Author Topic: Is the 1% rule for Canada as well?  (Read 1226 times)

canuckystan

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Is the 1% rule for Canada as well?
« on: February 13, 2018, 08:32:34 AM »
I ask because it seems near impossible to find an investment property that fits the 1% rule.  I'm in Alberta, best I can find so far is $210K purchase price renting for $1350.  Is there something unique about the USA or Canada that changes the 1% figure?

sammybiker

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Re: Is the 1% rule for Canada as well?
« Reply #1 on: February 13, 2018, 01:06:35 PM »
tl;dr  Yeah, those standard numbers are often impossible to find up there in Canada.

I'm a US investor but lived in BC for a few years and networked with local investors and even helped on a couple flips.  Their strategy was all about maximizing tax write-offs while hoping to break-even on cashflow and riding the appreciation curve.  Same value add rules we use in the US apply even more so - converting basements/attics to living spaces in order to increase gross income, etc.

I see the Canadian market much like the Australian market (I've also experienced first hand) where it really cannot be compared to the US standard rules (1%) of operation and one must really look at the local advantages that usually do not include cashflow until the property is unleveraged.

If you're looking for someone direct, I have a good friend in GTA who is making it happen as a landlord - his main focus is getting creative on value add.  I'd be happy to put you in touch so you can pick his brain.
« Last Edit: February 13, 2018, 01:10:03 PM by sammybiker »

Mr Mark

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Re: Is the 1% rule for Canada as well?
« Reply #2 on: February 14, 2018, 12:30:57 AM »
I ask because it seems near impossible to find an investment property that fits the 1% rule.  I'm in Alberta, best I can find so far is $210K purchase price renting for $1350.  Is there something unique about the USA or Canada that changes the 1% figure?

The '1%' rule is just a basic rule of thumb for instantly screening properties wrt comparable long term passive investment opportunities. IE
A $200k house, renting gross for the 1% of $2,000/mth, then assuming 50% of gross rental will be required for management fees, property tax, maintenance (short and long term items), and occasional vacancy periods. So that after all the expenses you are looking at ~6% annual 'net' return before tax.

This assumes paying cash for the property, and no appreciation. If the deal is less than that 1% rule, you would be better just putting the cash into VTSAX with better returns and a lot less hassle.

It seems very hard to get this outside the USA, where housing prices seem to have gone insane in many Western type countries over the past 20 years. EG Canada, UK, Australia, NZ, ...

Why? Due to a combo of low interest rates, not enough new building or already crowded urban areas restricting inventory, indirect government subsidy via capital gains being untaxed, and people essentially speculating on housing prices continuing to climb faster than inflation. Plus the old 'I don't trust the stock market, I prefer 'bricks and mortar' - it worked for my parents and it'll work for me"
And who can blame them - recent history is on their side! If you bought property 10 years ago in Vancouver, London, Sydney, Auckland, Seattle, ... you've made a damn good return so far.

A way around this bind is to simply do some detailed research, bust some shoe leather, and find distressed 'ugly' properties you can get under true market value. A bit of DIY improvements to put in sweat equity, some cheap financing, self management, and you can gain both some instant equity that makes up for the poor rents, plus use leverage to boost 'cash on cash' returns. Make sure the debt is at a longterm fixed rate and hope inflation comes to the rescue.

Or rent your own place and just buy REITs and VTSAX... ;-)

Rich on Money

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Re: Is the 1% rule for Canada as well?
« Reply #3 on: February 16, 2018, 03:20:02 AM »
The 1% rule has a purpose.  It's to give you an idea how the property will cash flow as a rental.  It's just not going to happen in high cost of living (HCOL) markets.  It doesn't mean you change the rule, it just means houses are too expensive.   Too many rich people and foreigners are buying and bidding up the market.  If it was me, I just wouldn't try to invest in real estate there, but thats up to you.  I'm a simple real estate investor, I don't mess around with HCOL areas.

marty998

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Re: Is the 1% rule for Canada as well?
« Reply #4 on: February 16, 2018, 03:27:16 AM »
I ask because it seems near impossible to find an investment property that fits the 1% rule.  I'm in Alberta, best I can find so far is $210K purchase price renting for $1350.  Is there something unique about the USA or Canada that changes the 1% figure?

Scratches head thinking what broom closet I can buy for $210k.... >:)

rocketpj

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Re: Is the 1% rule for Canada as well?
« Reply #5 on: February 19, 2018, 05:25:10 PM »
1% for residential property around here (western BC) is a pipe dream. Half that would be a lucky, lucky find.

