Mid-summer update

With the first half of the year on the books, I wanted to summarize where we are during these interesting times. 

As you might expect with two years in a row of double-digit property value growth in the Okanagan, and the headlines that go with it, we have seen the number of properties purchased for investment increase by 40 per cent.

This is a combination of baby boomers looking to augment their retirement income and out-of-towners catching wind that Kelowna’s market is in the full swing of a real estate boom and looking to get a piece of the action.

Now not all real estate investments in Kelowna have performed equally. Some have really exploded. Those holding properties in the new RU7 designations are seeing huge gains as values on war times houses in the North and South end of downtown have gone from the mid 400s to the low 700s in many cases.  

This is all due to the infill development potential that these city lots hold, as four units are now permitted on a regular-sized city lot

Multi family properties from duplexes, fourplexes and apartment buildings have become so scarce that prices have jumped nearly 40 per cent. A duplex in Rutland, for example, that could have been purchased for $550,000 last year, can fetch $750,000 in today’s market.

Suited homes have also seen dramatic equity gains. Gone are the days of buying a single family home with a suite for under $500,000. Even the most affordable of neighborhoods like Glenrosa are posting sales in the low 500s for a 1970s Bi level home with an income suite.

Rising rents have kept up with sky rocketing values reasonably well but CAP rates have fallen from six per cent to five per cent to fourper cent over the past two years.  

This means investors from markets such as Vancouver are coming in search of yield. Because of our relative affordability compared to their market, and the prospect of a few more years of property value increases, they are willing to forgo the huge positive cash flow, satisfied with breaking even as they watch their equity pile up from mortgage pay down and capital gains.

Many people that have been holding property since before the boom are electing to cash in at this stage. With thousands of units of purpose built rentals coming down the pike in the next one to two years, we expect to see the vacancy rate climb a little and rents on older units to soften.  

With this we may see prices stabilize on the multi-family properties. Good news for renters in the Okanagan, a sell signal for many landlords.

It appears the best strategy for this market is a buy-fix-sell-in-a-year strategy. If you are wanting to purchase a holding property before they no longer cover themselves, a five-bedroom home with a suite will still cash flow nicely, and will always fare well in any downturn as it always in high demand for both investors and first time home buyers alike.

Always remember, investors don’t put themselves in negative cash flow situation chasing capital gains, that’s called speculating and it’s how people go broke.

Stick to the fundamentals and buy well located real estate that is positive cash flow and has the opportunity to add value. That is a strategy that never goes out of style and is a fast track to building real, multi-generational wealth.

For the entire Vantage Report that dissects the data neighbourhood by neighbourhood, spotting trends and opportunity in our Okanagan market, view the entire report here.


Real estate is worth it

I like to tell war stories.

You know, the really gritty, tough moments of being a Kelowna real estate investor — the nightmare tenants who are three months behind on rent, the money-sucking roof repairs, flooded basements, and backed-up sewer lines.

Maybe it’s a badge of honour, or maybe I just like to vent, but inevitably every time I share one of these trials with someone, I get a similar response.

People say, “Yeah, I just don’t think it's worth it” or “Seems like it’s not worth the hassle."

Now, to be fair, typically the people I’m chatting with aren’t high-powered executives or independently wealthy types.

They’re regular, working-class people like you and me, who work a 40 or 50 plus hour week in exchange for a wage or salary. Most of them are daily facing some level of challenge at their workplace, whether physical, mental, or emotional.

Labour Board statistics say that the average hourly wage in B.C. is $26. But let’s say you are a trades-person with a ticket and you make $45 an hour. Or maybe you went the higher education route and landed a corporate job with a six-figure salary.

No matter your position in the work force and no matter what your income, you still face a disproportional amount of unpaid, off-the-clock hours thinking about, worrying about, and otherwise preparing for work.

Most people have made the decision to spend as much as one half of their waking hours on work-related things that result in no pay. This is a fact of life.

