Real Estate

Investment Condo in Edmonton - Thoughts on Return Calcs

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  • Sep 11th, 2017 10:34 pm
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Investment Condo in Edmonton - Thoughts on Return Calcs

I'm looking at purchasing a second 2 BR/2Bath unit in my building for the purpose of renting it out. I've owned a unit in this building for 10 years, and know the Condo is in good shape (financially and structurally). I also know that demand for rentals is decent in the building.

Here are the numbers I'm coming up with:

Based on purchasing the unit for $190k cash - no mortgage

Income
Monthly Rental ($1300) less 10% Vacancy = $14,040 Gross Income

Expenses (Annual)
Condo Fees = $4,300
Property Tax = $1,600
Repairs/Maintenance = $500

net Annual Income in the $7600 range for a 4% Annual Return on investment before tax.

The unit can usually be sold in the low $200ks during high season.

I'm already maxed out on TFSA and RRSP investments. The idea is to diversify my investments.

What are your thoughts on this opportunity?
22 replies
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I am looking for my second investment property anywhere in Canada, really.

I see nothing wrong with it except the usual - age of the building/reserve/financials.

If you buy it (or not) mind sharing which building later on?
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Numbers look decent enough to warrant further work.

Does the unit have above or below ground parking? If so, is it 1 or 2 spots? 2 spot units are attractive if both people work. If they don't need it you can rent the extra spot out.
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Mar 29, 2017
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Why not get a mortgage? The interest is tax deductible.
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BiegeToyota wrote: I am looking for my second investment property anywhere in Canada, really.

I see nothing wrong with it except the usual - age of the building/reserve/financials.

If you buy it (or not) mind sharing which building later on?
Basically a low rise building near downtown Edmonton. Sorry can't give property name due to privacy concerns in case the CRA is watching.
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cartfan123 wrote: Numbers look decent enough to warrant further work.

Does the unit have above or below ground parking? If so, is it 1 or 2 spots? 2 spot units are attractive if both people work. If they don't need it you can rent the extra spot out.
Unit comes with one outdoor covered stall, and rentals for additional spots are $30 a month.
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Damiar wrote: Why not get a mortgage? The interest is tax deductible.
Not a fan of debt and in a position where I don't need to. I know it makes more financial sense though.
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bender2k wrote: Not a fan of debt and in a position where I don't need to. I know it makes more financial sense though.
Having a mortgage isn't always the right answer. If you don't have any other debts and the cash you would use to buy a GIC would leave you with taxable income on the interest earned. So you would likely be earning a lower rate on a GIC than the mortgage resulting in a lower overall return.

Hence,If you have the cash on hand to buy the condo and the alternative is mortgage+GIC you are in fact better off using the cash to buy the condo. If at a later date you need the condo equity to buy your own place...then you could take out a mortgage on the condo and put the proceeds into your house purchase. This would give you the tax deductibility when you need it.
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A 4% ROI seems decent on paper.

You could swap the REI out of any liquid cash within the RRSP, what about the RRSP purchasing the REI?

There is also the 'holding a mortgage within the RRSP', consider this investment as a self mortgage that lets the RRSP hold the mortgage on the income property....pay yourself first, deduct the interest you pay yourself to the RRSP lender (you)?

OP, on REI consider or factor in property insurance & maybe be conservative on the vacancy to up it another 5% or 10% that would be 80% - 85% occupancy and work the numbers from that.

As a landlord there are the nuisance tenants that whinge about every little thing, ones that are late or miss paying rent on time, the middle of the night or at the worst time calls from a tenant.

Also some 'condo association management' surprise owners with a one-time or a few times 'hey we need to replace the roof or other capital expenses not covered in condo fees' or some other major expense. Check with other owners if they have experienced any 'over the top surprise expenses'

if you are using the income property as an investment long term 10+ years, consider CCA on the investment & deal with any capital gain or not at a later stage?

http://business.financialpost.com/perso ... -confusion
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4% ROI before appreciation? Though that's standard for Edmonton for cash on cash... what about transaction costs - commission, legal fees, etc. ? You're better off just investing in ETFs or stocks... which are more liquid, have less costs, and have higher returns...

Edmonton real estate isn't all that great (from a ROI perspective) without leverage. With 20% down payments then you can see 15-20% ROI (depending on property)... then it's decent. Bear in mind interest is a tax deduction.

e.g. With 2.29% interest, 20% down... in your first year, ROI would be 10.4% as your initial investment is just about $39K instead of $196K. With 2% appreciation, this would become 20.4% (VS 6% in pure cash scenario), 3% YoY getting 25.4%. Bear in mind only half of capital gains are subject to tax.

You also have much less cash tied up and be more diversified by putting the remainder into other investment avenues.
Last edited by FirstGear on Sep 11th, 2017 12:18 pm, edited 1 time in total.
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porticoman wrote: A 4% ROI seems decent on paper.

You could swap the REI out of any liquid cash within the RRSP, what about the RRSP purchasing the REI?