It is more possible for Commercial property. The rent to cost ratios are significantly better. I'm in the process of upgrading a 'distressed' property I found at just over the 1% mark ($650k purchase price, $6100/mo rent).  When I finish the upgrades it will rent for a total of about $13k).  Upgrades will total between $50-120k.  I'm budgeted for the higher number, but as I progress through the work the lower number is looking more accurate - at this point I'm thinking about $75k all in.

It took me a couple of years and a lot of looking to find the place, but they do exist.  I was able to get this one because most commercial property investors are looking for a very passive opportunity, and this one is very hands on for the duration of the upgrades.

Ironically, the commercial building includes 2 x 2 bedroom apartments which I could not have bought as individual units for less than the total purchase price of the building.

kmart

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Re: Is the 1% rule for Canada as well?
« Reply #6 on: February 19, 2018, 10:08:02 PM »
Is it hard to find? Kind of. Is it doable? Yes. If you are going to focus on major Canadian cities or even secondary Canadian cities you will have a tough time. I'm currently doing it (or very close to 1%) but you have to go more rural. It can be difficult for managing properties but I live in AB and invest in another province. Why? Because #1 the numbers make sense and #2 I have connections there that make that possible.

If I were you I would look at the places with a smaller population and do some research. We have targeted a few towns of even only a few thousand people that are close to a more major centre - and by that I mean less than 100k. Someone may say thats risky but is it if in our situation you have a high elderly population with super low supply of rentals? It all depends on the research.

Mr Mark

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Re: Is the 1% rule for Canada as well?
« Reply #7 on: February 20, 2018, 06:20:15 AM »
1% for residential property around here (western BC) is a pipe dream. Half that would be a lucky, lucky find.

It is more possible for Commercial property. The rent to cost ratios are significantly better. I'm in the process of upgrading a 'distressed' property I found at just over the 1% mark ($650k purchase price, $6100/mo rent).  When I finish the upgrades it will rent for a total of about $13k).  Upgrades will total between $50-120k.  I'm budgeted for the higher number, but as I progress through the work the lower number is looking more accurate - at this point I'm thinking about $75k all in.

It took me a couple of years and a lot of looking to find the place, but they do exist.  I was able to get this one because most commercial property investors are looking for a very passive opportunity, and this one is very hands on for the duration of the upgrades.

Ironically, the commercial building includes 2 x 2 bedroom apartments which I could not have bought as individual units for less than the total purchase price of the building.

I think that's a really good insight rocketpj - it's not just about residential.  I'm also hoping to get into the commercial property scene, probably with partners.

That sounds like a great deal you snagged, especially for Canada.

rocketpj

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Re: Is the 1% rule for Canada as well?
« Reply #8 on: February 22, 2018, 09:49:51 AM »

I think that's a really good insight rocketpj - it's not just about residential.  I'm also hoping to get into the commercial property scene, probably with partners.

That sounds like a great deal you snagged, especially for Canada.

Most of the time it feels like a good deal.  As I sit here right now waiting for the $(^$#^#$@ electricians to show up it has its other moments.

GuitarStv

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Re: Is the 1% rule for Canada as well?
« Reply #9 on: February 22, 2018, 10:06:01 AM »
You would be hard pressed to make that rule work in Toronto for residential real estate at the moment.  Or for the past 14 - 15 years.

Mr Mark

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Re: Is the 1% rule for Canada as well?
« Reply #10 on: February 22, 2018, 01:04:12 PM »

I think that's a really good insight rocketpj - it's not just about residential.  I'm also hoping to get into the commercial property scene, probably with partners.

That sounds like a great deal you snagged, especially for Canada.

Most of the time it feels like a good deal.  As I sit here right now waiting for the $(^$#^#$@ electricians to show up it has its other moments.

Oh come inn you've apparently got a $45k float left. ;-)

MMMdude

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Re: Is the 1% rule for Canada as well?
« Reply #11 on: February 22, 2018, 01:09:53 PM »
In Alberta it's just not possible.  I did find a rooming house in Edmonton that was generating around $2400 per month from the 7 rooms in the house and it was listed for $235,000 if I recall correctly.  The guy owned it for a long time and there was an older lady who managed all these short term renters and she was a tenant herself.  Sounded like a huge headache so I passed on that.  Figured REIT's in Canada were good enough although to be honest those haven't done that great in the 5-10 years I've held them.  I'm thinking of ditching them entirely

Prairie Gal

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Re: Is the 1% rule for Canada as well?
« Reply #12 on: February 22, 2018, 07:05:12 PM »
I am also from AB, and having a hard time finding my first revenue property. Forget the 1% rule. I am only looking for a couple hundred cash flow per month after expenses and contingencies.

