October 29, 2017 0 Comments Other Categories

Investment Condos: Edmonton vs. Lower Mainland, BC

Screen Shot 2017-10-29 at 12.11.59 PM

My original idea was to keep expanding the real estate portion of my portfolio with Edmonton properties, due to the following:

(1) Low entry cost.

Compared to Lower Mainland, BC; "Greater Vancouver area"; with the ever-tightening mortgage rules, Edmonton's real estate is much easier to get into, as prime location properties can be acquired for as little as $50,000 - 60,000 down (20%). A similar unit in suppose, Coquitlam, BC (1 hour away from Vancouver), would require $100,000+ - possibly $175,000+ if 35% downpayment is required to bypass minimum income requirements, as for most people, qualifying with norm incomes would be impossible for mortgages of those sizes, unless they jointly bought.

(2) Proximity to home.

Since I do most of my business here, I can respond to tenant inquires and concurrently manage properties easier and with lower cost; Lower Mainland is 10 hours away and will cost more to maintain properties there.

(3) Buyer's market.

Given the low-oil-price recessionary environment and the general negative investor sentiment, there is much more bargaining power here for the buyer, and bidding wars non-existent. Conversely, BC's market is generally red-hot and a seller's market.

(4) Cash flow neutrality or positivity.

Unlike BC properties, which are usually very cashflow negative due to high purchase prices but low relative rents, Edmonton properties are easier to be cash flow neutral or positive in. Most people do not want to live here, and rather rent. Even the average homeowner sells within 2 years in Alberta.

However, given that I already am exposed to about $680,000+ of the market in Edmonton with my two properties, diversification may be of my best interest. I also work in the oilfield, so my personal income and consequently the raising of further investment funds, is already heavily reliant on a robust oil and gas industry. Also, Alberta’s appreciation rates are generally very low – most are happy with 4% appreciation YoY. Vancouver region historically has enjoyed more than double that – triple or even more in recent years.

The primary issue I’d face is raising investment capital, as with the prime enemies of financial regulators and bankers constantly tightening lending rules, qualification for a BC property will be almost impossible now without significant downpayment. That is, even with $100,000+ income, likely I’ll have to supply a 35% downpayment to access lenders’ no-minium-income mortgages- cutting deep into my returns.

Screen Shot 2017-10-29 at 12.11.30 PMUsing a $400,000 condo in Coquitlam as the basis of comparison and hence $140,000 initial investment:

Appreciation: $40,293/year avg. over 5 years. Assuming lower bound of 8.5% YoY

Rental income: $1,878/month (current market is 1500-1600, but that is the anticipated average over 5 years, as rents rise with property prices)

Condo fees: $240/month (new building; current rates are <200, but this is the anticipated average)

Property tax: $300/month

Interest: $6,452/year avg.

Maintenance, vacancy allowance: $2,817/year (1+0.5 month's rent/year)

Legal fees, land transfer taxes, RE agent commission: $25,124; 5,025/year avg.

Profit/year (before tax): $42,055/year

Tax: Assume $91 - 142K tax bracket. 634 (rental income tax) + 4634 (Capital gains) = $5,268

ROI: 30%

ROI if can find lender allowing 20% down: 52.2%

After-tax ROI: 26.3%, 45.9%, respectively.

Note we plan to liquidate in 5 years- the end of the mortgage term.

Compared to a centrally-located Edmonton property:

Appreciation: $17,332/yr avg. Assuming 4% YoY

Rental income: $26,600/yr avg.

Condo fees: $458/month (smaller building; less units to divide fees between)

Property taxes: $2,788/yr

Interest: $6,452/yr

Maintenance, vacancy allowance: $3,325/yr

Legal fees, RE agent commission: $1,831/yr

Tax: 2415 + 1993 = $4,408/yr

Profit/yr (before tax): $24,040

ROI: 17.2%

ROI w/ 20% down (298/yr. extra interest): 29.7%

After-tax ROI: 14%, 24.4%, respectively.

We can conclude that if a 20% downpayment mortgage is accessible, the BC property is more profitable- even with the lower bound YoY of 8.5% and much higher transaction costs. Even if a larger downpayment is required to go to BC, it is still more profitable- 30% and 26.3% before-tax and after-tax, respectively, versus 29.7% and 24.4% – though the return discrepancy quickly diminishes. BC real estate is more likely to be cash flow negative also, making it more difficult to manage in addition to distance.