Purchasing a rental property is a popular option for many people hoping to get their foot in the door with real estate or for homeowners wanting to re-invest their current home’s built-up equity.
James and Denny break down the benefits, challenges, and responsibilities of purchasing an investment property and becoming a landlord.
This episode will cover what to look for when buying a rental condo, the difference between an owner-occupied or vacant condo and a rented unit, potential monthly rent amounts versus what condo mortgages and expenses cost in different cities, the reasons why you would evict your tenant, and allowable yearly rental increases and restrictions.
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Read the Transcript Here
Hi everyone, I’m James Garbutt. And I’m Denny Dumas. And this is the Garbutt Dumas Real Estate Podcast.
Denny: Buying your first investment condo, this is a very, very exciting time in the real estate cycle, and there are things to be aware of and we wanted to touch on a few things.
One: what to look for when buying a rental condo. What are some potential rents versus current cost of condos are in some different cities. Share the rent increases, the allowable rent increases that you were allowed to up the rent every year, and maybe some suggestions around that. And then ways to evict if your tenant is not paying the rent. If you sell the property, if you plan to do a large renovation to the property, how to evict the tenant.
Let’s start: what to look for. So one of the things we talk about all the time with investors is purchasing an owner occupied or vacant condo versus purchasing something that is already rented. The reason for that is the yearly rent increases are very low. Lower than inflationary rates lower than what your cost of strata fees, property taxes will potentially increase each year. So being able to start at market rent is extremely important. A lot of these, a lot of condos that come up for sale, a tenant has been there 3,4,5,6 years and the the rent that they’re paying is well below market rent and with this world of increasing interest rates, your monthly costs are going to be quite a bit higher than they were obviously a few years ago. And it’s going to be a lot harder to be cashflow neutral, or positive cash flow on these investment type properties in Greater Vancouver.
James: Yeah, I think just to add to that, over the last couple of weekends I’ve kind of watched, I’ve had more people reach out in the last few, in the last month about investment property. So you know, part of the reason behind doing this episode is who’s looking for an investment right now? There are people that don’t want to move that have excess cash and hear the market is falling. And I’m getting more questions about what does it look like? Should I buy a pre sale, should I buy existing, should I become a landlord, invest in my first property. And one thing when you’re talking about market rents.
One thing that was really highlighted in just taking a quick scan of the inventory of the last few weeks is, you know, a clear example is Yaletown.You know, 550 square foot one bedroom in Yaletown. A lot of the products on the market has tenants in the property. So if you’re trying to be under say a $600 or $650,000 price point for 20-15 year old one bedroom and Yaletown perfect little rental. I found a lot of them were renting for around $1,800 which was probably the rates about four years ago, maybe five. And the market rate today is probably in the neighborhood of $2,600 or higher.
And if, if you’re going to take on a tenant, if you’re going to look at purchasing a property like a condo in Yaletown or False Creek or you name the suburb of Vancouver, because we’ll get into that, recognize that it better be a good deal if you’re buying strictly for cash flow investment. And if a tenant’s in there for $800 less per month than the market rent. You are taking essentially a $10,000 hit annually by doing that.
And the deal, I mean there is a reason to do it if you get a really good deal on the buy and the place is not showing well and no one else wants to bite at it. But the moment you buy that property you are assuming that landlord position. You are taking over the terms of that tenancy. You can’t just evict them because you bought the property and you want to make it look better and rent it for a higher amount. That is, that is a no-no today.
So Denny, the market rents of what you’re looking for is one critical factor. If you’re looking in the suburbs, I think you’re more likely to find owner occupied or vacant properties. But if you’re looking and say the downtown core and the lower price point, very common to run across tenanted properties.
Denny: It’s quite common for consumers to believe that they can purchase a tenanted property, kick out that tenant and put a new tenant, but that is, the residential tenancy board is very strict with these types of things. And so it is very, very important to understand who’s living in that condo prior to even going to see it.