Seadog

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Re: Is the 1% rule for Canada as well?
« Reply #13 on: April 15, 2018, 04:39:50 PM »
I am also from AB, and having a hard time finding my first revenue property. Forget the 1% rule. I am only looking for a couple hundred cash flow per month after expenses and contingencies.

Can't help but shake my head at a lot of the "investors" even in Edmonton where prices aren't anywhere near as crazy as Toronto or Vancouver. I was renting a nice condo for $1650 a month, including all utilities and internet. Condo Fee was $~450/mth, they told me they paid about 330k for it. After the oil crash the condo values dropped, maybe worth 300k when I left a couple years ago based on similarly listed ones.  Playing with various mortgage calculators and using best guesses for numbers, I figured they were cashflow negative $50-200/mth.

The reasons are simple. People who haven't run numbers but casually observed huge gains while ignoring money put into homes think it will go on forever. Now everyone is an investing superstar. They don't understand economic forces at play in the big scope of things, and lucky timing can mask poor decisions. Up until recently it was a literal cult of home ownership. It only goes up. It doesn't matter what it costs, since it will be worth more tomorrow, so get as much as you can. When 70%+ of the population thinks like this, and a self-fulfilling prophecy comes about. The ad-absurdum of housing raising 30% a year forever until it's more than 100% of everyone's income, or even something as predictable as raising interest rates never cross their minds.

daverobev

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Re: Is the 1% rule for Canada as well?
« Reply #14 on: April 15, 2018, 06:29:58 PM »
Thing is, you can live through market declines if your property is cashflow positive. When you add vacancy, management costs (your time, which has value, or a company), and all the rest - 1% isn't actually all that good. It is actually a 2% 'rule' in the US (mind you, that is for multiple unit buildings).

Everyone and their dog thinks they should own their own house and a couple more as rentals. I won't go as far as to say it is unethical, but it certainly does drive up prices for poorer people.

It is also worth noting that in some countries the rule of thumb isn't appropriate because there is no 'property tax' but rather a habitation tax (in the UK, for example, council tax is payable by the tenant, not the owner).

Transaction costs are high in North America, as well.

Here, it seems many places are at about half a percent. If I can swing it, we'll rent our next place rather than own. Those saying they've done well in Toronto etc... sure. Until the market crashes/houses become difficult to sell. There was a thread on Reddit today about someone with a condo in Fort MacMurray, now worth about 2/3 what they paid for it and losing money every month. Is that likely to happen in Toronto? Eh. Some people who bought right at the top might be in for some pain, but whatever.

I guess the thing is the leverage. But, taking money out of a HELOC on the home you own and investing it in a decent ETF ten years ago would also have generated a good return, with cheap transaction costs, you still get to deduct the interest, etc, etc.

What would you rather have - one house (or two, or three), or 5,000 companies? The difference is the market will tell you what each and every one of those companies is worth on a daily basis.

An ETF can't lose you money. A bad tenant can cost you a lot.

I'm not saying don't buy rental properties. As a sane part of a portfolio, sure. But as a massive debt that can have seriously negative effects on your retirement, why? Unless you are handy and want to manage them yourself (which means you are buying yourself a part time job).

Seadog

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Re: Is the 1% rule for Canada as well?
« Reply #15 on: April 21, 2018, 09:44:42 AM »
Came across this story the other day about a guy who made too large an offer on a home in a bidding war with no conditions. Couldn't actually afford it, and then unilaterally just decided to ignore the signed contract despite that fact that the guy turned down other offers on the assumption the buyer would honour his. Long story short, home was relisted, eventually sold for half a million less, original buyer who balked is now on the hook for the $470k difference with nothing to show for it.

https://www.thestar.com/news/gta/2018/04/11/couple-ordered-to-pay-470000-after-reneging-on-stouffville-home-deal.html

I think it was Warren Buffet who said you can get into a whole lot more trouble with a sensible premise than an irrational one. (Or something to that effect). We've seen that with housing in Canada. It's sensible that owning is cheaper than renting. After all, (in a balanced market) people buying home to rent out, they're of course going to cover mortgage, expenses, and then profit. So buying instead of renting means that profit goes to you. 

So you buy whatever you can. You entering the market slightly drives up demand and prices. Maybe you had to out bid someone. Then someone else does the same thing. Again and again. At no point was it a crazy stampede, just people paying marginally above asking, *on the assumption it was a balanced market* means they'd be saving money by owning instead of renting. That marginal extra you paid really doesn't make a difference. This happens a thousand times though. Now housing eclipses inflation. People start to notice. More people pile in. Now it's not just that it's smarter than renting (because rents will always be mortgage + in their minds) but you're also seeing crazy appreciation. And then here we are.