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.