James: Touching on that for a moment. So yeah, so you do take that risk. You buy a place, you evict them, you know, you say you’re moving in, but you don’t. The consequence of that is I mean, One: tenants are more and more aware of their rights and power nowadays than 10 years ago. So if you re-rented that place and put it online two months later, three months later, you are a target you are setting yourself up for, you know, being on the bad end of a lawsuit of some sort.
But the claim that they’re gonna go after is, if they rent a new apartment at market rents for 12 months because you evicted them and they find out that you evicted them without notice, they can go back to you for basically that amount that they’re paying, potentially plus damages and cost of moving. I mean the claim can get outrageous depending on the award might differ but ultimately by re-renting a place and evicting a tenant out without the proper notice or reason. You’re setting yourself up for a year of rental damages that they incur. And it may or may not happen.
And the reason why those rental rates are so important is because the rental increase caps are so low, you know if, if you bought a property that was rented for $1,600 a month or $1,800 or month and the market rent is $2,500 or $2,600. The 22 or 2022 rent increase cap was 1.5% and the 2023 rent increase cap is 2%.
Denny: They upped it.
James: They upped it to 2%.
Denny: Yeah, isn’t that exciting?
James: Yeah, well 2% on $1,800 is $36. So you can get a $36 increase if you, if you take advantage of that. The moment you do that increase you can’t do another increase of 12 more months. And if you are going to do an increase it takes three months notice to make it effective. So you submit that increase now for January on no that’s now even three months from now, we’re doing this in November. So we’re looking at February or March, March 1. Yeah.
Denny: Yeah. Yeah, those rates I mean, like looking at inflation over the last year. A 1.5% rental increase in 2022 is kind of hilarious. 8% inflation over the summer. I know that number’s going down. But in most cases, your strata fees go up every year. In most cases, you’re paying more property tax every year. So having a 1% increase, 1.5% increase is just doesn’t, it seems strange that there’s that type of rule.
Whenever we have clients that are buying investment properties, we encourage them to stay on top of the rental increases just to prepare themselves for the future. There are local governments are talking about now potentially bringing in some sort of rental income cap, meaning that if your tenant moves out in three years from now, you can only up the rent. You can’t go up to market rent, you can only up the rent, the percentage that they’re going to allow you to. So I think it’s really important to like, stay on top of these rental increases. Otherwise you may, you may be in a position where it just makes more sense to sell that investment if the tenant moves out in a few years, then continue to rent it because of potential future caps.
James: If you’re owning a condo strictly for rental and strictly for cash flow and you have no intent to move into it. There could be some scenarios where you get so far behind market rents, it may just not make sense. You may be better off by selling it and pursuing a different type of investment to start from scratch.
Denny: And on the other end of it if, if your tenant does stay for a few years and you don’t up the rent at all, and in five years from now you decide to sell that property. You are essentially cutting out the investment world if your rent that you are charging is well below market. like we’re talking about. We’re steering clients who are looking to buy investment properties to, to properties that are either vacant or owner occupied, for this reason.
James: You are relying on the buyer, the investor buyer being, loose with money if you have an under-marketed place that you’re trying to sell. But, I mean the perk of it is in a lot of these areas, say the downtown core, a 550 square foot one bedroom apartment is, I mean, it’s great for first time buyer, someone who wants to live downtown but oftentimes the next buyer is an investor and there are some investors that are less cashflow concerned. There is an argument if you get a really good deal on a place that’s under marketed or under rent, that you may have good upside potential.
But if you’re a young investor or this is your first one and you don’t have those deep pockets to worry about, to be less cashflow sensitive. I think it’s, it’s at this time as we’re talking in November, you have December, January. I wouldn’t be settling in November for an under marketing, like under rented investment.
James: You know, I would be waiting for an opportunity to arise where I could put a tenant in there for market rents. Just simply to pay the increased mortgage that we’re going to have. I mean right now at this moment in time, your mortgage is costing you more. If we go back, geez, I don’t know if it was two years ago, might be more than that. But if we go back two years ago, a $100,000 mortgage would have been under $400 a month, maybe $375.
