Geoff Hall

There are many avenues for investment: stock markets, precious metals, even tulips!  One investment that has seen remarkable results over the years is revenue properties and real estate.  

As Mark Twain once said:  “Buy land - they’re not making any more of it.”

But are they making more of it?  We see more condos being built every day, and the cost of building is skyrocketing.  The majority of pre-sale condo developments in Victoria, Vancouver, and Kelowna are surpassing prices of $1,000 per square foot.  These buildings are sleek and very appealing, and many have impressive amenities.   When it comes to a stunning place to call home, these can be quite attractive.

But what if you’re looking purely for a revenue or investment property? 

The glamour of a shiny and new amenity-rich condo does not always translate to increased revenue.  The typical renter is generally more concerned with living space and location, rather than lake views and infinity pools.  There are many established developments (read: older) which can realize stronger ROI (Return on Investment) than glitzy new builds. There is significant price appreciation potential in these established communities, as the ever increasing construction costs on new builds inevitably bolster the relative values of older developments.

Importantly, as the resale market has softened over the last few months, the rental market has remained incredibly strong.  Good news if you’re a landlord… or a soon-to-be landlord.

Rental income will usually cover the costs of the mortgage, strata fees, and property tax.  With a bit of luck, there will be some light cash-flow as well.  But the real magic of an investment property is in the monthly principal paydown.   You invest the down payment up front, and from that point on the majority of the monthly costs are covered by the tenant.  

Will this make you rich overnight?  No. But long term, it is powerful. 

Let’s do some math... 

Take this Lower Mission condo located about a five minute walk to the beach: 3735 Casorso Road.  It’s offered at $554,900, which is only $484/sqft.  According to the latest rental analysis from Associated Property Management, this condo should attract rent of at least $2,700/month (excluding utilities, which are the responsibility of the tenant).  With a conventional 20% down payment, the monthly mortgage payment will be about $2,195.  Add in strata fees and property taxes, and your total monthly expenses are $2,745.  Between you and me, I bet you could find a good tenant who will pay $2,750.

So let’s call it a wash.  No cash flow, but no out of pocket expenses either.  Not very exciting on the face of it, but wait - there’s more!

When you look at the breakdown of the mortgage payment, you’ll find that in your first year of payments, the principal of the loan is reduced by about $7,300.  In Year 2, it is reduced by $7,600.  This amount will accelerate every year.  As the loan value reduces, so does the interest paid, which increases the amount that goes against the principal.

5 Year Summary 

Let’s say you need to sell the condo in Year 5.  To be conservative, we’ll assume the market has been relatively slow, growing at just 2% per year. Your condo is now worth about $612,000. In that same time, your tenants have paid down $40,000 in principal on your loan. Even with sales commissions included, you have profited over $74,000 on your $111,000 initial investment.

Long story short, you put in $111,000 at the outset, haven’t paid out a penny more, and walked away with $185,000.  That’s an 11% annual return when the market itself has only increased 2% annually.  That is the power of principal paydown, completely paid by the tenant.

10 Year Summary

If you can hold on for 10 years, that rate of return will increase, as the amount of principal paid down increases each year.  Given the same set of assumptions, in 10 years you will have profited $186,500 - nearly $90,000 of which comes from the tenants paying down your mortgage.  You put in the same $111,000 up front, and walk away with darn near $300,000.

So, there you have it.  Cash flow isn’t the only thing to consider when investing in a revenue property.  The power of principal pay down plays a massive role in the picture!

Let me know if you have any questions - I would love to help you find the perfect investment property when you’re ready!

Geoff Hall

Personal Real Estate Corporation

Direct: 250.575.4292

Royal LePage Kelowna

    Pre-listing Stage

1. Listing Presentation & Comparative Market Analysis - during this time we will explain our marketing strategies, review comparable properties on the market, and so on.   This is a great time to ask any questions about the process, the market, etc.

