Home April 2019 The Rise of the Rental Market

The Rise of the Rental Market

Current real estate conditions are ripe for investment property buyers

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Last year was a challenging year for Alberta’s real estate market. Buyers and sellers faced rising interest rates, a struggling economy, and a new federal mortgage stress test that tightened how much they could borrow. Designed to cool the real estate markets in Toronto and Vancouver but nationally implemented, the new policy requires buyers, even those with more than 20 per cent down, to prove they can pay a mortgage on whichever is higher – the Bank of Canada’s five-year benchmark, which is 4.98 per cent, or 2 percentage points higher than the offered mortgage rate. Although Edmonton’s real estate market is sitting on shaky ground, there is some hope that 2019 will be more stable.

“Edmonton has traditionally been a suburban city where long commutes are the norm and fee simple ownership, usually in the form of single-family detached houses, are attainable options for most residents. However, the real estate market has shifted immensely over the last five or so years,” says Brandon Imada, an associate for Colliers International Edmonton.

According to figures from the Realtors Association of Edmonton, a total of 15,519 homes were sold throughout 2018. That’s a 5.57 per cent drop from 2017. The average time on the residential market also rose from 72 days to 84 days this year, which means pricing is expected to continue going down. The average selling price of a single-family home was $404,275 last month. Compared to January 2018, that’s a decrease of 6.04 per cent.

“It’s not only a combination of tighter mortgage rules, a new government, and the state of our oil-driven economy, but factors like international and interprovincial migration, and the availability of higher quality rental buildings have led to a huge boost for our rental market. There is also a generational movement happening in the market where more and more millennials are looking to rent rather than buy,” Imada explains.

Although it’s been a tough year for Edmonton’s real estate market, construction and property development haven’t seemed to slow down.

“You don’t have to be a real estate expert to understand the scale of development happening in our downtown area, as well as in suburban neighbourhoods. Nearly every development breaking ground has some form of residential component to it. Since condominium sales are historically low right now, I believe rental buildings will mostly likely be the development of choice,” he adds.

Even though Edmonton has nearly double the amount of apartment buildings then Calgary, there are nearly 3,000 brand new rental units slatted to hit the market in the next five years.

According to Imada, apartment and rental-only buildings provide developers with the flexibility to sell entire buildings as a whole and move on to new projects. While many of these new buildings are built with the intent to sell to large-scale institutional grade purchasers from Toronto and Vancouver, there is plenty of inventory for Edmonton buyers to invest in.

“When I first started back in 2016, the market was still a bit steady in the sense that first time homebuyers were not tested so heavily. Since the new mortgage stress test came into play, today’s market is definitely flooding with more houses than there are buyers ready to purchase a home,” says Suzanna Yu of Home and Garden Real Estate.

A large surplus in inventory and fewer resilient buyers that can pass the mortgage test means now is a good time to invest in rental properties. After-all, what happens to the countless buyers who failed the test? They become renters, and plunging vacancy reflects that.

Between 2017 and 2018, vacancy dropped by a considerable 1.8 per cent even though thousands of units were added to the market. As a result, rents increased, and more and more large-scale purchasers continue to look towards the Edmonton market.

“Its even attracted smaller local and interprovincial purchasers,” says Imada. “Last year I sold four properties to Vancouver purchasers, three of which were smaller apartments in the 12 to 20 unit range.

“Investing in real property is different than investing in the stocks. If the house burns down you have insurance, but if a company shuts down your stock portfolio may be hooped. Not only is [property] a good source of income for an investor, but they can potentially use it to leverage themselves into other larger investment properties,” he adds.

For anyone looking to build their portfolio, leverage is a huge advantage but investors, especially first-timers, need to understand how much of a commitment they are making before signing off on anything.

“I recommend most clients really budget out their choices before moving ahead with an investment property. The cost of investing and owning your own property are not the same, and there is also a chance you may not be able to rent it out for the price you had originally forecast,” Yu warns.

Nolan Matthias, co-founder of Mortgage360, Canada’s first B-Corp Certified mortgage company, advises buyers to assess the mortgage on the merits of the product itself rather than personal risk tolerance.

“For example,” he explains. “A five-year fixed rate has higher penalties, which makes it more expensive to liquidate if you need to off load the investment property. You probably aren’t going to stop owning a home for you to live in but, if life changes, a rental property may be the first thing on the chopping block. You don’t want to lose a huge chunk of your original investment because you chose a mortgage with a big penalty. Your average banker may have been taught that a five-year fixed rate is always safer, but when it comes to investment real estate, that isn’t the case.”

If investors are aiming to build up their portfolio, Matthias says a mortgage like the Scotia STEP or the MCAP Fusion can be hugely beneficial because attached to them is a line of credit with an increasing limit equal to the amount of principal that is paid down on the mortgage. These lines of credit can be used to purchase additional properties, which helps investors move up the ladder.

But where is the best place to start?

“Investors should look at buying two-bedroom condos instead of one because they rent out better, especially in weak economies, and buying in desirable neighbourhoods that tend to be a little bit more recession resistant. Those often include inner city and areas around college and university campuses,” says Matthias.

“The checklist for an investment property in no way resembles a checklist for a residential home. It is much more expansive and directed towards the financial performance of the building rather than personal preference. Investors should pay attention to rent roll, financial statements, list of upgrades, status of mechanicals and other major items like tenant profile, area demographics, financing options, nearby developments or planned future infrastructure, and nearby amenities,” concludes Imada.

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