Denny: It was down to $335 for every $100,000.
James: That’s what it would cost to finance $100,000 of loan.
Denny: Correct. This is when rates were around 1.5% – 1.7%
James: And today?
Denny: Today, I don’t know the exact number but I believe it is in the range of $522-$550, per every $100,000. So that’s gone up to over $200 per $100,000.
James: So the, a $500,000 mortgage on a $600,000 purchase has gone up $1,000 a month. Cash flow investments in Vancouver, when we use the word cashflow, we’re not often suggesting that you can find cash flowing properties if you put a minimal downpayment down. It is a very hard market to find cash flow. It’s usually a typical best case scenarios if you put 20% down you might find a property that breaks even.
Right now with the mortgage payments the way they are, you might have to outlet a little bit of cash every month to help cover your payment. You might be out $100 to $500 depending on what the investment is. But you’re doing that with the future anticipation that rents will rise and your payments will lower and normally you can’t anticipate a payment lowering but right now I think you can.
Yeah. So the, the conversation of cash flow you are more likely to find cash flow in other markets in maybe, I don’t know Saskatoon. Maybe Alberta, maybe down in the States where the real estate prices are significantly cheaper. But in Vancouver, I’d say the cash flow well, maybe not this moment time with high rates. But prior to these high rates, there was a moment where rents were rising, rates were still low and it was more probable to find breakeven property. And I’d say that is as good as cashflow gets in the city. It’s breakeven.
Denny: You mentioned you’re having more conversations with people in the last few weeks about investing in real estate. Why is that? And is the time of year? Is it because markets slow down? Why? Why are people reaching out now?
James: Well, I think that, there’s two things. Often the conversations I’m having are individuals that are looking, like, we’re not talking about the first time buyer / investor.
James: And I do think that is a market that any first time buyer, like oftentimes first time buyers might be stretching themselves to make that purchase. And with the higher rates, it may be out of touch for some. So I’m having more conversations with people that have equity in their homes that have, they have no intention of moving in the property. They’re they’re living often in a detached house or have a higher value property and they hear the sky is falling in real estate and this might be a good opportunity. They’ve missed previous opportunities in the past. So the conversation is often with an opportunistic homeowner that has equity that has funds available, that wants to take advantage of this down market.
And when you look at the prices that some of these properties are selling for today, you know, a downtown, Vancouver condo for example. You might be a little bit off of, I call it 10% off of earlier this year. But in a lot of cases when you go further, deeper and deeper. There’s some for around the same price that we’re selling for five years ago. Costs of construction aren’t going down. The cost of owning a product with mortgage rates are, is going up but that’s temporary.
So, I do feel there is a lot of a lot of people thinking that this is going to cause, prices they’re gonna go up because costs aren’t going down and costs are gonna go up and whether it’s two years or four years or five years out, paying these prices today is going to feel like a deal tomorrow.
Denny: I saw some article the other day that the federal government has announced that their immigration goals for the next five years. And next year, their goal is to bring in 480,000 people and that goes up to over 500,000 people per year in five years from now.
So as more people are moving to Canada, obviously a lot of, a big portion of those people are going to be coming to Greater Vancouver. And what does, what does that do to residential real estate, both in terms of the cost of it but also in terms of rental rates. Local governments are not making it easy to be a investor, to be a landlord. So I think like, with more immigration comes higher rental rates and it seems like local governments are working against people wanting to rent out residential real estate.
James: That probably translates to what around 100,000 of those people go into BC?
Denny: I think the estimate to be to Greater Vancouver alone was 80,000.
James: 80,000. So that’s a lot of people coming in. I don’t I mean, even though you see all those towers popping up in Brentwood and Lougheed, it’s not enough. And I think the biggest cap on, on big I guess the investor side of renting a condo is the affordability that, what people can afford. You know, there’s clearly demand for homes. The issue is they cost so much to make, and that’s not getting cheaper. And so the rent has to be at today’s levels to justify being a landlord and justify being an investor owner.