We must be willing to focus our attention on, and endure the hardships of work in order to earn the money required to fund our lifestyle.

With that in mind, let's break down the trade off between hours spent working on, or thinking about, an investment property and the benefit received in return.

Let me consider the worst property of my Kelowna Real Estate portfolio because it has the weakest revenue and causes me the most headaches. 

I’m going to go back to a time before I delegated said headaches to a property manager and became an actual investor versus an active landlord.

The property was a duplex with basement suites in a fringe location. I had a revolving door of tenants all of whim lived from paycheque to paycheque and were chronically late on their rent.

One of the worst years saw two midnight dashes that required extensive time and money consuming, clean up and the need to re-rent. This same property had the toilets back up three times that year, a broken down washing machine that required replacing, and a tree that fell on the power lines.

It was a handful.

I will now attempt to estimate the hours spent on this property for this year. I am going to over estimate the hours spent to be on the safe side. 

  • Collecting rent from 4 tenants monthly: 2 hours (can be automated but the late ones require time)
  • Attending to maintenance items monthly: 2 hours (would go months with nothing, but let's go high)
  • Communications with tenants monthly: 1.5 hours
  • Banking: 1 hour
  • Book keeping: 1 hour
  • Advertising: .5 hours
  • Tenant Screening: .5 hours (2 hr x 3 times per year )

Total: 8.5 hours per month x 12 months equals 102 hours per year — Or 102 individual ass pains in one trip around the sun.

OK, so we have established the cost — 102 hours out of the roughly 2,500 productive working hours per year. Or, to put in another way, two full working weeks of crap to deal with. If you are already working a 50-hour week, you are increasing your total workload in your life by four per cent.

So now let's examine the benefit:

  • This duplex was purchased for $700,000
  • The financing of $560,000 cost me $2,300/mo
  • The taxes were another $400/mo
  • The insurance another $200/mo
  • And the maintenance bill for the cleanup, plumber visits and appliance repair was almost $4,000 for the year so lets just round up to another $350/mo

The total monthly expenses averaged $3,250/mo

My monthly rent was $1,900/side for $3,800/mo total

Annual cash flow of $6,600

Now, if that was all I got, the $6,600 bottom line divided by my 102 hours of output has me at approximately $65/hr. Not bad, but there might be more enjoyable ways to earn $65 an hour.

Every time I made a mortgage payment, using my tenants rent money, my mortgage balance was reduced by $1,000. At the end of the year, the total paydown was $12,000.

At the same time, the property appreciated by five per cent a year in line with the 80-year average, not the double-digit stuff we’re seeing now. This five per cent resulted in $35,000 in capital appreciation

Combined, I have $47,000 in new equity and the $6,600 in net cash flow for a total benefit of $53,600.

Dividing this by the same 102 hour input, we arrive at a $525 per hour.

That’s a pretty spectacular hourly rate by most people’s standards.

So I ask you this question: what type of work would you be willing to do for that hourly rate?

If I called you up and said, I have a part-time job offer for you and that the job would entail coordinating service providers, fielding phone calls, collecting rent (sometimes having to ask more than once), running some ads, checking some references, filling out forms, and some light book keeping and banking.

I’ll pay you $525/hr for this job.

Are you going to tell me, "Nah, I’ll pass?"

You see people that don’t own investment property seem to only hear about the horror stories and they develop a bias that keeps them on the sidelines.

They see the costs, the hassles, the worry, and the unexpected surprises and expenses. But the benefits have never been properly explained.

As shown above, you can do a proper cost benefit analysis and determine for yourself. Is eight hours of effort a fair trade off for a $4,000 holiday?

Think of the worst eight-hour day you’ve had at your current job. The absolute crappiest day you can remember. Would making four grand at the end of that day have alleviated any pain?

