As the landscape of investment real estate continues to get more and more competitive, and as we move through the boom phase of the cycle, I find myself in hot pursuit of the next great opportunity.
For the last five years, I’ve touted duplexes as the best ROI, but people have caught on; lately there are so few for sale, and the ones that do sell are going for top dollar, thus suppressing the returns.
I love apartment buildings even more, but try to find one for sale. They are like finding a unicorn right now.
So what's left? And more importantly, what is going to perform for the average investor over the next 10 years?
The answer to this burning question can be found by doing a deep dive into the main drivers, the dynamic duo, Supply and our fickle friend Demand.
Local developers are following the Vancouver trend and building these “micro suites” — units as small as 350 square feet in some instances.
In an era of decreasing affordability, it seems like the answer is maximum density. Build ’em small to achieve economies of scale. Even units without parking stalls are flying off the shelves. For now...
The micro suite trend flies in the face of one of the largest market drivers, demographics. Let’s explore this concept for a moment.
There are two groups of buyers who will drive the real estate market for the next two decades.
They just so happen to be the two largest generations in human history, so it behooves us to pay attention to their needs and desires.
The first and wealthier group is the baby boomers. More boomers will reach retirement over the next 10 years than ever before.
In many cases, with retirement comes a decision to downsize. They have money, and they have stuff. Stuff accumulated over the years, and its not going to fit in a micro suite.
I deal with boomers daily and they almost always set their sights on a three-bedroom unit. A recent trend, some boomers are choosing to rent their primary residence and put the cash into investments that finance their retirement.
Regardless, whether they rent or buy, the only inventory they will be interested in looking at will have three bedrooms, lots of storage and a bit of elbow room for when the grand kids come visit.
Then. there are the millennials, Born between 1981 and 2001 they are coming of age and driving the economy in a big way.
A slightly more populous group than the boomers even, there are more people turning 33 (the average age of a first time buyer) for the next 20 years than we’ve ever seen.
The vast majority of these millennials will have tied the knot by this point. Many have kids or plan to in the next few years.
You know what doesn't match well with a life partner and offspring? You guessed it, a micro suite!
Many of this generation will rent on purpose and many will be forced to rent because lending rules are so tight that it's simply out of reach.
Regardless, the one thing they have in common is they need space. In search of space for their budding families, this group will leave the downtown core for the suburbs.
This is my demographic; I deal with them daily in both our sales division and our property management division.
I can tell you first hand, they almost always set up their MLS search for three beds or more and preferably something with a yard.
If the demand is for three bedrooms, why aren’t developers building them? The answer is in the dollars. As of this writing, the average two-bedroom unit will fetch $335/sq ft compared to the average three bedroom that commands only $293/sq ft.
This 15 per cent difference represents the developers entire profit margin. In order to have new development, it needs it be profitable.
In the past few years, the city has given some incentives to developers to increase density in an effort to increase affordable housing in Kelowna.
Now, in a recent release by the city of Kelowna, they have started to incentivize developers to build three bedroom units in response to a study that showed they are in such short supply.
It will be a few years before we see this new inventory hit the market.
You can bet that in the coming years this gap will close, but for now I think exploiting this gap is the move that will pay off handsomely for investors in the years to come.
You have two big markets to serve based on your budget and the tenant profile you are after.
You can go mid to high end in search of a boomer to rent your property for premium dollars.
Seek properties that are newer and in choice locations like the south Pandosy Village or Kelowna’s up and coming North End and you will see excellent appreciation.
The other, more affordable option is to serve the Millennial market. The vast majority are priced out of the “A” locations, and less likely to be brand new, these three bedroom units will cash flow nicely.
There are a few options in the low to mid range three bedroom segment to pay attention to.
Half duplex, townhomes and condos in family neighborhoods like Glenmore, Lower Mission and Rutland. In West Kelowna you have Lakeview heights, Rose Valley and Shannon Lake.
Close to good schools and a short commute, the three bedroom homes in these neighbourhoods will be a hot commodity.