The rents even though they’ve gone up like let’s call it up $1,500 a month, one bedroom in New West five years ago or six years ago was, is now $2,100 a month. Will that be $2,800 tomorrow? Probably not. You know, I could see this being a bit of a leveling off period.
Maybe, exceptions being rates go down, immigration goes up. There could be an argument there that we could see a 10%-20% more run and the rates but I feel like that rental rates have done their adjustment and I will likely start easing up moving forward. I could very well be wrong on that.
Denny: Yeah, my argument to that is just that there just is not enough rental housing. And like resale prices in Greater Vancouver the problem is supply and demand. And if there are like, one of our team members, rented a one bedroom condo for his mom recently in Port Moody. And there were 75 people that went to the open house for this rental condo. So it’s, we’re back to…
James: That’s a lot!
Denny: It’s insane! It like, what, 74 people that don’t get it, that are looking for another rental condo and we actually in the last 12 months we’ve had many more people reaching out to us asking for help with rentals because they just can’t find any.
James: Yeah, we get that question often. And often we’re diverting them to Facebook Marketplace, Kijiji, Craigslist, staying on top of it. You know there’s, there’s no secret world of underground rentals because when we do get an opportunity to come to us about someone that is renting their place, they get snapped up right away. It’s not that we have an ongoing inventory of rental properties, it’s a challenging one.
I’d love to just kind of give you some highlights of or what to expect with the, some of the markets we work in on what the numbers might look at. Prior to doing this, I did a little research because that’s what I like to do before we get to make a permanent audio footstamp on what we’re talking about. And let’s start with Port Moody. We’re here in Port Moody now at the podcast headquarters in Denny’s basement.
Port Moody is a standout area of the suburbs for the rent, say one bedroom condos are getting I think they’re getting a pretty good return, definitely compared to 10 years ago.
James: You know, I have a poor concept of time, but I want to say five to 10 years ago the rental rates in Port Moody and New West were very similar. Now, Port Moody is probably 10-20% Higher. So let’s go with a 600 square foot unit in Suter Brook maybe it’s 121 Bruce street, or a six might run you $550K. So that’s, we’re talking about just under $950 a square foot.
Similar price per foot in say a newer build, Electronic Avenue that’s just getting complete 2022, a 650 square foot unit might run $600k. Depends on the floor, depends on the view but in these generic examples, you’d probably get a little more for Electronic Ave over Suter Brook but let’s say you spent $550K on a 600 square foot place you’re probably renting that over $2,400 a month.
The New West comparable ,buying a place at Bosa’s RiverSky, a real high end development concrete tower on the water in NewWest. For the same price you’d be getting a slightly smaller place so instead of 600 square feet it would be 550 and the rents would be instead of $2,400 around $2,100. So the rents are a little bit lower in New West.
In Yaletown, False Creek, you buy a 550 square foot place, it’s gonna cost you $100 grand more about $650K. You’re gonna get a little bit of an older building, not like old, old but let’s call it 10 years old and they’re running for around 1100 to 1200 a square foot. So, and those are renting from call it $2,600 up. You know there’s, there’s definitely a lot of nicer one bedrooms that get $3,000 a month in Yaletown or False Creek.
So, you have to spend a little more from the cash flow perspective. It’s no better than say Port Moody, in this example, but I guess it’s really, it has more upside potential if you do decide to do furnished rentals or you know yeah, if, if the market does get hot, Vancouver tends to get hotter sometimes.
And then, you know, I throw out Squamish. I did a little kicker up there and see what’s going on in Squamish and a 600 square foot place you might be able to pickup for %515 posted to 900 a foot. There aren’t many of them. There are very few on the market and so I couldn’t get a lot of rental data but I’ve heard you know, I my assumption is it would be based on what I could see it’s probably around $2,400 a month. So the numbers arguably might work great in Squamish but that’s due to lack of supply, lack of availability, and if you don’t live out there and can’t manage it, I don’t know if I buy a rental that far away but I think Squamish is amazing community.
