1% Rule in Canada - is it possible?

[Robin L.]

Hello Everyone,

Hope all is well with you.

Over the past year I have been reading books, watching real estate investment videos, and the 1% rule seems like a common target a lots of investors looking for. It is basically the gross rent should be at least 1% of the selling price.

It is definitely an awesome target to reach, and it definitely will generate great returns. However, I have been looking and looking in BC, Canada, especially in Kamloops, Kelowna and Prince George with No luck so far.

I talked to many local realtors in the areas and asked about the 1% rule, all of them said it is impossible in that market.

So...any suggestion and insights?

PS: I am looking to invest in BC this year, currently I live in Vancouver, with one condo investment. The unit has good potential for appreciation, but cash flow BAD lol

[Tom Lundberg]

Seems standard everywhere 

[James Furneaux]

1% possible in Saskatoon and Regina

Not a everyday deal but is possible.

Small town sask can hit 2%

[Dan Veld]

Example of a 200k multi family in New Brunswick.   Rents for 2625 total (before expenses) but rents are lower than they could be,  I think with some tenants moving on, could be 3000 to 3500.  

Does 1 % rule account rent after all bills are paid or before? 

[Roy N.]

Originally posted by @Dan Veld:

Example of a 200k multi family in New Brunswick.   Rents for 2625 total (before expenses) but rents are lower than they could be,  I think with some tenants moving on, could be 3000 to 3500.  

Does 1 % rule account rent after all bills are paid or before? 

Dan:

The 1% rule (of thumb) bantered around here on BP is just a yardstick to help you with initial triage.   Once a property has made it to your short list (whatever metrics you apply), then you should perform a in-depth analysis to determine if it is really a deal and at what acquisition price.

On the surface, a monthly rent of $2625 for a purchase of $200K looks promising, but what are the operating expenses?   Can you realistically lower operating costs and/or raise rents.  If the market will support higher rent, what level of capital re-investment is required in the subject property to obtain those rents?

As an example, there are 5-8 unit buildings available for under $30K - $60K per unit in Saint John (perhaps even a few still in Moncton), however many are older building stock which has not been upgraded/improved, with common heating plants (or the landlord is carrying utilities to attract tenants), whose operating expense ratio are 70%+.   All of sudden a monthly gross revenue of $2600 looks far less valuable when $1800  - $2000 goes right back out the door.

That said, many such buildings can be fine investments if you go in with your eyes wide open; have the capital available to modernize the building; and make the acquisition at a price where your total costs (purchase plus improvement) are supported by market rent.

[Dan Veld]

Roy,  lowering operating costs is not likely,  they will likely go up as I’m planning on using property management on this property.  Raising rents on the other hand,  from my research looks very likely over time,  each unit has been rented for the same amount as far as 3 years ago.  One great thing is tenants pay there own utilities,  so expenses for me are mortgage, prop tax,  insurance,  snow, grass,  prop management.   After expenses, I’ll be sitting at about 600/month cash flow.  But that’s being conservative with cash flow as the mortgage is tied to a couple properties so true number will Be a little higher.  

Off course there will be vacancies, repairs etc as I go,  but I feel with added rent over time it should perform quite nice.  Any appreciation would be a bonus.  Looking at a 5 to 10 year hold on this.  

Inspection came back today,  roof will need some attention soon,  other than that the deck will need a bit of work and some small stuff,  overall pretty happy with the inspection (other than roof) 

What are your thoughts?  Thursday is decision day 

[Roy N.]

Originally posted by @Dan Veld:

Roy,  lowering operating costs is not likely,  they will likely go up as I’m planning on using property management on this property.  Raising rents on the other hand,  from my research looks very likely over time,  each unit has been rented for the same amount as far as 3 years ago.  One great thing is tenants pay there own utilities,  so expenses for me are mortgage, prop tax,  insurance,  snow, grass,  prop management.   After expenses, I’ll be sitting at about 600/month cash flow.  But that’s being conservative with cash flow as the mortgage is tied to a couple properties so true number will Be a little higher.  

Off course there will be vacancies, repairs etc as I go,  but I feel with added rent over time it should perform quite nice.  Any appreciation would be a bonus.  Looking at a 5 to 10 year hold on this.  

Inspection came back today,  roof will need some attention soon,  other than that the deck will need a bit of work and some small stuff,  overall pretty happy with the inspection (other than roof) 

What are your thoughts?  Thursday is decision day 

 Dan:

Without more information I cannot really offer much.    $600/mth net revenue would be healthy for 3-4 doors; perhaps acceptable for 5 - 6 doors; rather anemic for 7 - 8; and "run-away" for 9+.   Not knowing the precise market where you will be operating, it is not possible to forecast the viable range of market rent.

If you would like to send more details on your deal and your analysis in a PM, I'll see if I can contribute any value.