So there you have it, a little forward thinking based on some sound economics.
For a list of well located three-bedroom units that are fully rentable, email me and I’ll send it right over.
The difference between speculation and Investing
Like clock work, every time the market cycle heats up, the opportunist in us comes out to play.
The slow-and-steady-wins-the-race mentality gets abandoned as people chase the sexier, faster buck.
Great people with admirable intentions to do right by their families look to “invest” some of the freshly minted equity in their home into something that has the potential to pay off big.
The right idea, but lately the conversation has begun to shift from solid, yet agreeably less sexy investments like single-family homes with suites, and duplexes, to this idea of “buying” three units in the latest pre sales condo development.
The thinking is: I could spread out my $150,000 by putting deposits on three units and then in a year or two, when the market has climbed up another 10 per cent each of my $500,000 units are now worth $550,000.
Since I only have a deposit of $50,000 with the developer, I have doubled my money on each unit just for sitting on them for a year.
Is the above scenario possible? Sure. Is it a forgone conclusion? Absolutely not! There are countless other ways this can go, including losing all your investment.
I use that word reluctantly because although the intention of the person was to invest their equity, what they were actually doing is speculating.
Speculation means: Ideas or guesses about something that is not known.
The cruel teacher of experience has taught me that to win big in this real-estate game you must avoid guesswork at all costs.
- Forget about timing the market.
- Forget about trying to predict where pricing is headed, and focus on the fundamentals.
- Focus on positive cash flow.
- Focus on creating your own appreciation through value-adding renovations.
I fell into the trap of speculating the last time the market was hot in 2006/2007.
I put $1.5 million worth of the hottest condo project under contract for $150,000 and had expectations of doubling my money at least.
I wasn’t alone as I waited at the front of a 300 plus person line from 2 a.m. the night before the sales centre opened to the ravenous public.
I lost every penny of my six-figure investment when things went sideways in 2008. And that hurt like a you-know-what.
Contrast that with a duplex I bought around the same time in 2007, at the peak of things.
I put a similar amount down on this property, $140,000. I bought this property because the cash–flow made sense.
I wasn’t trying to guess what the market would do; I was investing my capital into a proven revenue stream.
In this case, it made about $1,000 per month net. Between that, and the equity I was building each month through my mortgage being paid off by the tenant, the returns were actually pretty good (18 per cent) despite paying peak pricing for the duplex.
Around the same time my $1.5 million in a half completed condominiums saw their values sliced by 20 per cent, my duplex value had plummeted to a mere 80 per cent of its former value as well.
The difference between the two was that I wasn’t forced to sell my duplex at a loss, it cash flowed through the entire five-year market slump.
My mortgage got paid down by nearly $50,000 and I had approximately $50,000 in cash flow paid to me during that time.
Today, that duplex is worth about 10 per cent more than what I paid for it and the cash flow is about 20 per cent better than what it once was thanks to rents climbing at about three per cent per year.
The $150,000 I dumped into the condos was an expensive lesson, but one I’m glad I learned as we go into this next boom cycle.
As exciting and alluring as some of these shiny new projects seem as an investment, sinking that same money into a boring, old duplex or multi-family building will always be my choice.
I know what I’m getting into. I know where I can add value, and I know that as long as it cash-flows, there’s no down turn in prices that will ever force me to take a loss.
As an investor, I like control; I don’t like putting my fate in the hands of bankers, politicians or even public opinion. I like to see my returns on paper in black and white and I like to be able to influence my upside.
My challenge is I also love the smell of opportunity and, if I’m honest ,I love the thrill of a good wager as well.
Knowing this about myself, I have to work hard at finding the discipline to stay the course with my investments and follow the plan I’ve laid out, as unsexy and tortoise like as it may be.
If you’re a boring old tortoise as well and want to see my hand-picked selection of painfully unglamorous cash flow properties with PDF analysis of each showing the predictable double-digit returns, click here and prepare to be underwhelmed.