Those are kind of rough ballpark to market rents, we will just touch on. You don’t get market rents. You have a tenant in a place. What are ways, what are allowable ways to evict a tenant? I mean, let’s, let’s be clear, there’s, there’s tenants have every right to be in that place. Let’s acknowledge One: you can’t evict a tenant. Well, the obvious one is to put a new tenant in for more money. And you can’t evict a tenant to sell a place to get more money.
So the two main reasons you can evict the tenant is for the buyer or the homeowner to occupy the property or their immediate family. So that means their children or their parents, their spouse. It excludes the brother and sister. Your brother and sister is not immediate family, not a means to evict a tenant. So just recognize that it really is for immediate family only. And the other way is for changing the purpose of the unit to something else and that really comes down to say a significant renovation, demolish and redevelopment, converting a rental apartment to a strata or converting you know, a house to a commercial property. But ultimately you are going through a significant reno of some sort.
And in order to pull that off you have to well, I mean, if it’s not clearly significant that involves a building permit, demolition and redevelopment, say it’s like you’re putting the old “reno-eviction” term was putting new floors in and paint to say you’re going through a reno to get a tenant out. That is what they want to get rid of. They don’t want to, they don’t want to allow room for the simple reno to get rid of a tenant and go back to market rent. So if you are in that sort of reno-eviction area where you’re doing a cosmetic renovation and hoping that that’s a reason to get a tenant out. You need to get an order of possession from the residential tenancy branch. So you need to put an application in and explain your case. And they need to prove it.
Denny, I did some research on like notice. Should I dig into that? Because this is like a fun fact episode.
Denny: No, I think so. I think that’s good. Because it is a common misconception with consumers to believe that when they sell their property, we get this question all the time: “Should I sell it vacant?” And you, the first comment is: “Is your tenant leaving or would they like to leave?” and they’re like, “No, I can just give them two months notice” and that’s not true.
You cannot, that’s not a good reason for the residential tenancy board to evict someone. You can ask them to leave. There is another document that we haven’t touched on that is called a “Mutual agreement to end tenancy”. You can ask a tenant you can say hey, you know, I’m planning to sell this next year in 2023, next spring, do you have any plans of moving? Would you be interested in, in moving out before I sell this unit? It’s likely that you know someone who wants to move into the unit is going to be purchasing it rather than giving you two months notice, I’m giving you you know four or five, would you be open to moving? And you can compensate them to do that. But they do need to sign that form. You can’t give them notice that they have to be out by a certain date.
James: I think a good scenario would be, while touching on giving tenants lots of notice. I highly recommend it. I highly recommend it, at the consequence of potentially they move out earlier than anticipated, that’s a risk that I would take on. If they move out earlier, you have more time to paint and make the place look beautiful to get on market and hopefully get a higher price.
But in today, we’re doing this episode in November, you might hear it in December. But if you were, you know, if you own a tentative property and you wanted to sell it, it was just a disaster and you wanted to fix it up to sell it. The “Mutual agreement to end tenancy” is the best solution and the suggestion would be: give the tenant four to six months notice of your intent. The tenant does not have to move out because you want to sell but if you say, informed a tenant look, I want to list this property in May. So my proposal to you is if in, a typical eviction scenario, you’re going to compensate one month, one month rent anyway. So the proposal is, proposal to you is I’d like to give you six months to find a new place. And if you agree, I will give you two months rent free. If you sign this mutual agreement knowing that I intend to sell in May you’ll, the hope is that you’d be out by the end of April and I am giving you a deal because I’m giving you more notice, more compensation. And this product that we’re selling is likely going to be owner occupied, the buyer is not likely going to be an investor, so you’re probably going to move out anyway. So it’s just giving you more time to plan.
That would be, from a tenant perspective, if they live in a property that is likely to be an end user, you’re probably going to be getting out of there so might be a good time to consider taking that compensation. On the other hand, if you’re living in a property that is strictly rentals. You might not. You absolutely might not. But we’re using an example of upping the compensation from one month to two months. I mean arguably, I would consider going higher three months or more if if the property really needed it, really needed a facelift before you wanted to sell.
