Evaluating Investment Properties in Vancouver: Cashflow and Profitability

Dec 24, 2020 | Buying, First Time Home Buyer, Interest Rates, Investing, Presale

For first time investors, property investing can be a safe and tangible means of wealth creation. It allows you to leverage a downpayment to acquire an asset, and if you find the right property can generate both income and profit. However, there are a number of variables that need to be considered in order to determine accurate property cashflows, equity, and profitability, to decide if the investment is worth it.


Property Investing in Vancouver: Getting Started

Property investing is unique in that it allows you to leverage a smaller position (your downpayment) to acquire an asset that can be 5-6 times higher in value. For many it is an attractive, time-tested and relatively safe investment to make. However, just owning and renting a property doesn’t mean that it is generating a positive cash flow, nor that it is going to be a profitable investment on your part.

Rather, investment properties need to be evaluated on several criteria

  1. Cash flow
  2. Likelihood of appreciation
  3. Ease of renting
  4. Unit/building expenses
  5. Personal element

Your agent is the best source of information for a lot of this data and should have extensive knowledge of the state of the current market, neighbourhoods, and new developments in the area you’re interested in.


Cashflows: Positive, Neutral and Negative

Cash flow looks at the total flow of cash moving in and out of the investment. That includes any rental income, as well as deducting expenses such as strata, repayments, repairs, property taxes etc… Cash flow can be positive, neutral or negative, and can affect the overall profitability of your investment.

  • Positive cashflow: your investment is generating more from rental income than your monthly expenses and payments, generating additional income for you.

  • Neutral cashflow: the rental income is enough to cover all expenses/payments, but not to generate income

  • Negative cashflow: your payments/expenses are more than your rental income. This requires additional financial input to cover repayments.

In Vancouver, while rental rates are high, so are property prices. Positive cash flow to any significant level at the outset is impossible unless you’re putting down 35% or more (approx.). However, savvy investors love investing in Vancouver because of the number and quality of tenants, the trajectory of this world-renown city, and the historical performance of these investments.

Furthermore, a neutral cash flow will still see about 60% of each mortgage payment being paid towards your equity, which can make the property quite profitable when taken into account. Whilst positive cash flow may not be available immediately, it can become possible after principal repayments have been made, and depending on the intended term of the investment could still reap benefits long term.

What Can Affect My Cash Flows

There are a number of variables that can affect the cash flow and profitability of your property investment in Vancouver. These can affect how much rent you’ll be able to charge, your expenses, and whether there will be demand for your property and it’s location.

  • Market Variables
    -Is there a strong rental market?
    -Competition/availability in the area?
    -Standard of living
    -Proximity to amenities
    -Will a new development affect your ability to let?

  • Property Variables
    -Building expenses and maintenance costs
    Property taxes
    -Contingencies for damage/repairs

  • Financial Variables
    -Rental income
    -Purchase price

Evaluating a property investment should try to quantify and qualify as many of these factors as possible. The more informed your decision, the more likely you are to benefit from the investment.

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Calculating Profitability of Vancouver Property Investments

To figure out what sort of profit could be made from your property as a rental the main factor to consider is your downpayment amount. This would in turn give you a rough idea of how much your monthly mortgage rate would be. Along with this, you factor in things like strata fees, yearly property tax etc… to give you a base amount per month.

Right now mortgage rates are incredibly low which is a huge bonus for you as a buyer. Access to finance and lower repayments can contribute to a larger investment on your part, or reduce the burden of the investment.

Your downpayment will affect your mortgage rate and amount, but with those figures, you can calculate your monthly costs.

Monthly costs = mortgage payment (governed by downpayment size and interest rate) plus strata fees, plus annual property tax amount, divided by 12.

Once you know your monthly costs you can work with your agent to analyse market data, such as current rental prices, property prices, neighbourhoods, and individual properties and match them up to determine if your property would be

a) cash flow positive, and

b) determine if your investment would be profitable.

What About Building Equity?

A positive flow of cash is only one of the ways to turn a profit from property investment. Whilst it can make it more attractive, using the available data and your agent’s knowledge/experience, you can build a thesis as to the likelihood of value appreciation, and determine whether the equity acquired/value built is worth the upfront capital.

A good rule of thumb is to plan to hold onto a property for a minimum of 5 years. This obviously depends on many things, but ideally, you want to be in a position where you don’t have to sell at any particular time, just in case. Of course, it will also be dictated by the evolution of your personal circumstances over time.

Below is a graph of the MLS HPI pricing index. The HPI price is the board’s way of most accurately calculating true average prices. Downtown falls under the area of ‘Vancouver West’.

If we look at Vancouver West (west of Quebec Street – one block west of Main Street) apartments, we can see that over the past 10 years the HPI price increased from about $430k to about $790k. The annualised rate of return is about 6.1% based strictly on this.

However, this does not take into account the ‘leverage’ aspect of real estate investing (using 20% of purchase for an asset worth 5x as much) nor does it take into account the assured equity building each month with every mortgage payment made.

More accurately, we would need to use:

  • the initial cash investment of 20% of $430,000 ($86,000), and compare that to

  • the end equity position (790k-430k = $360k)

  • plus let’s say about $1,000 paid toward the equity component of the mortgage every month for 120 months ($120,000).

So, we start with $86,000 cash and end up with equity of $480,000. The actual annualised rate of return would be 262% in this example. If you were to sell, the profitability would be just under $400,000, before closing costs and expenses are taken into account.

Note: the formula used for annualised rate of return was [(ending value of investment/beginning value of the investment) to the exponent of (1 / 10 years)] – 1

Is Now a Good Time to Invest in Vancouver?

The property market in Vancouver over the past 10 years has been bullish. Strong demand has even seen the introduction of the City’s Vacancy (Empty Homes) tax in 2017, and the more recent provincial Speculation and Vacancy tax to try and increase supply.

More recently, 2019 saw a slower than usual Vancouver property market, until Q4 where we started to see renewed vitality. This transferred into 2020, and even with the pandemic, we have seen the Vancouver Real Estate market hold strong and continue to flourish.

In November of 2020 sales reached almost 25% above the 10-year average and we had a 3.4% increase in prices of apartments overall compared to November 2019.

Whilst we would expect property transactions in the Downtown core to stay a little slower while the world navigates COVID, we also expect vaccinations to see some normalcy return to the market, and see the return of higher demand.

Ultimately investing in real estate uses leverage to acquire a robust and tangible asset. Regardless of market forces, as the city of Vancouver continues to grow so too will the need for housing. However acquiring the right property can be the determining factor in deciding whether your property is the right investment, and a profitable one to boot.

Your agent is the best source of information when it comes to calculating cash flow, assessing the state of the market, and accounting for unknown or ill-considered variables. If you’re interested in property investing in Vancouver and would like more information, reach out and connect with us.

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