Most vacation-property owners will tell you that breaking even off their seasonal tenants is a pipe dream and unattainable.
The negative cash flow of beachfront condos is tolerated because historically they’ve offered great appreciation, personal enjoyment and that bit of prestige.
It feels better to say you have a beach spot than it does to say you have a duplex.
Beach condos tend to appreciate better than the average property because demand is high and the supply of projects that can be situated on the water is extremely finite.
Over the long term, people have done quite well buying this type of property if they can afford to subsidize it over the years.
Rarely do you get to have your cake and eat it too. Where do you find a nice piece of downtown beachfront that offers the ideal vacation property for your personal use four weeks per year, and have it cash flow spectacularly?
There are two developments in Kelowna that will tick both boxes. One is Discovery Bay on Sunset Drive and the other is also on Sunset, appropriately named Sunset Waterfront Resort.
They’re a stone’s throw from one another, and by the same developer. Discovery has 236 units and they sell for $392/sq ft. Sunset Resort is a concrete high rise with fewer units (128), so it commands $470/sq ft.
Both rent for about the same, but Discovery Bay is a slightly better cash-flow property.
I have a decade's worth of experience owning units in both complexes through good markets and bad, so I know the numbers and the secret to getting enjoyment and cash flow.
They cash flow so well because the demand for them in both on- and off-season is great and the values are still comparatively low compared to other tourism destinations.
These two developments have a special kind of zoning known as resort residential. This allows the owner to do nightly and weekly rentals and charge handsomely for it. You’ll pay $275/night or $1,800/week if you plan to stay on Sunset Drive during our beautiful summer months
The units in this complex switch back and forth each year from furnished long-term rentals to vacation rentals. Because of the location, demand is extremely strong. Keeping the units booked was not a problem, even during the great recession from 2008-2012
In the off-season, there is a frenzy of people waiting to rent them for 1,800/month. I opt for an eight-month lease From Sept. 15 to May 15. This allows me to get the place summer ready in time for the May long weekend, and I get to enjoy it for at least a week in May and then again in June. I chose these dates since, historically, I only got the last two weeks of June booked by vacationers.
July and August will be booked solid and will bring in over $15,000 in revenue. So this is prime rental time.
September, I typically block off a week for myself to enjoy the late summer weather, which is almost always perfection and the resort is more peaceful and relaxing as we enter the shoulder season. I’ll still accept one week’s booking for my usual $1,800.
As a nice little bonus, I park my boat in the protected lagoon and enjoy the most affordable moorage in the city. I can utilize the resorts many amenities whether I have the units rented or not. Spend the day by the pool and then walk to best restaurants in the city
Here is an average year’s revenue for a two-bed unit.
- Jan. – $1,800
- Feb. – $1,800
- Mar. – $1,800
- April – $1,800
- May – $1,500 (Half month rent plus 3 night rental)
- June – $3,600
- July – $7,950
- Aug. – $7,950
- Sept. – $2,700 (One week plus half month)
- Oct. – $1,800
- Nov. – $1,800
- Dec. – $1,800
- Total $36,300
Expenses for the year are pretty low as the heating and cooling and water is covered in the strata fee of $360/month, the taxes are quite low at around 2,300/year. Tenants pay for the cleaning, so you have about another $1,000 in incidentals for advertising and supplies.
Neither complex requires you to be part of a rental pool so you can manage them yourself on VRBO with relative ease and save the 20-30 per cent. For many however, the $8-10K investment in a manager is worth it to be totally hands off.
The net operating income of these investments is $28,680, which makes these a perfect 7 CAP while you can still buy them for around $400,000 multi-family residential and commercial properties are selling for approximately 5.5 CAP in Kelowna so this is extremely good.
And when was the last time you spent four weeks poolside at your duplex?
For a list of properties for sale on Sunset Drive and others that perform similarly to the above examples, email me and I will send it right over.
I've been writing for Castanet since 2013 and I have written only about strategies for acquiring property.
