In search of cash flow for small-scale rental investors, a pair of Vancouver realtors are suggesting buyers shift their gaze from the coast and mountains to the desert of the American south-west.
“A lot of our clients are firefighters or teachers, doctors or lawyers, and some don’t want to go into crypto or the stock market,” said Amy Leong, a sales advisor with Engel & Volkers Vancouver who, along with business partner Ally Ballam, is opening a satellite office in Scottsdale, Arizona. Some of their clients have built up equity during the two-year upswing in residential real estate prices and are sitting on $500,000 or $1-million, she said. “They are having dinner conversations saying it would be really nice to be able to buy a vacation home, or a family joint venture … they want to own property across the border.”
The biggest challenge to real estate investing in their home market is the cost of ownership versus the potential rental earnings.
“B.C. and Vancouver real estate does really well over time appreciating – you look at it as a long-term investment. But if you’re doing a 20 per cent down payment, it’s very hard to find something that cash-flows in Greater Vancouver. That’s what I see myself through working with clients,” said Johanna Williams, a client of Ms. Leong and Ms. Ballam and a mortgage specialist with Royal Bank of Canada. By “cash-flows” she means the rent covers the mortgage and other costs and still adds money to your bank account monthly.
As it happens, one of the fastest-growing trends in real estate investing in the United States – the growth of the single-family rental portfolios held by large institutional investors – has found there are places such as Arizona where home values are relatively low and rents are high enough that cash-flow isn’t a problem.
“It is a more attainable market to enter, certainly than a California or a Seattle,” said Kenneth Perlman, a managing principal with John Burns Real Estate Consulting who focusses on the Southwest market. “Institutional investors are big into that space, they love SFR, and they are all-in on the Built for Rent space [where a developer creates an entire low-rise subdivision to be managed by rental companies], which is the hottest segment of the market. They want yield and, if you have inflation, rents are going up.”
One of the biggest institutional players in this space is also a Canadian investment firm: “Tricon Residential is one of the largest operators of single-family rental homes in the country,” said Mr. Perlman, with 35,000 homes under management. “The three public single-family REITS – Tricon, Invitation Homes and American Homes 4 Rent – they own and manage almost 171,000 homes nationally.”
John Burns’ data suggests the portfolio of single-family homes owned by institutional capital is about 3 per cent in the United States, but Arizona is ground zero for the market where it’s closer to 10 per cent. A big driver of that activity is a region with a pleasant climate that remains undervalued relative to other major centres.
“What we bought in Arizona for $700,000 would be $3-million in Vancouver,” said Zia Hirji, an investment advisor who owns a rental condo in Vancouver but recently bought another home in Arizona that he’s listing on Airbnb.
While home values in Arizona shot up 33 per cent year over year in April, the average sale price was just US$569,752 (according to data from the Arizona Regional Multiple Listing Service) which converts to $717,261 Canadian, and remains below the Greater Vancouver average of $1.35-million (up 35 per cent from 2020).
Two years ago, Ms. Williams bought a pre-construction townhouse in Langley, B.C. as her first investment property, but is planning to sell the never-occupied home and take the proceeds shopping in Arizona. “Our home has probably gone up half a million in value in two years,” she said. “When we started looking [in Arizona] we saw it was US$650,000 for a lower-end single, detached with a pool, now it’s like US$850,000, that’s like $1.07-million Canadian. That’s not significantly cheaper than here, but we couldn’t buy a million-dollar house here and have it be cash-flow positive,” said Ms. Williams.
There are demographic factors that may keep Phoenix rents rising: 36 per cent of households in the area are rented (lower than the historical peaks of 38 per cent rentals in 2014) and the median population age is 34 (72 per cent of American renters are 44 and younger). According to Arizona State University’s Morrison Institute for Public Policy, rents for some one-bedroom apartments in the Phoenix area have more than doubled since 2020.
And there are other benefits for small landlords, too. An Arizona lease can be written to allow the landlord to raise rent at any time with 30 days notice, and if there’s no such provision in an existing lease, landlords just need to wait until a new tenancy begins. And because the state also has no “just cause” requirements for eviction, at the end of a lease a renter who has done nothing wrong (like not paying rent or committing crimes on the premises) can be evicted and rents raised for the next resident.
If you’re a local the result is a frustrating housing shortage where the costs of home ownership are rising faster than the costs of renting. For an investor with cash to buy, there’s an opportunity.
Single family rents are up about 12.5 per cent year over year, according to the most recent data from March, said Mr. Perlman. “If you look at home ownership, payments on an entry-level home are up 40 per cent [largely due to rising interest rates]. What that means is, it costs 25 per cent more to own an entry-level home than to rent.”
Mr. Perlman says he has found little evidence of any significant growth in the number of Canadians flocking to invest in Phoenix, even though it remains a major nesting ground for snowbirds.
Canadians remain the largest share of international purchasers of U.S. residential real estate despite a falling share in recent years, according to the National Association of Realtors. In 2020-21 Canadians purchased 8,800 American properties for a total of $4.5-billion, or 8 per cent of international purchases. Florida is still the number one destination, with 38 per cent of purchases, but Arizona was a strong second with 24 per cent (well above third place California’s 7 per cent).
Ms. Leong argues there’s opportunity for growth, not least because less than 20 years ago, following the 2008 financial crisis, Canadians were typically 23 per cent of the market, spending more than $12-billion on more than 40,000 properties across the U.S. annually.
“I personally did the same thing, I bought a couple houses in Arizona,” said Ms. Leong, who listed them on Airbnb when she wasn’t using them herself. “From October to May, our houses were fully booked.”
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