There is also the 'holding a mortgage within the RRSP', consider this investment as a self mortgage that lets the RRSP hold the mortgage on the income property....pay yourself first, deduct the interest you pay yourself to the RRSP lender (you)?

OP, on REI consider or factor in property insurance & maybe be conservative on the vacancy to up it another 5% or 10% that would be 80% - 85% occupancy and work the numbers from that.

As a landlord there are the nuisance tenants that whinge about every little thing, ones that are late or miss paying rent on time, the middle of the night or at the worst time calls from a tenant.

Also some 'condo association management' surprise owners with a one-time or a few times 'hey we need to replace the roof or other capital expenses not covered in condo fees' or some other major expense. Check with other owners if they have experienced any 'over the top surprise expenses'

if you are using the income property as an investment long term 10+ years, consider CCA on the investment & deal with any capital gain or not at a later stage?

http://business.financialpost.com/perso ... -confusion
Regarding using RRSP to purchase REI, two things - 1) I think it needs to be your primary residence (aka not rental), 2) I am not currently liquid on my RRSPs and plan on using them to purchase a condo in the future for myself.

Regarding property insurance, is it still required? I know the condo fees cover building and unit insurance. I was under the impression that additional insurance would be required by the renters/tenants if anything?

Regarding Condo Management fees, I've lived in the building and been active with the management for 10 years and know the financial reserves are sufficient.

I will definitely look into CCA. Thank you for the input.
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FirstGear wrote: 4% ROI before appreciation? Though that's standard for Edmonton for cash on cash... what about transaction costs - commission, legal fees, etc. ? You're better off just investing in ETFs or stocks... which are more liquid, have less costs, and have higher returns...

Edmonton real estate isn't all that great (from a ROI perspective) without leverage. With 20% down payments then you can see 15-20% ROI (depending on property)... then it's decent. Bear in mind interest is a tax deduction.

e.g. With 2.29% interest, 20% down... in your first year, ROI would be 10.4% as your initial investment is just about $39K instead of $196K. With 2% appreciation, this would become 20.4% (VS 6% in pure cash scenario), 3% YoY getting 25.4%. Bear in mind only half of capital gains are subject to tax.

You also have much less cash tied up and be more diversified by putting the remainder into other investment avenues.
I'd like to use this property as an introduction to being a landlord, with the plan being to move onto multi units in the future. The plan is to also purchase the property below market value further improving possible profits.

I'm pretty saturated on stocks/etfs/indexes and am looking for another investment option to diversify my portfolio.

Also, if I do hold onto the property for 7-8 years, I could see the unit value appreciate significantly once that new 104 Avenue LRT is complete.
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bender2k wrote: I'd like to use this property as an introduction to being a landlord, with the plan being to move onto multi units in the future. The plan is to also purchase the property below market value further improving possible profits.

I'm pretty saturated on stocks/etfs/indexes and am looking for another investment option to diversify my portfolio.

Also, if I do hold onto the property for 7-8 years, I could see the unit value appreciate significantly once that new 104 Avenue LRT is complete.
What do you define "saturated"? The equity world is extremely vast. 4% extremely illiquid ROI before transaction costs and appreciation is just a very inefficient means to use money.

If you're new to landlord'ing there is a whole world out there to learn also... namely bad tenants (especially ones that don't pay!!!) and unexpected horrors with a propert(ies), like special assessments, tenants wrecking the place, etc.
Getting $39K tied up can be less painful than having $196K "stuck" at the wrong time.

My first property is not too far off from yours - 99ST and just a little ways north from Whyte. It's in the upper end ($1800-2000/mo. market rent) so I've been pretty lucky with the grade of tenants going through there. Sometimes cheap can be bad because it attracts the type of people who would struggle to come up with an extra $100-200/month and when they get hit with a sudden expense like destroying the suspension in their car in a pothole, they will prioritize that before your rent payment. On the bright side, cheaper properties are usually the deals to be found and cash flow positive (or more cashflow, anyways).
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FirstGear wrote: What do you define "saturated"? The equity world is extremely vast. 4% extremely illiquid ROI before transaction costs and appreciation is just a very inefficient means to use money.

If you're new to landlord'ing there is a whole world out there to learn also... namely bad tenants (especially ones that don't pay!!!) and unexpected horrors with a propert(ies), like special assessments, tenants wrecking the place, etc.
Getting $39K tied up can be less painful than having $196K "stuck" at the wrong time.

My first property is not too far off from yours - 99ST and just a little ways north from Whyte. It's in the upper end ($1800-2000/mo. market rent) so I've been pretty lucky with the grade of tenants going through there. Sometimes cheap can be bad because it attracts the type of people who would struggle to come up with an extra $100-200/month and when they get hit with a sudden expense like destroying the suspension in their car in a pothole, they will prioritize that before your rent payment. On the bright side, cheaper properties are usually the deals to be found and cash flow positive (or more cashflow, anyways).
I won't need the funds anytime in the next 5 years minimum but I see your point.

Is your first property a condo or house? How have you found the rental market in Edmonton in the last while?
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bender2k wrote: I won't need the funds anytime in the next 5 years minimum but I see your point.