So, yes, I invested $150,000 into Kelowna Investment Property to buy myself a job, the same way someone might buy a franchise for $150,000. Not with an expectation of a passive return, but as an opportunity to be their own boss and actively earn some dollars in exchange for hours worked.

When you are doing the work yourself, I think this is a better measure, or a better way of answering the “is it worth it?” question.

At this stage, it’s more relevant to quantify what your time is returning to you rather than looking at the ROI or investment performance of the cash invested.

Once you graduate to having a property manager and you are no longer actively land lording, the metrics of internal rate of return and cash on cash return are more applicable. And, because you are paying yourself dividends, there are a myriad of options for dividend returning investments.

If you are someone with zero desire to be a landlord, but who would consider options for wealth building investments, here is how things can shake out with a manager doing all the work.

My bill for the year at eight per cent of the 3,800/month collected is $3,648.

The total benefit for the year is now $50,000 on my $150,000 investment, earning 33 per cent passively.

The property manager with their 102 hours invested, received approximately. $35/hr.

Funny how that works.

Real estate fear and greed

I recently had the privilege of speaking at the mayor's state of the city address. 

Amid the optimism and seemingly endless growth and opportunity, I wanted to deliver a dose of realism to the group as we move through a predictable cycle. 

There’s a fortune to be made in real estate if we detach from the emotion and become strategic and proactive in our approach. 

This article is an expansion on what I shared with the group. It’s precisely what I am doing inside my own portfolio.

At my firm we are tracking all 17 market drivers and a dozen different market influencers so that we know exactly where we are in the Kelowna real estate cycle, and more importantly, what’s coming next.   

Since the market always moves through three phases in the same order—boom, slump, recovery—by pinpointing where we are in the cycle, it allows us to know where we are heading next. 

In tracking the financial, demographic and emotional drivers, the data tells us that we are still in the early-mid stage of the boom. 

Strong, inward migration, a crazy construction market (anyone building a house right now?) and a healthy first-time buyer market are all-indicative of early stage boom. 

How long does the boom last?  No one knows for sure; however, my prediction is that this boom has a fair bit of runway. 

And I’m not just saying that; I’ve personally taken on multiple development projects that will take me well into 2018 and I sleep like a baby at night.

Anytime you say the word boom, 20 per cent of people hear bubble. 

These words are far from synonymous. 

A boom is an amazing thing for an economy; a bubble can have devastating consequences.  Since fear sells in the media and a large percentage get their opinion from the media, it’s no wonder people are quick to throw around the bubble word. 

So here are a handful of bullets you can use in a debate with anyone that tries to tell you we are heading towards another crash.

First, our market is not speculative; in fact, CMHC recently published a stat that in 2007, the height of our last boom, there were five times as many people purchasing with the intent to resell within a year. 

Speculation is everyone becoming a flipper or a condo high-rise investor with dollar signs in their eyes.

During our last boom, our labour market was in trouble, we were losing all of our skilled youth to the Alberta oil boom without much to attract young talent to our region. 

Now, we are seeing a large diversity in new jobs created in the tech and film sector along with good paying jobs in health care and construction.

Tight lending is what will truly save us from ourselves. 

Anyone that’s tried to get a mortgage recently will know what I’m talking about. 

To say the underwriting process has become “thorough” would be a contender for understatement of the year.

Contrast that with the end of our last boom in 2007; we had zero down, 40-year amortization, and stated income lending. This basically meant if you could fog a mirror, you were likely approved. 

What we have now is healthy growth driven by solid economic fundamentals. I’m not saying the party will continue forever, though. 

As affordability is diminished, and developers push new inventory out in droves, the supply and demand will naturally shift the other way.  

If you take only one thing from this article, it’s that following every boom is a slump. 

Once you accept that, you can begin to be strategic and take some proactive steps to ensure that you are prepared to capitalize on the market when it does normalize and enter the slump. 

As I’ve written in my articles for years, the slump is where fortunes are truly made.

