Why Ottawa Is Hot, Hot, Hot With Investment Condo Opportunities
Why Ottawa Is Hot, Hot, Hot With Investment Condo Opportunities

By Wayne Karl

Source Link from homeTRADER.ca

Forget what you’ve heard about Toronto and Vancouver being where all the action is when it comes to real estate in Canada.

Some of the best investment opportunities exist right here in small, quiet Ottawa.

Why? At first glance, Ottawa might not seem like a real estate hotbed. But for prospective investors looking to buy and rent out a condo, the city is actually one of hottest rental markets in Ontario – indeed, in the entire country.

A solid local economy, stable employment conditions and minimal new apartment construction are conspiring to produce an increasingly tight rental environment, where vacancy rates are 2.4 per cent and rents are increasing.

For those thinking of buying an investment condo, this is all great news.

As an investor/landlord, vacancy rates are a key barometer to watch closely. Canada Mortgage and Housing Corp. (CMHC) summarizes these, along with average rents, in twice-annual rental market reports.

An increasing rate essentially means rental supply is growing, which means renters have more units to choose from. For landlords, this means more competition, and therefore you may have trouble renting a property or increasing the rent. Declining vacancy rates means supply is tightening and your property may be in higher demand, which could lead to you being able to charge more rent.

A vacancy rate between two and three per cent is generally considered a balanced market, meaning supply of rentals is appropriate for the demand, so anything below that level is ideal.

While Ottawa’s overall vacancy rate as of April 2010 is 2.4 per cent – at first glance perhaps not considered spectacular – it is down from 2.7 per cent in April 2009. Average rents, meanwhile, increased to $957 from $882 in this same period.

Not many markets in Ontario are better: only Kingston, at 2.2 per cent, has a lower vacancy rate, while Toronto sits at 2.7 per cent and Hamilton 4.1 per cent. At the other end of the scale is Windsor, at 12.4 per cent.

For two-bedroom condos – considered the most desired rental units – the news for Ottawa is even better. The vacancy rate as of April 2010 is 2.3 per cent, down from 2.9 per cent a year earlier, while average rents have increased to $1,061 from $995.

Further in Ottawa’s favor are very affordable purchase prices and a solid local economy that has not shared the wide swings seen in other parts of Ontario or Canada during the recession.

CMHC says Ottawa and Kingston benefited from public sector spending over the past year.

Investment strategy
Acquiring and operating an investment property is very different than buying a primary residence.

Forget fixing and flipping, or buying and turning around for a quick profit.

Even buying a pre-build condo and selling it upon completion – a strategy that has worked in other markets in recent years – is rife with risk, experts say. You can’t always count on a property’s value increasing sufficiently over two or three years to generate enough net profit.

Plus, depending on market conditions and the sales pace of the project, the condo developer may still have units of its own to sell when the building is complete. Or, other “investors” may be trying to sell their units for a profit at the same time you are. All of this leads to too much competition and downward pressure on pricing.

Your strategy should be to buy, hold and rent the property to generate income over and above your mortgage costs, while building equity over time.

Rule number one when you’re setting out as an investor, experts agree, is to take a long-term view – five to seven years – with an emphasis on generating positive cash flow.

“Ottawa homes have given us a positive cash flow, as we bought our properties here at a good time within the last two years,” says Rasna Arora, an investor with multiple properties in the Ottawa area. “There was no recession here and prices didn’t go down. They were priced well enough relative to the rent.”

“There is nothing more challenging than buying an investment that does not cash-flow,” adds Mike Cunning, an experienced investor. “Buying something that doesn’t cash-flow when you rent it is akin to death by Chinese water torture – a slow, drip, drip, drip.”

Achieving positive cash flow means renting out your property for more than your monthly mortgage payment and other costs. Sounds simple enough, but once you include items such as condo fees, taxes, insurance, property management fees, general maintenance and advertising – which you, as owner/landlord are responsible for – the financial picture can look much different.

But if you can generate positive cash flow, the benefits are three-fold: you pocket the monthly surplus; you build equity over the long term while someone else pays down your mortgage; and eventually, when you go to sell, you gain from any value appreciation in the property.

“Be in it for the long run – not to flip and speculate but to invest, for at least five years,” says Arora.

With the federal government’s recent changes to mortgage rules, buyers now require a minimum 20-per-cent down payment for investment properties. But on the plus side is that a larger down payment also means you have to borrow less and your monthly payments will be lower.

For example, if you buy a condo for $200,000 and put down 20 per cent, or $40,000, your basic mortgage amount would be $160,000. At an annual interest rate of 5.25 per cent over a 30-year amortization, your monthly mortgage payment would be about $878.

Ottawa area vacancy rates
So, what does all that mean, in the context of opportunities in the Ottawa area? The overall vacancy rate is 2.4 per cent and tightening. The city’s vacancy remains among the lowest of major centres in Canada.

