Does 1 % cap rule works in calgary ?

[gladaki]

I read somewhere about cap rate rule of thumb which states that the monthly rent should be equal to or greater than one percent of the total purchase price of an investment property.

Does this applicable in calgary market ? Do you recommend getting into rental property in Calgary ?

[TorqueDog]

Not likely, in most places in Calgary, the purchase prices would result in rents way too high unless you got creative. If you bought a place that was around say $300k and had a basement suite, you could squeeze a little more out of it and get closer.

[flamesfan1297]

I really doubt it, I paid roughly 300K for my townhouse a couple months ago, and there's no way I could rent it for $3,000/ month.

[bizaro86]

Originally Posted by gladaki

I read somewhere about cap rate rule of thumb which states that the monthly rent should be equal to or greater than one percent of the total purchase price of an investment property.

Does this applicable in calgary market ? Do you recommend getting into rental property in Calgary ?

That rule of thumb hasn't been true since interest rates were WAY higher than they are now.

I think Calgary real estate is probably a decent buy right now, but that rule of thumb isn't realistic.

[CorsiHockeyLeague]

If it were I would be immediately going out and buying three rental properties.

[Enoch Root]

Originally Posted by gladaki

I read somewhere about cap rate rule of thumb which states that the monthly rent should be equal to or greater than one percent of the total purchase price of an investment property.

Does this applicable in calgary market ? Do you recommend getting into rental property in Calgary ?

As someone said, that rule was created when interest rates were much higher - it is no longer realistic at all.

The way to assess it is to determine the monthly cost of a property - mtge, taxes, utilities, repairs, etc (don't forget to build in a return on investment capital) - and then compare that to rental rates to see if you can make money.

As an example, if the monthly costs total $2,500 and you can rent the property for more than $2,500/m then it is cash flow positive.

The more cash flow positive it is, the better the investment. If it is cash flow negative, then you are relying on the value of the property to rise enough in order to make money (usually a bad idea). Plus, you are slowly bleeding cash, which is not something you want to do indefinitely.

Rents are fairly decent in Calgary right now, relative to carrying costs. However, the prospects for capital appreciation are low, and the risk of higher interest rates is high, so if you are going to enter into new investments, do so carefully, and with an eye that you'll probably need some wiggle room for those higher interest rates.

Personally, I would only do so right now if the property was well into the black for cash flow.

[Enoch Root]

I believe that a word of caution is in order with rental property investments...

For most of us, interest rates have been declining for our entire lives. Unless you were around in the 70s to see inflation and rising interest rates, most people really don't know what it was like.

When interest rates go down, the monthly carrying cost of a home goes down, meaning people can afford a bigger home. And housing prices rise. Housing prices have outpaced inflation and real value for decades - for the entire period that interest rates have been declining. And for the entire adult lives of anyone under 60 or so.

Those two things (rising prices, and lower interest rates) have created an environment whereby investing in real estate has provided excellent returns - higher returns than passive investments should have offered, relative to other investments. When an investment vehicle does well, people get over-confident and assume it will continue.

However, we are now in a situation where interest rates simply can't go any lower, and are quite likely to start rising - perhaps a fair amount. When interest rates go up, the monthly cost of a property goes up. Then people can't afford the same home. That puts downward pressure on prices.

IMO, the great reckoning is coming in the housing market. As I said, most people have never seen rising interest rates. Look at markets like Toronto and Vancouver. People making average wages are trying to buy their way into homes that cost $1 - $2M dollars. But what happens when interest rates go from 2% to, say 4%? How many people can no longer afford their home?

In 1981, mtge rates peeked at something like 19%. Many people, whose mtge came due for renewal, simply walked away from their homes because there was no way they could afford the mtge.

I am not suggesting for one second that we are looking at a 1981 situation any time soon. I am simply saying that rising interest rates are a huge issue with the price of homes being so out of whack. And most people have no idea what is coming.

And that is why I am very leery of investing in property right now. I think the great free ride that people have been getting for so long, is coming to an end. And investing in properties is going to be a MUCH tougher game going forward.

Just my opinion.

[bizaro86]

If interest rates are rising to fight inflation that could quite possibly be very good for real estate prices. Also, if interest rates rise rapidly, a low fixed rate mortgage can become a very good deal.

[Enoch Root]

Originally Posted by bizaro86

If interest rates are rising to fight inflation that could quite possibly be very good for real estate prices. Also, if interest rates rise rapidly, a low fixed rate mortgage can become a very good deal.

Your current, locked in rate is great while rates are rising, but it won't last forever. At some point, you are getting a new, higher, rate.

As for inflation being good for housing prices - good luck with that. I mean sure, if home prices were low, a little inflation boost would be great. But it is always a matter of where are we now? Home prices are already sky-high, relative to incomes. There is little room for them to outpace further. And then when you add higher mtge rates, it's a huge headwind.