How will you know when?  The early stages of a slump are very subtle and can be easily missed if you drink too much of the real estate Kool-Aid. 

Things to be watching for are:

Overbuilding and oversupply – If inventory gets much higher than eight months of inventory it means conditions have shifted in favour of the buyer.

Vacancy rates up and rental rates down – If vacancy rates edge up toward four per cent, this signals a shift in the cycle.

Fear and greed – When the predominate emotion driving real estate transactions becomes fear based, rather than opportunistic.

So what do you do to be in a position to do some serious damage when the market does turn?

Over the next year or so, if you have investment property, sell anything that doesn’t cash flow. 

Just take your money and run. 

If the property value continues to rise for a bit, who cares? 

You can never get hurt leaving a little meat on the bone for the next guy. 

Do this before the capital gains exemption disappears after changes by our government

Take advantage of the profits in your primary residence by accessing them on a line of credit.  This capital will come in handy when there are hot deals again and no buyers to compete with.  Finish your reno projects and get the home appraised by your banker, there’s likely a large chunk of change available to you. 

If you are up for a move or a change of lifestyle, this is what we call a downsizers market. 

Take some tax-free capital gain, put the money in the bank and shrink your footprint. 

Some people might even opt to rent for a period of time leaving them no personal exposure to a falling market. 

No downside, only opportunity.

If you purchase Kelowna real estate in 2017, make sure that it cash flows by at least $300 per month, per unit. 

This will stress test your investment against rising interest or decreased rents. 

To insulate yourself from both of these further, consider purchasing three-bedroom units since there will be a zero vacancy for them for years to come.  

When financing your purchase, consider locking in to five-year terms or longer; it’s cheap peace of mind.

There you have it, its cash in or cash up.   

No magic here, just some good solid real estate advice that you can use to create multi-generational wealth or, at the very least, make sure you don’t get caught swimming naked when the tide goes out.

For the scorecard we use to determine what time it is on the Cycle Clock, email us at [email protected].

If you have questions about the value of a particular piece of property you own, use this online market analysis tool



3 is the magic number

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.

More Investment Real Estate articles

About the Author

AJ is the owner of Kelowna’s downtown boutique firm, Vantage West Realty. The firm takes pride in breaking the mould when it comes to how they practice real estate. With a well-deserved reputation as a real estate renegade, Hazzi has been shaking up the Kelowna real estate scene since 2002.

Having been a student of real estate through two market cycles, AJ has come to see an absence of truly qualified professionals specializing in investment real estate. This has become AJ’s role within the firm and the community: To educate clients on how to achieve financial freedom through real estate.

Arming his clients with knowledge on where to find positive cash-flow, how to renovate for profit, and other creative avenues that most agents completely ignore, Hazzi has carved out his niche as a real estate investment advisor (REIA), and loves nothing more than educating people on the right strategy to capitalize on both boom and bust years.  AJ is a firm believer that the Kelowna market is rich with opportunity, if one knows where to look.

If you are in search of an advisor who practices what they preach, consider that AJ has built his own real estate portfolio up to include multi and single family cash-flow rental properties, development property, resort property, fix and flips, and commercial properties. By sharing the lessons learned from his own experiences, his clients get the knowledge and confidence to invest without having to make the expensive mistakes he and many new investors have made along the way.

His goal is to impart on people, especially of the X and Y generation, that depending on RRSPs and Government Pension Plans to look after us down the road is risky business. Most people don't realize that as little as one or two properties added to your real estate portfolio now, can secure a comfortable, even lavish, retirement.

Bringing a consultant's approach rather than the tired, old-fashioned sales approach, AJ and his partners offer a world class service from finding, pre analyzing, and negotiating your next acquisition, to property management, all tailored to today’s busy investor.

To hear what AJ Hazzi's clients have to say about his service view the testimonials.

Contact Information

For more details or to reach AJ Hazzi, please visit www.vantagewestrealty.com

Email [email protected] Cell 250.864.6433

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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