficulty finding places even in Kingston, Ontario. In the odd case where the numbers did seem to line up, I was not sure if there was something deficient with the property or neighborhood which allowed the property to sell so low below market value.
Has anyone been able to find anything following the 1% rule?
Would you have any further information on how to invest in Maritime properties? Say, if I was looking to purchase a student rental?
Thanks Roy.
The basics are the same as up your way ... the outlay will be a little lower ;)
Rule 1 remains - know thy market. If you were looking for a student rental at a reasonable price, I would first look in Moncton, then Fredericton, and finally Halifax.
Now - being the middle of August - is not necessarily the best moment to purchase a student rental. Those who have been trying to sell their student rentals (houses, apartments, etc) over the summer have likely not re-rented them, so you would be picking up a building 2-weeks before the term starts with no tenants. With a few exceptions, those looking for an apartment now are not the best candidates (i.e. they weren't organized enough to look in March/April). Yes, there are exceptions, but I've declined 3 sets of applicants, in the past two weeks, for a 3-bedroom unit we have turning over this month. If you are renting {furnished} rooms, particularly to international students, there seems to be no bad time here.
However, in about a month, those landlords who have not re-let their properties will be more motivated not to carry them empty through the winter. If you are looking at a place which will need a little work, then a Close in October leaves you enough time to do the work and try to have it rented for January {though folks hate to move in winter, there is a certain number of students who have just discovered they do not like their current roommates, or are not crazy about residence, etc. and are looking to move).
Now, if you can find a property and dance with the owner until after Xmas and then Close in {say} late January or February, you will miss carrying an empty property through winter and will be just in time for those renting for May or September.
If you want to talk more specifically about areas for student houses, or about specific properties on the market, drop me a PM and I'll be more than happy to help ... depending on where you decide to look, I'll even offer to be your boots on the ground.
Hey William, I have had a very hard time finding anything matching that criteria in Kingston. I have had a hard time finding anything that to me looks like a profitable deal. Mind you i am still pretty new to this whole real estate investing thing. I did find a house that was converted into a six-plex in Napanee that was actually 2.5% but when i went to look at the house it was a write off. It was going to need some major repairs in the immediate future and in my current position i was not able to put that kind of capital in up front. Not to mention the amount of work i would have to do. Hiring it all would have driven repair costs high enough that it would not be in the 1% category anymore. There isn't as much room to go up in rent prices in Napanee as there is in Kingston. I also looked at a couple of duplexes in Napanee that with a mortgage barely broke even with operating costs, and that was without any repairs factored in for the year (which they really needed). I am looking into different avenues of acquiring or building which may yield better results. Or if there is a down shift in housing prices that would be good as well. So as of right now i guess the answer to your question is no. If you do end up finding anything that makes sense let me know how and where you found it. Good luck.
@Account Closed
Thank you for the response James.
I am quite new to this whole thing too. I find the Southern Ontario real estate market to be over priced generally.
This being said, I think I did come across a couple of duplexes in Kingston that would satisfy the 50% rule. However, the 1% rule is definitely hard to come by. I don't know whether this is a hard and fast rule or whether it could be bent?
As I mentioned to William in another thread..I invest in Hamilton and have found decent numbers in a growing market where rent rates are increasing and vacancy rates at all time lows....Hamilton.
Most recent purchase was a semi 136K rents for $1200/ mth plus utilities...I have friends investing in Barrie and others in Collingwood that cash flow well.
Cheers.
That's definitely one of the more impressive cash flow returns I've seen in Canada, well done!
@Account Closed
You can find numbers like that in the Maritimes.
We have a student house which originally cost us $125K. After a couple of years we carried out an energy efficiency retrofit and added a second bath along with 2-more bedrooms. In the end we have invested ~155K and the house generates 1800/month.
I recently looked at a 4 x 3-bdrm conversion in Moncton (ask of ~60K/unit) which needed 15-20K of work, but was renting for 4 x 1000 = 4000/month {with a bit of work, it could be bringing in $4200 - 4600}.
That's definitely one of the more impressive cash flow returns I've seen in Canada, well done!
