Can Alberta Rentals keep up with rising interest?

[nepoez]

Hi All, It`s me newbie again.

I`ve posted this once before but it was off topic so I`m creating a new topic this time.

In Edmonton, will the rent increase keep up to the interest rate? My break even property(and others I`m looking to buy) will become negative $250/m at a 6% interest rate so my ability to increase rent by that much is crucial. What is your opinion? Is it foolish to invest in break even properties knowing that the interest rates will go up soon?

My rationale is that rates are raised to counter inflation, which means there`s expected inflation, which means increase in rent...but by how much? According to CMHC, 2 BR apartments increased rent by about $70/m in 2008. I`m targeting 3 br townhouses so the increase will probably be about the same. CMHC also forcasts 2008-9`s one-year posted rate at 6.5-7.5% which to my situation means negative cash flow of over $400/m per property. Even if I can increase rent by $100 by 2009 it is still a negative cash flow of $300/m.

I`ve just bought my first investment property, and I have been planning to get another 2-3 within the next 12 months. However, the situation which I described above makes me wonder if I need to change my strategy from looking for just better than break even properties based on current interest rates, to looking for better than break even props based on 7% interest rates. So far I see no properties in Edmonton that will even come close to cash flowing at 7% interest rate. Maybe suited properties, but my distance puts a constraint for me on those types.

Thanks for any feed back,

Nepoez

 

[DianneDachyshyn]

Rents seem to be rising substantially in Edmonton. We have been shopping for new Edmonton properties this summer and have been pleased with the higher rents. We have found cash flowing properties, since the selling prices have been dropping for months and the rents have been increasing. I`m sure that if you look, you will find good opportunities.

Anticipating a 7% interest rate seems premature. Even if the rates begin rising in the New Year, it will likely take some time to increase by over 2%, and by then, rents could have risen even more. It seems likely that rents will rise, but when and by how much none of us knows. My advice would be to find the best deal that you can and when analyze the property, use a higher interest rate. That`s what we have been doing.

 

[Thomas Beyer]

QUOTE (DianneDachyshyn @ Aug 10 2008, 04:13 PM) Rents seem to be rising substantially in Edmonton. ..
Actually, I beg to differ .. rents HAVE BEEN going up substantially over the last 2-3 years .. but if you are @ market then right now THEY ARE FLAT .. as much inventory is out there .. slightly higher vacancies .. still well below 5% .. so still tight ..

use the following benchmarks in Edmonton and area for an average apartment with average location and average condition, with ability to go higher by 20-40% for a great location, a great view, an extra large suite, a yard, brand new renos, a top location close to UofA, brand new stuff ..

bachelor: $700
1BR: $825
2BR: $975
3BR: $1150

we will raise rents only around 2-4% right now .. to see if in-migration picks up ..

the good news with higher interest rates is: more tenants as less people can afford to buy !! so landlords are OK either way !!

 

[DianneDachyshyn]

We found two bedroom apartments renting for 1300-1500 in the SW, a one bedroom for $1000 in Bonnie Doon and a bachelor for $975 in Garneau.

 

[Thomas Beyer]

QUOTE (DianneDachyshyn @ Aug 10 2008, 04:49 PM) We found two bedroom apartments renting for 1300-1500 in the SW, a one bedroom for $1000 in Bonnie Doon and a bachelor for $975 in Garneau.
all within my 20-40% plus sector as they are better locations .. and possibly better apartments .. just because someone gets $975 in Garneau (where I used to live for 2 years, 300 m from UofA) doesn`t mean you will get that in an area like Central McDougall !

Be realistic !

 

[nepoez]

QUOTE (thomasbeyer2000 @ Aug 10 2008, 03:28 PM) use the following benchmarks in Edmonton and area for an average apartment with average location and average condition, with ability to go higher by 20-40% for a great location, a great view, an extra large suite, a yard, brand new renos, a top location close to UofA, brand new stuff ..

bachelor: $700
1BR: $825
2BR: $975
3BR: $1150
Right, we invest in specific locations, not the city average.

QUOTE (thomasbeyer2000 @ Aug 10 2008, 03:28 PM) the good news with higher interest rates is: more tenants as less people can afford to buy !! so landlords are OK either way !!

Interesting point! But does that also mean lower demand if you are hoping to sell?

 

[DianneDachyshyn]

I agree that rents vary depending on many factors such as location and amenities. The point that I wanted to make is that there are properties out there that will produce positive cash flow. A person just has to look and not get discouraged.

 

[nepoez]

I guess what I mean is having something cash flow in the analysis sheet with the interest rates of 7%.

QUOTE (DianneDachyshyn @ Aug 10 2008, 08:44 PM) I agree that rents vary depending on many factors such as location and amenities. The point that I wanted to make is that there are properties out there that will produce positive cash flow. A person just has to look and not get discouraged.

 

[kboughen]

QUOTE (nepoez @ Aug 10 2008, 01:34 PM) So far I see no properties in Edmonton that will even come close to cash flowing at 7% interest rate.
Hi Nepoez,


If you are concerned about rates rising to 6% - 7% in the next year or so, perhaps you should consider purchasing with a five year fixed rate which is around 5.5% (and locking in your current variable may help you sleep better).


If you are not comfortable with the returns at 5.5%, you may have to consider different types of properties or different locations that do provide acceptable returns to you with this rate.