2. Staging Recommendations - to maximize results, it is essential to remove as many potential Buyer objections as possible up front.  This includes going the extra mile to make the best first impression possible, and to allow photography to show the absolute best of the home.  We will provide recommendations including: furniture places, cleaning, de-cluttering, etc.  Let’s make your property look like a show home!

3. Listing Documents Reviewed and Signed - we will review all applicable documentation.  The listing agreement is relatively basic.  The more substantial review will come with an offer to purchase, as that contract is much more detailed.

4. Strata Properties - if your home is part of a strata, the full updated strata document package must be received before activating listing on MLS.  We will order this on your behalf.  Expect about 5 business days for the strata management company to process.

5. Identification - our regulators require Government photo ID for those on title to the property.  

6. Photography - photography generally needs to be booked three to four days in advance.  Once complete, the photos, virtual tour, etc take 1-2 business days to process.  Rule of thumb is allowing five business days from ordering photos to receive the complete package. Our main photography provider is Listing Box (www.listingbox.ca). 

7. iGuide - our photography packages all include iGuide virtual tours.  We will receive weekly reports from the iGuide system which tracks total views, unique viewers, and average time viewed.  

8. Lockbox & Property Access - generally we will use a lockbox to provide access for showings.  Please have a spare key ready.  If you have a door code or other access, we can utilize that as well. 

9. Listing Day - the listing will be activated by the Listings Department at Royal LePage Kelowna, and will show up on Realtor.ca and other websites the day of activation.  At times there can be some minor lag between MLS activation and seeing it on some websites.  We will send the listing to you right away - please let us know if you’d like any changes to the write-up, or any other details of the listing.  

10. Signs - we will place a For Sale sign on the property.  For most strata properties, this will be substituted with a sign on the community’s For Sale board.

Showing Stage

11. Viewings - showings will be booked through our Realtor-specific access system called Touchbase. This system also is generally used to receive and record showing feedback, which ideally is received the night of the showing or the day after.

12. Feedback - as Buyers provide feedback on the property, we will keep you updated and see if there’s any tweeks or changes we need to make.  

Note - we will do our best to get feedback from all showings, but sometimes agents do not provide feedback in a timely manner. 

13. Open Houses - Depending on the type of property, we highly recommend doing open houses on the first one or two weekends of the listing.  

This process can be frustrating.  It can test your patience even if everything goes smoothly.  Always reach out if you have questions, concerns, or just want to vent!

Offer Stage

14. Receiving an Offer - when an interested Buyer(s) writes an offer, we will sit down and review it, going through all of the details of the offer, including price, possession dates, included items, etc.  The offer will be open until a certain time, at which we need to counter/accept/respond to the potential Buyer.  

15. Accepted Offer - once we have agreed and have a fully accepted offer, the subject period begins.  The subject period is generally 10-14 days.  There are no action items for you during this period, except vacating the home for the Buyer’s home inspection, appraisal, etc.

16. Subject Removals / Firm Deal - once the Buyers have removed their subjects, it is a firm and binding deal.  The Buyer will submit their deposit to their Agent’s brokerage to be held as security until the closing date.

Closing Stage

17. Lawyers - signing with your lawyer will take place approximately 1-2 weeks prior to closing & possession.

18. Cleaning and Closing Preparation - moving out and cleaning needs to be complete by the possession date at the latest.  

19. Keys - please have all keys organized for the new owners.  This includes: house keys, building fobs, garage door openers, mail keys, fireplace remotes, etc.  Ideally these would be labeled and placed on the kitchen counter.

20. Closing Day - this is the day title transfers to the new owners, and the proceeds of your sale are remitted to you.  

21. Possession Day - this is the day the new owners are granted full access to the property.  Generally either the same day as closing, or 9:00 am the day after. 

I wanted to take a break from market talk, graphs, and all that stuff.  What does the process of buying a property in BC actually entail?  Here's a quick step-by-step guide.   A good outline for the newbies, and a good refresher for the experienced!

