Thinking of investing? Ottawa is a GREAT place to be a landlord right now.

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. In this first example, I’ll also assume you are paying all cash instead of leveraging your money  by borrowing. 

Purchase price:  250,000.00

Rent: 2,100 x 12 =  25,200 (Gross Income)

Annual expenses

Condo fees 300 x 12 = 3,600.00

Property taxes = 2,700

Landlord insurance = 300.00

Total annual expenses: 6,600

Net Operating Income = Gross Income – Total annual expenses

25,200 – 6,600 = 18,600 total net income.

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!

Now, let’s assume you decide to get a mortgage. You have to put 20% down, which is the minimum required on an investment property. On a $ 250,000 purchase, that’s $ 50,000, meaning  you would have to borrow $ 200,000. Let’s assume an interest rate of $ 3 % per year.  Interest payments in this hypothetical would be approximately  $ 12,000/yr or $ 1,000/month. Let’s assume the same gross rent of $ 25,200 but now your annual expenses are $ 12,000 higher, and add up to $ 18,600.

Net Operating Income = Gross Income – Total annual expenses

25,200 – 18,600 = 6,600 total net income.

Now your ROI is calculated based only on your $ 50K investment, because your tenants are paying the interest on your loan. Your ROI now goes up to a whopping 13 %! (6,600/50,000 = .13).

These numbers will vary depending on your financing and how much cash you put in to the purchase and related costs. You will need to adjust the total investment cost up if you do renovations and add these to your purchase price.

You will have to carry your property costs while you renovate, so be sure to add those to your costs in Year 1. Same if your unit stays vacant longer than you expected.  Your ROI in year two is calculated the same way, but you wouldn’t have those costs now that the unit is rented, assuming your tenants stay. If not, recalculate your ROI based on how long your unit is vacant.

Over time,  the underlying value of your unit will go up too: real estate generally trends up over time. 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!

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