But now that we are in the full throes of a boom cycle, my best advice to many will be to sell. Sell anything that isn't a cash-flow rock star and take the cash, ready to re deploy for the right opportunity.
Many of us, myself included, are sitting on properties that aren't serving us well. We have too much equity in them, they don’t have good cash flow or they don't fit our current model.
We would have sold these cash vampires years ago, but the market wasn't right. Well, here we are at the edge of summer 2016, in the busiest market we’ve ever had, with inventory at levels reminiscent of 2006/2007.
If ever there was a time to seriously consider selling, it's now.
Some might argue that there's more appreciation yet to come. I would agree, but the largest returns on property are when you add value to them.
Take the cash out, and sink it into something where you can get the full three-course meal — immediate value gains with renovation, strong positive cash flow, and the rest of the appreciation this boom has left in ’er.
Having cash back in the till during a boom and, even more important, during the slump that follows every boom is paramount. What would you have done during the last slump if you had been sitting on a large sum of liquidity?
Now, there’s selling a property, and then there’s selling a property. I’m talking about specific steps you can take to create a bidding war and get over list price on your terms. There’s a formula, and I’m going to share it with you free of charge.
This is divided into two sections. What to do in advance of listing to get the value as high as possible, and what to do to create a frenzy for the property when its time to go to market.
- Get a consultation on the most profitable renovations you can do before hitting the market. It’s not uncommon that $5,000-10,000 wisely spent will return 15,000-20,000 or more on the sale price. This consult is free from an investor-focused realtor.
- Bring in the stager – Now, it's time to get the decor right, from minimizing clutter to adding the right accents. A staged home will sell for up to five per cent more than an un-staged one. The cost is only a couple hundred dollars and it returns thousands.
- Get it inspected – It's common practice in the U.S. and Australia. A pre-listing inspection has a few not so obvious, but major benefits.
Buyers will negotiate a price before inspection and often attempt to re-negotiate once issues are uncovered. Dealing with them ahead of time prevents this often adversarial and costly renegotiation at the 11th hour.
It creates more trust and good will. Again, having the inspection open on the counter puts buyers at ease, allowing them to get out of defect-detection mode and back into deciding if their life fits in the space.
You get more for a home in great condition than one that comes with a list of deferred maintenance. Fixer-uppers appeal to only experienced buyers or ones looking for a deal. They often take longer to sell and are more likely to attract lowball offers.
By investing in an inspection, you greatly increase your chances for a multiple offer situation, of having a bidder come in without any conditions, because you made it safe for them to do so. You can even get a one-year warranty for around $300, like a certified pre-owned car. We know those go for more.
Now, to the actual launch of the listing.
- One week out, place a coming soon sign in the front yard to build demand and intrigue for the home, but don’t show it just yet.
- Next, get 35 plus architectural digest quality photos taken of the property for use in your marketing to get buyers.
- Create a video walk through because buyers in Vancouver and Calgary will often buy homes sight unseen because they know they don’t have the luxury of time to fly out when the market is this hot. A good video broadens who can bid on the home.
- Go Live on a Thursday afternoon. When you hit the MLS is a subtle nuance that can make a heap of difference. You are only on the hot sheets for 24 hours, so let's make the most of this small window. Realtors are far more likely to see your listing if its featured between 3 p.m. Thursday and 3 p.m. Friday than competing for their attention as the weekend hits.
Now, you should get a ton of showings for the weekend. Make it clear that you will be entertaining offers at 5 p.m. on Monday and then let the demand and competition build for the property until then.
Come Monday, if all goes as planned you will have your choice of offers some well above your asking price. Just remember, you don’t get what you deserve, you get what you negotiate.
Well there you have it, not my typical cash flow investment, real estate centric article, but one thing I’ve learned over the years is that part of being a good investor is knowing when to it’s time to cash out and look for the next deal.
If you would like a list of the service providers I’ve mentioned in this article including my trusted Inspectors, appraisers, stagers, contractors, photographers, videographers, please email [email protected] and I’ll send it to you.
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