Thanks @Account Closed! We closed on that semi this past March. We also closed on a 3 bedroom condo last Decemeber for 127k and it too rents for $1200/mth plus utilities.
Another example is our 3 bedroom single family we bought a few years ago for 142,500k and it rents for $1600/mth.
I'm bullish on Hamilton for several reasons...the growth of the city, influx of jobs, low vacancy rates, prodevelopment, recent approval for LRT, and many Torontonians starting to realize standard of living is considerably less for only an hour away....
Happy to help or answer questions.
Cheers.
Fair point, good to know, thanks! Those are indeed some great numbers.
Awesome, and good info on Hamilton, thanks! I've never looked in-depth at it / spent any time there but seems worth a gander!
Thank you Thomas for that information! I wasn't too sure about Hamilton because I heard some bad things about it ... ie; poverty and high unemployment rates. However, I will take a deeper look at it. I did actually crunch some numbers on duplexes in Hamilton and the numbers did seem to make sense.
@Roy N
Thanks for that information Roy! Those numbers do look pretty good. My only concern may be capital appreciation though because the economy is generally weaker in the Maritimes. How were you able to overcome this concern?
Thanks for that information Roy! Those numbers do look pretty good. My only concern may be capital appreciation though because the economy is generally weaker in the Maritimes. How were you able to overcome this concern?
William:
I'm not certain I would phrase it as overcoming anything. One could flip this on its head and say how do you underwrite a property in a hyper-inflated environment where the underlaying economic fundamentals do not support current property valuations?
While not on-fire like the GTA or Southern Ontario - possible exception being Halifax - appreciation in most of the urban markets is running 2 - 2.5% /annum (Saint John being an exception at the moment). At least when the correction finally occurs, it will be less drastic down east as valuations are not hyper-inflated.
When we analyse a prospective property - or as we update the actuals and projections on properties we hold - we typically model both w/ and w/o appreciation. While we underwrite to MIRR, the cash return of a property is a large component of the return.
@Account Closed
Thank you for the response James.
I am quite new to this whole thing too. I find the Southern Ontario real estate market to be over priced generally.
This being said, I think I did come across a couple of duplexes in Kingston that would satisfy the 50% rule. However, the 1% rule is definitely hard to come by. I don't know whether this is a hard and fast rule or whether it could be bent?
I think the 1% rule could definitely be bent in the right situation. My biggest concern is profitability. If i can't make money on it i'm not going to do it. Sometimes the expenses associated with a house may be too much even if the 1% rule is satisfied. I personally have seen a duplex that was at 1% or maybe a touch over but after expenses and mortgage payments i would be breaking even. This house also needed work so i take into account future repairs as well. When you are breaking even and something breaks you are immediately in the red with repair costs, and there are always repair/maintenance costs with a house. So to me that would not be a profitable deal even though its close to making money and meets the 1% rule. The real estate agent explained to me that you make your money on the tenets paying down the mortgage and future appreciation. For the right person that might be fine but that does not work for me or my situation. Moral of the story these 1% and 50% rules are just rules of thumb, you still need to make sure the property is profitable before you buy.
Would you have any further information on how to invest in Maritime properties? Say, if I was looking to purchase a student rental?
Thanks Roy.
Would you have any further information on how to invest in Maritime properties? Say, if I was looking to purchase a student rental?
Thanks Roy.
The basics are the same as up your way ... the outlay will be a little lower ;)
Rule 1 remains - know thy market. If you were looking for a student rental at a reasonable price, I would first look in Moncton, then Fredericton, and finally Halifax.
Now - being the middle of August - is not necessarily the best moment to purchase a student rental. Those who have been trying to sell their student rentals (houses, apartments, etc) over the summer have likely not re-rented them, so you would be picking up a building 2-weeks before the term starts with no tenants. With a few exceptions, those looking for an apartment now are not the best candidates (i.e. they weren't organized enough to look in March/April). Yes, there are exceptions, but I've declined 3 sets of applicants, in the past two weeks, for a 3-bedroom unit we have turning over this month. If you are renting {furnished} rooms, particularly to international students, there seems to be no bad time here.
