Dilemmas about purchasing a rental unit this year in Airdrie/Calgary..What to do!?

Question

Hey guys, I'm an investor living in Airdrie right now, and I have been holding off to purchase a rental unit for the past year or so due to inflation and the forever-rising interest rate.

However, I plan to buy one this year to make "money work for me", but still..there are just so many things that I cannot overlook. I am hoping someone with much more experiences can give me some pointers! Here are my dilemmas:

1. Interest rate may not be rising any more, but it's not falling either - with a high interest rate right now, my ROI is only about 5%, which is much lower than what I was able to get from my other units from 2 years ago. Also, the 5% ROI is based on the "crazy" rent raise from 2022-2023. My struggles here are simply not knowing if the 5% ROI makes sense, and that future rent drop can also damage it easily.

2. Housing market is still at it's peak in Airdrie - a laned house that was valued at 400k 2 years ago is now selling close to 600k with the same specs (pricing from home builders). I understand that houses bought at a higher price today means nothing in 20-30 years, but still..it's a very hard pill to swallow.

3. Low inventory - there are just not enough houses for sales these days, and that's kind of forcing my hand to purchase houses that are not 100% rental ready. Which also pushes me back to purchasing pre-construction houses. The down side I found with pre-constructions is that the overall cash required is much higher than purchasing from otherwise. Garage, fences, laundry units...etc adds up to almost 35k cash from my previous units.

What do you think? Should I just hold cash for another while to see what's going to happen? Hoping for a semi-crash to take advantage of it? Invest in stocks or other options while waiting for RE to recover from the "bubble"?

Thanks in advance, I know it's not an easy answer for most! Much, much appreciated!

Spencer Rivers · Answer

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Christopher H. · Answer

Here is a few more things I thought of while reading your post.   Hopefully there is some value for you. I used some simplified ballpark numbers just to convey my thoughts and assumes you are financially sound without the cash or cashflow from the property.

Regarding #3, not %100 rental ready sounds like a good opportunity.  Would it be possible to find a unit that would command a higher rent with a light reno?(floor, trim, paint, fixtures). For example a 1000 sq ft unit @$20 sq ft your into it for $20k and you go to the market for an additional $250/m.  That's 3k/year or a %15 return, even if we had to increase our reno budget the return is still decent.  You also forced additional appreciation and set yourself up for a potential brrrr(later).  Still requires cash, but most deals do, and this at least positions you better for later on if the deal was good.

Rates:  They can only go 3 ways!  If you were to do the above and for example locked a 3 yr fixed and rates go up then you win(as far as rate goes).  If they go down then when it comes time to REFI you could leverage that forced appreciation to pull equity and switch to an ARM you can ride down for years to come.  If they stay flat then so be it you cashflow.

Market crash:  Yep.. If you can time it perfect then congrats I hope you dumped every single penny into houses and enjoy your retirement in a decade.  If you buy then it dips a bit what's the worst that would have happened? you missed out on the 15-30k less you could have got the property for? Because if you don't buy and BOC starts lowering rates how quickly does it go back that same amount the other way?

I'm not necessarily saying to buy or sell or when as it very much depends on your personal scenario, but if you find a deal that makes sense on a good property that you would keep as a long term hold then usually the answer is going to be buy imo.

CH

Ken Didychuk · Answer

If you are comfortable with operating a little remotely, check out the market a little ways up the QEII. The Red Deer market is still $100k-$150k less than Calgary and rents are as high as anywhere else in Alberta these days. If you are more adventurous, you can look at Rocky Mountain House, where rents are even higher than Red Deer with house prices about $60k less.

Something to keep in mind when comparing market values. Builder values are not a good benchmark to gauge marker conditions. Their prices are set by commodities, supply chains, labour availability, and of course profit. To get a solid understanding of where your market sits, you will need to follow what properties have SOLD for, not what they are listed for. The value of anything is what someone is willing to pay for it, not necessarily what it costs to produce or what they are listing it for.

Get ahold of me if you'd like to talk shop and I can give you more insights to consider.

Drive safe!

Chris Davidson · Answer

1. interest rate is cost of capital it effects your deal. A deal can make sense with a 20% rate if the terms are right. Determine what you need out of a deal and make sure you can check as many boxes as you can.

2. Are you a long term investor? Swallow the pill, all that matters to you is the hold period. If you are holding 5 years what do you think the prices will be or if you are holding 15 or 30 years use that.

3. Goes back to your deal all that matters is what you are buying.

Do what makes sense to you. With inflation the longer you hold the more of a drop you need to cover the loss you have in your cash. The equity and debt market can make sense especially in times of high rates. I personally prefer to invest in something I can control so I will keep investing in RE mainly.

Account Closed · Answer

I am buying in Edmonton and area.  High wages, high population growth, low housing costs compared to the rest of the country.  I think Alberta is a perfect place to be investing.

I like to get at least a 10% return but I am willing to do renovations.  Turnkey houses typically get lower returns.  Go make some low offers at a price you'd be happy with.

Good luck!

Jonathan Yeh · Answer

Thank you for this!

Anthony Therrien-Bernard · Answer

Amen, more people need to hear this

Jonathan Yeh · Answer

I have no answers to those questions either, and random major events are just popping out left and right these days.

I'm happy with my purchases so far so I guess I'm not really in a rush for anything..sideline it is since cash is still king 😂.

Theresa Harris · Answer

Rents go up each year.

Interest rates may stay the same or go down a tiny bit, but if you think they will be lower in 2-3 years time, get a 2 or 3 year term on your mortgage.

No one knows what house prices will do. I'm further south in Alberta and aside from last year, prices here haven't changed much here since 2008.  Yes the average price to buy goes up, but only because builders are building $600+K homes instead of $300K ones they were building 15 years ago.

Dilemmas about purchasing a rental unit this year in Airdrie/Calgary..What to do!?

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