1)      BC Property Transfer Tax (PTT) - this is a tax that is charged on title transfer for every property in BC.  This is unavoidable in 99% of cases.  It is calculated as 1% on the first $200,000 + 2% on the remainder of the purchase price.  For example, on $500,000 the PTT $8,000.  This is payable upon closing, and cannot be wrapped into the mortgage.   

There is an exemption for PTT on new build properties under $750,000, if you are declaring it your principal residence.  Leasehold properties are also exempt in most cases. 

More info here: https://www2.gov.bc.ca/gov/content/taxes/property-taxes/property-transfer-tax

2)      GST - This is payable on new builds in BC.  Generally it is a flat 5% on the purchase price.  GST can be rolled into a mortgage, unlike PTT.  On most resale properties, GST does not apply. 

Note: In most cases, GST does apply to properties that have been used primarily for short term rentals (AirBNB, VRBO, etc).

3)      Legal Fees - Your lawyer will handle the actual execution of the contract, directing funds from the bank and completing title transfer.  Legal fees will be approximately $1,800-2,000.  

4)      Down Payment - In most cases, the minimum down payment will be 5% on the first $500,000 + 10% on $500,001 to $999,999. If the purchase price is over $1,000,000 then it will be a minimum down payment of 20% on the whole amount. This applies to all home buyers who are purchasing their main residence, whether it is their first home or not.

For purely investment properties, the minimum down payment is generally 20%.  On some properties, notably those zoned for short term rentals, required down payments may be as high as 35%. 

On some properties, notably those zoned for short term rentals, the down payments can be as high as 35%.

Note: In the case of many leasehold properties and mobile homes, the minimum down payment will likely be 20%+. It is important to confirm with your mortgage broker what your specific lender will require before getting too far into the process.

5)      Deposit - The deposit is security for the Seller that you will not walk away from the deal once it becomes a “firm sale”.  In most cases, deposits are payable only once all subjects have been removed, and it is “firm”.  The deposit is payable by personal cheque, bank draft, or wire transfer.  It is held in a trust account, hands off to all parties to the deal.  Upon closing, the deposit goes to form part of the down payment.   Generally a good deposit is considered something like 3% of purchase price.

6)      Multiple Offers - On particularly desirable properties it is common to be in multiple offers.  It is a blind auction at that time, where you put your best foot forward and hope the Sellers choose your offer.  It is very difficult to attain any level of certainty during multiple offers, so that will be an adventure we’ll all be on together when it occurs.

7)   Finding a Property – The process of finding a home is pretty basic.  We will try to narrow down properties that fit your criteria, do a bit of research prior to actually viewing the property to make sure there are no big speed bumps, then schedule an actual showing.   Generally one day’s notice is appreciated for showing requests, to give the folks who currently live in the home time to prepare for the showing.  If the home is tenanted/rented, 24 Hour notice is generally required.

This is one we’ll work on together, as timing is important and requirements will be different for each property.

8)     Offer Process - 

a)     Offer - we would sit down and write up the purchase contract.  This includes things like price, deposit amount, inclusions (appliances, etc), subjects/conditions, and completion dates, and plenty of fine print.

b)      Acceptance & Subject Period - Once an offer is negotiated and accepted, the subject period begins.  This is when we will send the contract to your bank/mortgage broker for approvals, schedule the home inspection, review all pertinent info, have an appraisal, etc. This is often the most stressful time of the process, but don’t worry - it’ll all work out! 

c)       Deposit - Once all subjects have been removed, the deposit is due within two business days.

d)      Lawyer & Lender - Once the deal is firm, all paperwork will be sent to your lawyer and your lender/bank/mortgage broker so they can prepare the legal transfer and fund release for the mortgage. You will book a meeting to sign all paperwork at the lawyer’s office approximately one week prior to closing day.

e)      Utility and Service Transfer - it is very important to remember to transfer or set up your accounts with Shaw/Telus, Fortis (gas & electric), etc to make sure everything is ready for the….

f)      Closing/Possession Date - the title will transfer on the Closing Date, and you will receive full possession on the Possession Date.  Generally speaking we will have closing, then possession at 9:00 am the next morning.  For example, if closing is on May 31st you will get keys and ability to move in at 9:00 am June 1st.