However, in about a month, those landlords who have not re-let their properties will be more motivated not to carry them empty through the winter. If you are looking at a place which will need a little work, then a Close in October leaves you enough time to do the work and try to have it rented for January {though folks hate to move in winter, there is a certain number of students who have just discovered they do not like their current roommates, or are not crazy about residence, etc. and are looking to move).
Now, if you can find a property and dance with the owner until after Xmas and then Close in {say} late January or February, you will miss carrying an empty property through winter and will be just in time for those renting for May or September.
If you want to talk more specifically about areas for student houses, or about specific properties on the market, drop me a PM and I'll be more than happy to help ... depending on where you decide to look, I'll even offer to be your boots on the ground.
@Roy N. Thank you for this very detailed answer.
I was just doing some browsing on line and saw the following property here:
http://www.remax.ca/nb/fredericton-real-estate/na-...
For this property, would you think it could rent it according to the 1% rule? This house is close to the University, so, perhaps it could be rented out to students.
Do you know of any turnkey companies in the maritimes and are you involved in such an operation yourself?
Thanks again.
@Roy N. Thank you for this very detailed answer.
I was just doing some browsing on line and saw the following property here:
http://www.remax.ca/nb/fredericton-real-estate/na-...
For this property, would you think it could rent it according to the 1% rule? This house is close to the University, so, perhaps it could be rented out to students.
Do you know of any turnkey companies in the maritimes and are you involved in such an operation yourself?
Thanks again.
William,
I know it well, pass it several times a day. If you are looking for an on-market, SFR or duplex close to the universities, there are better options (1, 2, 3) ... there are a couple I've been eyeing which have been on the market for a while and, pending upon answers I received to questions posed to City planning we may make an offer. There are a couple of off-market properties in the same area which could be obtained.
I do not know of any turn-key operators locally - though there are a few flippers who try to rehab these houses and sell them to families with kids attending university. We are strictly buy-and-hold and, while we have taken on partners in the past, it's usually been on larger buildings.
As I said, I'd be willing to be your boots on the ground, just send me a PM with properties of interest and/or your criteria and I will tell you what I can about the area and the property.
I'm going to presume you are talking about 2-4 unit residential properties and, perhaps small multis (5 - 12 units) not larger apartment buildings.
We have looked at {nearly} every apartment building which has come available in the past two years in Moncton, Fredericton and Saint John and, less so, in Halifax and have gone though the exercise of underwriting close to a dozen (6 this year alone), have had folks come overtop of us on two, and are still dancing on two ... hence are still 0 for 6 this year.
Out of the cities in the Maritimes, Halifax is the most expensive, but has the strongest overall economy. Whether you are looking at larger or smaller buildings, anything in the city core will be expensive. As you move out of the core (Clayton Park, Bedford, over to Dartmouth, etc) you will find improved pricing, but need to spend time understanding the neighbourhoods as their will be certain areas, and certain clientele, you probably wish to avoid.
Moncton, IMHO, offers some of the best opportunities at the moment. That said, there is an over supply in the city at present which is putting pressure on older properties that have not been allowed to become functionally obsolete or accumulate deferred maintenance. Like anywhere, you need to take the time to learn which parts of the City are best left to others and on which to focus.
Saint John - Lots of inventory here, much of it at low prices, but that does not automatically make you a deal. There are lots of old, majestic buildings in the Uptown - many former family mansions from days when Saint John was a major hub of commerce. These older buildings make for aesthetically pleasing apartments, but, unless the building has been modernized (particularly the building envelope) in the past 30 years, the operating costs of some of the old stone and brick multi-units can have operating costs in the 60 - 75% of gross revenue range.
The other thing to watch in Saint John is the local economy - which is struggling a bit despite the recent announcement of the refurbishment at the refinery.
We've been watching this market for a few years and there are deals to be found, you just want to be most conservative in your analysis to leave yourself with sufficient cushion.
