Considering Purchasing An Income Property In British Columbia?

(April 29, 2014 )

Considering purchasing an income property in the Metro Vancouver, Fraser Valley or anywhere in our beautiful British Columbia? If the answer is yes our real estate team will attempt to debunk and shed some Truth About Real Estate on some buying myths along the way. 
One myth in particular is that the only real thing that matters when sizing up a property is the cap rate. First off, what is a cap rate? Our in house real estate expert Robert Pybus will explain.

A cap rate is a measure of the purchase price of an investment property compared to the net income you make from that property. Or, the rate of return on an investment property based on the expected income that the property will generate. This is calculated by dividing the income the property will generate (after fixed costs and variable costs) by the total value of the property.

If you want to get technical, it is basically the discount rate of a perpetuity.

But if you want it in layman’s terms, you could consider it the official return on the property if you bought it outright in cash. The amount after fixed costs — what is typically referred to as the net operating income – that would go into your pocket with no loan to service. This amount (if you had no mortgage) would go into your pocket. This is how you compare the placement of your money to other investment vehicles like RRSPs, stocks, etc. For the majority of investors, the cap rate is what you would use to determine how much you have to service a mortgage with — and if you play your cards right — what you have left over.

The BC Home Hunter Group's in house real estate analyst Robert Pybus often speaks to the issue of capitalization rate on a residential (or commercial for that matter) British Columbia property — while important — is not the only thing BC real estate investors  should be reviewing. 

Different areas of any given city will tend to have different cap rates and they’ll vary quite a bit. This is why you should also consider the following:

1.Tenant Quality - This is a huge one. Inheriting tenants is the passage of a relationship between one individual to another. Reliable tenants who take care of a property, who are reasonable, and who pay appropriate market rent should be a big consideration when seriously considering any purchase. Evictions, your time and chasing rent cost money, so if that’s what you’re in store for maybe you should think twice or three times. 
Just because a property has a large cap rate, this does not necessarily mean you can’t suddenly find yourself in a difficult situation with bad BC renters in exchange for that big return. 

Our real estate team at The BC Home Hunter Group are always careful to euthanize our investors to the fact that beautiful BC is a tenant rights paradise and the complete opposite for home and property investors. 

Is it worth it? Ask yourself this question, are you prepared to potentially deal with endless calls, unforeseen costs, expenses, nightmare renters and rental laws that favour everyone but you the property owner taking all of the risk and shouldering all of the expenses? Yes, if the potential upside is 10%+ cap rate . Yes, it can be.

2.Property Condition - Houses, like anything else, deteriorate. It’s inevitable. Some houses will be more expensive to fix than other ones. What condition is the place you’re buying in? If it’s a fixer-upper then you’ll have some work to do. But if it’s a turnkey property your overall maintenance expenses will be low. A large cap rate is great, but not if you’re looking down the barrel of a major renovation or a glaring structural issue that will need to be eventually addressed.

3.Appreciation Potential - This is as always a significant consideration and particularly applies to areas of any BC city that might be improving, gentrifying, or seeing other commercial development that might have benefits to residential property values in the next 2 to 5 years. Appreciation potential is equity potential, and equity potential is beneficial not only in net worth to the buyer, but in the ability to refinance and purchase something else — or pay off a personal residence. 

Keeping in mind that numerous GVRD cities have political parties that more often that not want to raise your taxes and levies and most often redistribute that revenue to your renters not you. We can recommend the best and worst of the lower mainland and British Columbia's cities to be an investor/landlord in and those you might want to run away from! As all of our clients know our real estate team are 90% of the time NOT a fan of condos, we love detached and in some areas town house investments and home ownership.

4.Income Potential - see above. If you can determine that a 10-20% increase in the rent roll is a possibility then this absolutely needs to be considered.

Now with all of this to say it’s important to be balanced in your view on a cap rate. The above are a few of the issues and potential benefits you should consider with respect to a purchase. If you’re selling, you need to be sensible and recognize that the cap rate is an important part of the equation and undoubtedly will be seriously considered by any smart investor. If anything, this is the best way to ensure you’re maintaining a market-appropriate rent roll and keeping your building in good shape — regardless of where it is. A good rental property purchase will have a favourable rating on all of the above five points.

Feel free to call or email our passionate real estate team to chat about your questions and concerns or register for our newsletter, The Truth About Real Estate. Happy BC Home Hunting!

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