Closing costs will include any prorated property taxes, strata fees, or other fees/levies, as calculated by your lawyer.  These will be added to your statement of adjustments upon closing.

9)      Open a bottle of champagne and enjoy!

Disclaimer

The above is for general guidance only.  Any specific questions about mortgage lending, taxation, or other potential legal consequences of buying or selling a property should be directed to a qualified professional in those specific fields.

The times they are a changin', as the Bob Dylan song goes. Change is inevitable, so let's look into things a bit.

The housing market throughout 2020, 2021, and early 2022 experienced a tremendous surge in price growth and sales activity.  It wasn't only the housing market, as anyone on the hunt for a sports car, a Michael Jordan rookie card, a boat, or a swiss watch will tell you.  The demand for any remotely investment type assets has boomed - just check out the waiting list for a Rolex or a new Ford Bronco.

One contributor is the re-examination of priorities. Undoubtedly there has been a shift towards preference for hard assets, especially those that provide direct lifestyle value.  "Honey, we've always wanted to spend more time on the lake, so let's stop putting off the boat and just do it." 

There are three more technical contributors: interest rates, inflation and supply.  In a supply-challenged market of any kind, price will trend upwards.  In the current state of historic inflation the tendency to save cash is low.  Increased interest rates, though, are encouraging Buyers to sharpen their pencils and make responsible purchases. 

Let's bring it to real estate. It is clear there has been a shift in the market, both in Kelowna and nation-wide.  The incredible froth of the last two years has dissipated - so what does that mean?  According to the statistics, we're entering a balanced market.  Inventory levels are increasing, approaching historical averages, as is the time it takes for a property to sell ("sold days on market" 5 year average is 45-90 days). Prices are softening, but are still up year-over-year. Further, "months of inventory" is still below our 5 year averages.

Supply of new housing has been a chronic challenge, and that won't change any time soon.  Supply of all types of properties will remain low moving forward, and that is something that cannot be ignored as our city, and country, continue to grow.

Now let's talk rental market.  The rental market is still incredibly tight and rents are historically high, partly due to low vacancy rates.  With the 5-10% drop in property values in the last several months, it could be a great time to lock in a fixed interest rate and start demolishing the principal on that investment condo.   Put in the down payment and let your tenants start building your equity for you.  For a medium to long term investment, it's a no-brainer.

So is this the time to buy?  The time to sell? 

If you're investing with the intention to flip in 6-12 months, it may be a risky time to make that move. 

If you're looking for a longer term family home, it's a fun time to shop, as you have more selection and will be able to be much pickier than any point in the last two years. 

If you're investing for longer term revenue, it's also probably a great time to make a move, as you can take advantage of the softer prices, and still capitalize on strong rents.  In inflationary and higher interest rate environments, rents tend to remain high as younger people and first-time homebuyers may not be able to qualify for a purchase as easily - so they continue to rent.

For Sellers: while you may have missed out on the absolute height of the market, you are still near record-high values.  Plus, your new home will be a bit more affordable.  When making a lateral move in the same city or general location, the net result will be the same.  Plus, you'll get the benefit of being able to be more exacting with your new home, and have more control over the entire transaction.

Summary

The market is uncertain right now, especially if you just read the headlines.  When things are booming, we tend to forget what a normal market is like.  When things slow down, we tend to hesitate - at the risk of missing the right property.  Regardless, timing the market is nearly impossible, so my advice is...  make smart investments in quality properties in good neighbourhoods.  You won't go wrong.