Fredericton has a fairly stable rental market - being a predominately government and university town - but a recent wave of new construction has seen vacancy rates climb from 2-3% to 6 - 8% and I think we will starting to see a little pressure on those landlords who provide their tenants with poor offerings. You can still find the odd deal here, but most things are fully priced. The promising news is inventory is not quite as tight as last year with the exception of medium to large apartment complexes which remain quite overpriced.
What size (2-4, 6, 8, 12, 16) of property are you entertaining? Who would be your target clientele (students, young professionals, families, low income)?
Hey @Roy N. we would be looking at anything up to 12 units. It would be mostly young professionals we are targeting.
Thanks for a great response I appreciate the information. Coming from Calgary the buy and hold strategy doesn't work the same here as it could in other potential markets. We are doing some flips currently but would love to develop a buy and hold strategy concurrently. We are looking into other markets where we could break into provided the numbers look good.
what is your current strategy and is it primarily focused on multi units?
@Roy N. Thank you for all this great information.
Is there a link for this "1% rule" that I keep reading about?
James:
The so-called 1% rule is simply a metric benchmark; the metric being the ratio between purchase price and monthly gross revenue. The so-called 2% rule is a different benchmark of the same metric.
It does not provide any useful information about the quality of the asset: how much of that gross revenue is consumed by operating costs; what is the age and condition of the asset (is it functionally obsolete); etc.?
Such benchmarks are really bragging rights and I cringe a little when they are referred to as rules.
Is there a link for this "1% rule" that I keep reading about?
James:
The so-called 1% rule is simply a metric benchmark; the metric being the ratio between purchase price and monthly gross revenue. The so-called 2% rule is a different benchmark of the same metric.
It does not provide any useful information about the quality of the asset: how much of that gross revenue is consumed by operating costs; what is the age and condition of the asset (is it functionally obsolete); etc.?
Such benchmarks are really bragging rights and I cringe a little when they are referred to as rules.
I think I first read the "1% rule" 20 years ago from Carlton Sheets. I'm assuming most people here (the younger ones anyway) don't even know who he is, so I was curious to see the current source.
Thanks for the response :)
@Roy N. - These student properties, I trust CAP rates for the asset class in MF are just much higher out in the Martimes due to supply & demand, affordability etc, and NOT because it is in a rougher part of town?
Unfortunately, we won't be able to find this out in Calgary, but it doesn't mean opportunities don't exist!
Ram
@Ram Srinivasan, I so rarely trust CAP rates, you could almost label it 'never' ... as you may have gleamed if you have suffered through reading other posts of mine.
In the past 2-3 years we have been seeing mid-sized multi-units (20 - 50 units) trading hands at CAP rates in the 4.5 - 7 range and mostly on the lower end of the range. There has been significant corporate / institutional purchasing in the region in the past 5 -7 years (Hello, Killam ... though they seem to be focused more on Upper Canada now) and a fair amount of "money from away" purchasing smaller properties in this class (ostensibly as a safe place to park capital at a rate better than what it would fetch in a bonds or money market accounts). This is mostly in the Fredericton and Halifax markets where inventory is relatively tight and rental demand is good (Though vacancy rates have doubled in Fredericton in the past 4 years, they are still <7%)
Moncton has an oversupply at the moment and you are seeing many smaller (12 - 20 unit), older apartment buildings come onto the market at what initially appear to be good prices, but you really need to look at the property's location, state of obsolescence, maintenance, and operating costs. There are also a few newer buildings available, both on and off market, but many of owners seem to be willfully oblivious to present vacancy rates given their asking price.
Saint John has a struggling economy - though anyone with vacancies in East Saint John just received a short-term boost with the announced refinery refurbishment which will be engaging up to 2900 trades over the coming months. As I wrote further above in the thread, you can find some gems in Saint John, but also a lot of glamourous old buildings which need significant modernization to make them operationally effective.
To answer your question. Our current focus on on 16 - 30 unit apartment buildings, but we are still keeping our eyes open for opportunities with smaller (4 - 10 unit) particularly if they are unloved and in universityville. That said, we are 0 for 7 on underwriting a 20 - 30 unit building this year ... so we continue to look.
Cool, Thanks Roy N.