Like real estate prices, rental markets vary between specific areas, neighborhoods or even streets. Therefore, the broad-ranging numbers provided by CMHC and other bodies should be viewed only as big-picture averages. Depending on where you’re looking to buy and rent out an investment property, research can determine which areas have the tightest supply, leading to greater demand – and higher rent – for your property.

Conditions for investor-owned condos in Ottawa, importantly, are stronger than those for purpose-built rental units (apartment buildings). This is because rental condos are generally newer and feature more amenities, which contributes to greater demand and higher rents.

This means opportunity for investors who own rental condo units.

In addition, remember, as a prospective investor, you’re looking at the long term, so even short-term increases in vacancy rates shouldn’t scare you. This puts a premium on your research to select areas where:

• The vacancy rate isn’t too high or rising steadily
• The economic fundamentals are sound
• The area is desirable for renters and the building type is suitable for the local tenant profile
• Tenants in the area will pay what you have to charge for rent

Choosing a property
When choosing a neighborhood and a property to invest in, it’s important to conduct your research and due diligence, to look for areas with strong economic fundamentals. Look for job growth, population influx, average income growth and increasing (but still reasonable) property purchase prices.

Other influences in value appreciation are factors such as proximity to mass transit, shopping, schools and other amenities. Ultimately, you want a property that appeals to potential owners, not just renters, because if you can’t sell it to someone else one day, you won’t be able to take advantage of any increase in value.

Setting the rent
How best to set the “right” rent – high enough to yield positive cash flow, but not so high you price yourself out of the rental market for the area? First, find out what comparable units in the area rent for by checking sources where landlords advertise. You can also check provincial rent registry databases, along with CMHC’s rental market reports.

It’s essential to be market-appropriate. Don’t be thinking you can rent your two-bedroom condo for $1,500 a month (because you figure that’s what you need to generate positive cash flow) when similar units in your building rent for $1,000. Sure, you may be able to charge a premium if your unit has features or inclusions that others don’t, but be you have to be realistic.

Downtown properties might be your first choice as a location for an investment condo. The location no doubt appeals to a lot of renters, but it’s also where average prices are higher and therefore less affordable than out of the city core. That makes achieving positive cash flow difficult, because you might not be able to rent out your unit for what you need to cover your mortgage and expenses.

Arora recommends areas such as Orleans, Kanata, the area around the St. Laurent Mall and Bayshore Mall as good potential buys. People here can enjoy living in the suburbs but with easy connectivity with other parts of town via OC Transpo.

“Kanata is a high-tech employment area, hence a good demographic for well-paying, high income earning IT professionals and their families,” Arora says.

And one other final, but important reminder, from an experienced investor: “Remember that your tenants are your partners – they are the ones taking care of your investment and paying for it while you reap the rewards of appreciation and positive cash flow over time,” says Arora.

“Treat them well, but don’t let them walk over you.”

Investment condo checklist
Consider the following checklist of key questions, from Vancouver-based real estate research and consulting firm Cutting Edge Research Inc., for analyzing the potential of an area. The more “yes” answers you get, the more likely it will be a solid investment.

• Is the area’s average income increasing faster than the provincial average?
• Is the area’s population growing faster than the provincial average?
• Is the area creating jobs faster than the provincial average?
• Does the area have more than one major employer?
• Will the area benefit from an economic or real estate ripple effect?
• Has the political leadership created an economic growth atmosphere?
• Is the Economic Development Office progressive and helpful?
• Is the area’s infrastructure being built to handle the expected growth?
• Are there any major transportation improvements in the works?
• Is the area attractive to Baby Boomers’ lifestyle?
• Is there a short-term problem occurring that is likely to disappear in the future?
• Is there a noted increase in labour and materials cost in the area?

Source: Cutting Edge Research Inc.

Wayne Karl is an award-winning writer and editor with experience in real estate and business. In Fundamentally Speaking, Wayne explores the basics – such as economic fundamentals – you need to examine when buying property. He can be reached at wayne.karl@trader.ca or follow him on Twitter at http://www.twitter.com/WayneKarl 

Why Ottawa Is Hot, Hot, Hot With Investment Condo Opportunities was last modified: September 30th, 2010 by maddy
 

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3 Responses to “Why Ottawa Is Hot, Hot, Hot With Investment Condo Opportunities”

Condo says:

September 30, 2010 at 8:37 am

hi,

yes, it is correct..Ottawa Is Hot, Hot, Hot With Investment Condo Opportunities

 

Soliman says:

May 8, 2015 at 12:28 pm

Is there any municipal or governmental restrctions for owning and renting more then 2 houses?

 

Don R. Campbell says:

May 13, 2015 at 4:37 pm

No there is not.

The restrictions come from the financing – whether one can get approved for more than one property.

 
 
 

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