Is your first property a condo or house? How have you found the rental market in Edmonton in the last while?
Condo. It's a newer building and in this area there are only 3 newer buildings (4th right before the bridge further away from Whyte), each only 4-floor... so the selection for renters who want something newer is extremely narrow. I've been good in that regard- just to get one of these newer units here is expensive, so it's not good for the cash-flow focused people.

2015 admist the oil crash was the worst. Before that, properi around the $300K range could fetch about $1800-2000/mo. In rent- closer to $2500-3000 furnished. After, it became more like $1500, $2200, respectively. The 1 bedroom (600-700 sq ft) newer condos around here tend to fetch around 1400-1500/mo. and run $250-300K, depending on floor, direction, exact sq ft., position within building, etc.

Condos are very sensitive to area too. Outskirts condos or old ones tend to be more vulnerable to economic conditions, as they're usually the last resort since people prefer newer and closer. That market got hit hard, with lots of supply in outer Southside such as Windermere, Ellerslie, Laurel, etc. But short supply units such as prime location condos close to university or downtown have held value (especially newer, nicer units- as much of these areas are old and land in short supply), as the downtown and university workers and students tend to always be there.

Similar idea for detached housing- "essential" detached homes in good shape families want to be in, within the $300-500K range- have held value and appreciated since the beginning of the recession. The new mortgage rules also forced a lot of potential homebuyers down in affordability... so people who could previously mortgage in the 400s, now are forced down to the 300s... at one point, duplexes in Edmonton appreciated 7% YoY as they just hover in this bracket. The averse effect of that has kept a floor for rental demand for the lower end of the detached market as people who want to live in one of those houses, all of a sudden must rent them.

The high end luxury homes or homes in the middle of nowhere (e.g. Outskirts of Leduc) people usually will only go if must, conversely have taken a hit- both in resale and in rent. Lots of townhome supply around the $300K mark in there places that used to rent for closer to 1800-2000/month now would get 1400-1500 and often sit vacant every now and then.

The average household income in Edmonton is around $100K, so based on this you can gauge the relative affordability for housing for the average family/person (about 2000 for a family, 1000-1300 for one person- given a few hundred for vehicle and other debt). Coincidently this is the natural market force that makes these rent rates the "sweet spot" for typical investment properties.
Last edited by FirstGear on Sep 11th, 2017 2:39 pm, edited 5 times in total.
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You can buy the stock market for an after-tax, after-depreciation return in excess of 5%. And not have to worry one iota about renters, the market in condos, vacancy, etc.

Don't know why you'd even consider it, assuming you already own a principal residence.
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If you're looking for increased exposure to real estate, why not CIBC stock? Analysts have criticized them for having real estate as a very significant portion of their portfolio, and stocks have much more limited leverage options than condos - but then that's what you're looking for. But the dividend alone is greater than the 4% cash return on your $196K... and it takes $9.99 commission and a few phone button pushes to buy some. Then you can just let them sit, collect dividends, and forget about them for a few years. The chance of those shares collapsing is likely much less than getting a bad tenant horror story.
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FirstGear wrote: If you're looking for increased exposure to real estate, why not CIBC stock? Analysts have criticized them for having real estate as a very significant portion of their portfolio, and stocks have much more limited leverage options than condos - but then that's what you're looking for. But the dividend alone is greater than the 4% cash return on your $196K... and it takes $9.99 commission and a few phone button pushes to buy some. Then you can just let them sit, collect dividends, and forget about them for a few years. The chance of those shares collapsing is likely much less than getting a bad tenant horror story.
I think a lot of people are expecting another run on real estate market just like the one we had.
seeing 100% increases in some cases in less than 5 years and 30~50% rent hikes has a lot of people salivating.
Too bad, I personally feel most entering now are at the bottom of the pyramid scheme unless you venture where deals still somewhat exist.
ie: Simcoe county, Brantford, St Catherines, Ottawa, Montreal, Quebec.

Good luck long distance managing though. Unless you hire a management company.
If you have a pile of cash, maybe ETF's? REITs?
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This investment is only good if you are leveraging by putting a % down and using the remainder of the money for another investment OR buy the property cash and advance the money from HELOC to invest in the stock market.

In other words real estate is only good because of the leverage power that amplifies your gains (and losses) :)
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sidshock wrote:

Good luck long distance managing though. Unless you hire a management company.
If you have a pile of cash, maybe ETF's? REITs?
That'd erode the low cash on cash returns even more... each area and company is different, but seen rates of 10-15% of rent. OP's rent of 1300 would become what... about 1150? Be down to 2.96% ROI before appreciation and transaction costs... Edmonton homeowners are typically happy to see around 4-5% YoY, and that's with cashflow neutral or negative properties that are typically sought by homeowners. Investors here usually just shoot for cashflow due to high rents relative to purchase costs. 196K in Downtown sounds like one of those old building units people often buy as rentals (low owner-to-renter ratio), not homes, so YoY is likely even lower. 15.9% down from 20% ROI with 2% YoY, 20% down.
Last edited by FirstGear on Sep 11th, 2017 10:25 pm, edited 3 times in total.
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