With the rising prices of houses in Guelph, sustainability of rents can only last so long before an increase has to take effect.
Take, for instance, the increase in the median detached sale price in all of Guelph between 2016’s 2nd and 3rd quarter. It was a 7.4% increase which, if sustained for a 12 month period, would mean an increase of close to 30% to the median detached sale price of homes in Guelph in only 1 years time! Theoretically, this means an investment property that could be purchased this year for $350,000 would have to be purchased next year at $455,000 if prices keep increasing the way they have been. Rents are not increasing anywhere near that rate, so one must wonder how newly purchased rental properties will be able to remain cash positive if rents aren’t increased with them?
Given the above scenario, the additional mortgage expense (based on an additional mortgage amount of $84,000 at an interest rate of 2.6%, compounded semi-annually, amortized over 30 years) for the increase in the value of the home would be approximately $340 per month in extra operating costs to the landlord if financing were involved. If you stretched this over a 4-bedroom rental property, the landlord would have to charge an additional $85 per month for each bedroom to get the same rate of return next year that they could have gotten this year, assuming prices keep rising at the same rate.
Even if you are a cash-buyer and financing is not part of your financial equation, you would still be settling for a lower rate of return unless rent prices were increased. Buying an investment property for an additional $105,000 in cash but having no additional increase in income to make up for it simply does not make any sense.
Clearly, at some point landlords are going to be forced to jack rents if they are still going to be able to survive and/or make the same rate of return they’ve come to expect on any future purchases, assuming real estate prices do continue to rise.
In Toronto, house prices have soared so high and the rental market has gotten so out of control that landlords are now starting to hold offers on their leases and taking the highest bidders! Can you imagine? Just as holding offers when selling your home can create bidding wars and “over-paying”, holding offers on property leases can do the same thing to the rental market, especially when rental supply is so low and purchasing a property becomes that much more difficult meaning a surplus of renters (demand) remains in the rental market, unable to move into the first-time home buyer category.
Now, typically the rental market mimics the real estate market but there is usually a delay in adjustments between the two. It could be several months or even years before Guelph starts seeing rental prices start to rise on a grand scale, but I can assure you that if prices keep rising the way they are, the rental increases will be sure to follow.
So now, the question for landlords looking to purchase a newly acquired investment property in Guelph is, “What should we do?” My best advice would be to purchase a property sooner rather than later before you are priced out of the market. I believe if prices keep soaring, rents will eventually catch up, and properties will once again be easier to cash-flow positively at the newly adjusted rental rates, but in the meantime if you wait too long and the prices continue to rise without the immediate increase in the rental market along with it, you may be forced to purchase a property at the inflated sales price and have your property run at a deficit for the first little while if you are absolutely set on purchasing a property in the near-mid future.
Of course, the real estate market likely won’t continue to rise this rapidly forever and at some point it should cool off or even go down, but who’s to say prices won’t keep increasing this way for even the next 2-3 years and that by buying now you could be setting yourself up to see some massive equity increases in a short period of time, and still have Guelph’s current rental rates afford you a cash-positive rental property? I’m sure the residents of Toronto and Vancouver at some point thought to themselves that they’re little townhomes would never be worth more than a couple $100,000’s, yet now they are selling for over a $1M.
No one has a crystal ball, and not even the most scrupulous and informed economists truly know every piece of the housing market puzzle or when prices will cool down or drop off, but all things considered I still believe purchasing an investment property in Guelph now is a safe bet with interest rates so low, the population projections for the city in the next 15 years, the limited supply of homes on the Guelph resale market and for the simple fact that cash-flowing properties are still able to be found if you know what you’re looking for.
Working with a local agent who truly knows all of the ins-and-outs of the Guelph real estate investment market and the Guelph rental market will not only help you find the property that best suits your needs, but will also help you ensure all of your properties financial goals are met.
Until next time, Happy Investing!