With low inventory across the city (we are down 27% in residential listings and 41% in condo listings), prices are shooting up. And because of new mortgage rules making it harder to borrow, lot of prospective buyers, particularly first time buyers, are sitting things out. As a result, the vacancy rate in Ottawa has dropped from around 6-7% a few years ago to around 1.6%. And rents, correspondingly, are going up.
Which makes it a great time to buy an investment property!
Since I’m self-employed, I consider the rental income a kind of pension. I’ve blogged before about how to vet tenants and how to get great tenants — now I want to give you some tips on buying a solid investment.
The first thing to consider is cash flow. Some investors don’t care what the underlying property is like as long as the cash flow (known as ROI, for return on investment) is high enough. I don’t buy that philosophy. You want to buy a property where the underlying value goes up while also giving you a good return on your investment. I personally like to invest in well-run condos with good management and low condo fees so that I don’t have to worry about snow removal, or replacing roofs or windows. I also invest in renovating them so they shine. In the past three years, two of my condo properties rented on the same day I put them on the market; the third rented within a week.
To calculate your ROI, you need to know what your likely rent will be as you will divide the costs of your investment by your return on investment. In this market, on average, a one bedroom unit with parking will rent for at least $ 1700 plus utilities, much more than in the past. A two bedroom will go for an average of $2100 plus utilities depending on location.
Let’s work with the two bedroom, since those are usually the easiest properties to rent. I can find you a very nice two bedroom condo unit in Ottawa for less than $250,000, but you need to add on land transfer taxes and legal fees, so let’s just use $250,000 as our working figure. Let’s assume $300 a month in condo fees. I’ll also assume you are paying cash since the variables on a mortgage get a little too complicated for the purpose of these simple calculations.
Purchase price: 250,000 (Investment)
Rent: 2100 x 12 = 25200 (Gross Income)
Condo fees 300 x 12 = 3600.00
Property taxes = 2700
Landlord insurance = 300.00
Total annual expenses: 6,600
Net Operating Income = Gross Income – Total annual expenses
25,200 – 6,600 = 18,600
To get your Return on Investment, i.e. how much you are actually earning on your investment, divide the Net Operating Income by your investment. 18,600/250,000 = 0.074, or 7.4%. That’s a pretty good return on your money with a lot of economists predicting a recession around the corner!
You will need to adjust these figures if you do renovations, the way I do — your investment costs will go up. Your expenses may be higher if your unit stays vacant longer than you expected, or if you are carrying a mortgage, but remember: the ROI is just your annual return on investment. Over time, the underlying value of your unit will go up too. And in a hot market, you can do very well on that front!
If you, like me, don’t have a pension, you might want to think about investing in real estate. Ottawa is a stable market and even though prices are going up fast, there are still some lovely little buildings around that are worth investing in. I have my favourites for sure!