Are rents increasing enough to offset high purchase prices?

Question

Property prices are obviously up across BC. Some places more than others. On Vancouver Island the average is a 20-30% increase in price from a year ago. Great if you own a bunch of real estate, not great if you're trying to get into the market or buy more investments.

I noticed that when prices of houses started to climb in places like Nanaimo, Duncan and Port Alberni, a lot of deals stopped working. The 15% price increase of properties removed any possible cashflow from most properties if you had a 80% LTV mortgage.

I've noticed now that rent prices have shot up drastically and a lot of deals work again due to the new benchmark for rents. In BC we can't just increase rents and require a tenant turnover to get the new market value, but if you're looking at a vacant unit in one of your properties, you can often see a 20%-25% increase in price over a year or two ago.

This doesn't help an under rented property unfortunately, and I've been seeing 4 plex units sell for well under market value, just due to the low current rents.

I'm curious how other people are finding the rental market when their units come available. On the island a unit that might rent for $1,500 in 2019 can fetch $2,000 now. However, units in Prince George that would fetch $1,500, might only be up to $1,600 now.

What are other people seeing? I always have a hard time knowing where market rent prices are, especially when there are so few units listed for rent due to low vacancy rates.

Layton Gilbraith · Answer

Yeah, unfortunately the only strategy I currently see working in BC is through densification, and you need some serious reserves to be doing that at B.C. prices. If you are able to get it cashflowing, the ROI on the cash you need to put in just isn't worth it. There might be plays in the commercial space right now with the effects of the pandemic, but I know little to nothing about that world right now.That's why i'm personally investing out of province (despite desperately wishing I could stay local)

Jason Ridout · Answer

Hi Karli, you're right about growing pains with new rental prices. It seems like some units are very over priced, but then they get rented at the price and a new benchmark is set.

The biggest issue I find with renting something at over market value and getting someone desperate and willing to pay the high rent, is they will always be looking for something cheaper and you might have a lot of turnover.

It used to be houses with suites that would cashflow, but now you almost need 3 units to make it work!

Karli Ann Fortin · Answer

Hey Jason,

I am a Realtor, (former Plumber) in Cowichan and have figured that the only way to do well on a rental purchase now is to buy something that can have multiple rentals in it, and then it just seems to cover expenses.

I have seen people post outrageous prices on their rental ads, and by following the thread I've seen people completely irate, and then others inquiring about then rental.  Seems that we are in a growing pain period in which new prices are adjusting themselves out through trial and error. Also, with so many people from the mainland moving over, higher prices are normal for a lot of tenants. It is sad for the locals who don't make as much though...

What I am always looking for is a house that can have a suite added... That way it doesn't sell for the price a suited house would, and I can do most the work of adding a suite. Buuuut now with the price of lumber... Now I am digging the storage locker idea!

Karli

Nathan Gesner · Answer

If sales prices continue to go up, that will increase demand for rentals and rental prices will go up. It may take some time for the rent rates to catch up to sales rates.

My market has never met the 1% rule unless I find properties off-market, but we have good appreciation that makes up for it. With sales prices jumping 25% in the last 12-18 months, it's only gotten worse. You may have to sit it out and just build up your investment fund for 6-12 months while you look for unicorn deals that haven't hit the market. I just bought my first storage facility, located by cold-calling facilities in the area and just asking if they would consider selling. By the end of this summer, I expect to be cash-flowing over $6,000 a month from this one property and the purchase price was equivalent to what I would pay for two single-family homes. I'm starting to rethink my entire strategy!

Jason Ridout · Answer

I'd love to get into commercial real estate including mini storages. It's a great strategy when residential homes are getting pricy.