Denny: Now a lot of people obviously are concerned about eating that $2,500 cost per month. But if you’re looking at it from a resale perspective, having a empty unit, with no one in there, with no clutter, that is freshly painted, potentially you’re putting new floors in if needed, that could easily get you an extra $25 to $50 grand showing the unit at its best versus with a tenant in there with stuff and not great condition.
James: Get the money to you a few months sooner. It means the property is more sellable in some cases. It’s the difference of selling versus not selling. So yeah, absolutely.
Talking about the notice that you need to give. So just keep this in mind if you already are an investor or if you plan on buying something rented out and then rebuilding that property. Oftentimes some people find themselves being landlords when they buy a house that’s to be torn down for redevelopment. If you’re doing major construction, redevelopment, you get to tear down a house or something like that you need to give four months notice.
For typical notice where the landlord is going to use the property for their own use or say they qualify for one of these other, you know, renovation or conversion purposes but the most common one is if you’re gonna move into a property, you give two months notice. So if you’re selling a rented property and the buyer wants to move in, the buyer would instruct you to give that notice, two months notice. And keep in mind if your closing date is one and a half months out, and you’re giving two months notice, that buyer is assuming that tenancy, the tenant, the tenancy agreement is more powerful than the contract of purchase and sale.
Denny: If you are, well, let me ask you a question. Does that change based on the type of tenancy? If the tenant is currently in a lease versus a month to month, how does that change? How does that notice period change Jamie?
James: Geez, sorry, for a lease being like a fixed term, one year that automatically rolls on a month to month? Because well, on a month to month basis, you basically are at the mercy of just giving two full months.
James: If you have a fixed term, you have to get to the end of that term. So, if you’re six months through a 12 month term, that rolls into a month to month because that is typically how long term tenancies are supposed to be. I don’t know the scenarios where you’re allowed to do a straight fixed term but I know that say furnish shorter term rentals you’re allowed, you’re allowed to. But in a long term, unfurnished rental if you have if, you’re six months into a 12 month term, that tenant can be in for the full term. If you really want to sell that might be a reason to do that mutual agreement and tenancy and sweeten that pot and agree to end that tenancy.
If they don’t pay their rent, if they’re repeatedly paying rent late or broken a term of the tenancy or didn’t give the security deposit in time, you can give one month notice to get out. And if it’s unpaid rent, unpaid utilities -10 days notice to get out. And if they pay that unpaid rent within five days – that notice is gone.
James: So and then manufactured homes need 12 months. Reno-evictions you need permission. That gives you the kind of rundown of, of how to evict.
And then keep in mind if you are buying a rented property and that contract to purchase and sale it’s a, it’s important to outlay the security deposit, the pet damage deposit, any deposits that are in place for that tenancy, they should get transferred to the new buyer because that new buyer is going to be the landlord assuming the tenancy agreement.
Denny, anything to add to this list of wonderful world of being a landlord?
Denny: We’ve given a lot of very exciting information in this podcast Jamie.
James: I think, you know I think we’ll wrap it up at that. Let’s just take a moment to share with our audience that made it this far. Thank you for listening by the way.
Denny: Do we work with investors Jamie?
James: We do, we do Denny. Are we landlords? Both of us?
Denny: We are!
James: We are! We have experience buying and selling investment properties.
Denny: Quite a bit!
James: Does our team?
Denny: A lot!
James: And a lot of investment properties would be that say, entry level one bedroom condo you know. Whether it’s Vancouver, Burnaby, Tri Cities or Langley – do we have team members in all those markets?
Denny: We absolutely do.
James: What we’re getting at is we would love to work for you. So reach out! If you’re looking just for any sort of direction, any help, any, loose commitment, just a conversation about becoming a landlord or potentially looking for an investment property.
Denny: We have good and bad stories to share.
James: We may sell you out of it, we may sell you into it but we’ll be honest with you. Denny: Beautiful. If you’re getting value from this podcast we would love to hear from you, write us a five star review. Thanks for listening guys.