While home prices in Vancouver have continued to rise at ridiculous levels, monthly rents have not. As such, for investors looking to add a property or properties to their portfolio, the finances simply don’t work.
Calgary is literally the complete opposite. In the last year or two, property prices have decreased. Rents, although not as high as they once were, have held relatively strong such that with the right property, the finances are not only viable, but profitable.
Consider the statistics: (May, 2016, taken from respective real estate boards)
|Benchmark Price (detatched home)||$500,000||$1,513,800|
|Benchmark Price (apartment condo)||$278,500||$485,000|
The “benchmark price” is the price of a “typical” home, which naturally will differ from city to city. For purposes of illustration, it’s worthwhile to assume that the most likely home a tenant will rent is a “typical home.”
Consider the monthly rents: (from NUMBEO)
|1 bedroom monthly rent (city centre)||$1357||$1581|
|1 bedroom monthly rent (outside city centre)||$1061||$1155|
|3 bedroom monthly rent (city centre)||$2311||$3152|
|3 bedroom monthly rent (outside city centre)||$1707||$2220|
Although the monthly rents are higher in Vancouver, the differential is not enough to make up for the increase cost to purchase.
Based on a purchase of a benchmark property, what monthly rent needs to be collected to make an investment viable?
|Down Payment (20%)||$55,700||$97,000|
|Monthly Mortgage Payment (2.5% interest rate)||$991||$1738|
|Monthly Property Tax (estimated)||$200||$300|
|Monthly Condo Fee||$300||$300|
|Monthly Line Of Credit Interest||$162||$283|
|TOTAL MONTHLY COSTS||$1703||$2671|
|Monthly Mortgage Principle Paydown (average of first five years)||$570||$993|
Assuming very conservatively that the monthly rent for the benchmark condo in Calgary is $1500, that would make the average monthly rent for a benchmark condo in Vancouver $1747 (assuming that rent for a “city centre one bedroom condo” is 16% higher in Vancouver than in Calgary).
At first it would appear that you’re not even covering your costs. In Calgary, you are coming up $203 short per month ($1500 – $1703 = -$203), and in Vancouver, you’re coming up short $924 ($1747 – $2671 = -$924). However, consider that you’re actually paying down $570 (Calgary) and $993 (Vancouver) of mortgage principle per month.
So, on the Calgary condo, you’re actually ahead by $367 ($570 – $203 = $367) per month, and on the Vancouver condo you’re ahead by $69 per month.
On the Calgary condo, you’ve had less initial financial outlay. Further to this, there is no land transfer tax in Alberta, which would add over $5000 to the cost of the Vancouver property.
An assumption that was made is that an interest only loan was used for the down payment on the property. This is possible to do as a line of credit secured against your home. Costs would be adjusted accordingly if cash is used as a down payment, however, leveraging value in your home is an excellent way to purchase an investment in a tax-efficient way, saving significant dollars in initial investment.
*With each persons financial situation being different, the above should not constitute financial advice!