Investing in the Kelowna Real Estate Market: What to Look Out For

By now you've probably read all the headlines about the real estate market getting ready to tank with prices set to drop upwards of 25%!

If you're reading this in 2023 and prices haven't dropped like 'they' said they would then, whew, we dodged an economic collapse the likes of which we have never seen in this country. Even when the world was imploding back in 2008!

You're not here for prognostications though, you clicked on the link because you want to learn about investing in real estate here in Kelowna.

Let's get after it then.

First Things First: Set Your Budget

This is always the first rule in investing in real estate, whether you are buying in Kelowna for a personal property or if it's for an investment.

Set the budget and know what you are comfortable spending.

Now, look at that number and figure out if it lines up with what is currently listed for sale. I see this from investors a lot, especially ones coming in from Alberta, where their budget doesn't line up with the current state of the market.

It is very rare if not impossible to find a condo with more than 1 bedroom, that allows for STRs (Short Term Rentals, more on that later in the post), that is close to the beach and shopping for less than $450,000.

Start your condo or townhome search and do some digging prior to coming all the way out to Kelowna, get to know the market a little bit so you know what you will have to spend versus what you want to spend.

What is an STR (Short Term Rental)?

Short Term Rentals are what you would stay in if you booked an apartment, house or townhome through VRBO or AirBnB.

The advantage to STRs over a traditional style rental is going to be the revenue that can be generated. The traditional rental is going to get you somewhere between $1800-$3000 per month, depending of course of the size of the property, location and what's included.

Some short term rentals that I have seen here in Kelowna will generate around $300-$500/night so if you take the median and look at 21 days rented out of the month as a conservative estimate you could be around $8000 per month in the peak months of the year being June, July and August. 

So here's what I would do if it were me...look for a property that is going to have a good opportunity for STR cash flow, rent it out between May 1st and September 30th with the STR through AirBnB or VRBO and then do a short term agreement between Ocotber 1 and April 30th.

If you take the average of $400 per night with 21 nights rented you are looking at $24k in revenue in the peak months and figure about $5k in May and about the same in September giving you around $34k in revenue in 5 months. 

That 2 bedroom and 2 bathroom condo is likely to rent out for $2400 per month (I've seen as low as $1800 and as high as $3k but let's be conservative), if you add that revenue to the STR you are just over $50k in revenue for the year.

Measure that against a property yielding $3000/month and you are way ahead with the short term rental option.

Which Buildings in Kelowna Allow Short Term Rentals?

The caveat here is that this could be subject to change at any time depending upon how the condo boards of these buildings feel about the STRs.

The buildings that currently allow short term rentals in Kelowna and West Kelowna are:

1. Brooklyn
2. Barnoa Beach
3. Copper Sky
4. Discovery Bay
5. Playa del Sol
6. St Paul
7. Sole Downtown
8. Sunset Waterfront
9. The Cove

In these buildings you will find 1 bedroom and 2 or 3 bedroom options ranging in price (September of 2022) between $415,000 - over $800,000.

What are the Costs Associated With Investing in Kelowna?

Having moved back to BC from Alberta last year I can tell you that the land transfer tax was a shock to the system.

This is money that the provincial government collects and puts into the general coffers, it's maddening that it is done this way, the only option is to pay it and that is done at your closing with the lawyer or notary.

The land transfer tax is 1% on the first $200,000 and 2% on the balance up to $2M dollars. So, if you are purchasing a property of $600,000 your land transfer tax bill will wind up being $10,000.

If you are purchasing in Kelowna or in West Kelowna (this does NOT include Lake Country) you will also be subject to a speculation tax of .5% of the assessed value of the property so long as the home is not occupied by you for more than 6 months.

Property management for AirBnB is a must in my opinion, that's why we have partnered up with InfiniteBnB and their team to help manage your investment property. Your costs around the PM could be around 20% just as a management fee, please keep in mind that InfiniteBnB would be turning over your property once every 4 days so it's a little different than a property manager looking after a long term tenant.

Of course you will have strata fees and property taxes, I can tell you the strate fees really vary here in Kelowna. I've seen some as high as $700/month but they include all utilities and some as low as $200/month. 

Alright the last piece is the GST, I would recommend consulting an accountant on this but having a GST # could save you a headache when going to purchase a property like this as the GST could wind up being a pass through and could save you thousands of up front costs.

What You Need to Invest in Kelowna

Your downpayment is going to have to be 20%. You will likely have to apply for a business license with the city to operate your AirBnB.

You should consult an accountant, a lawyer or notary, get acquainted with a local Kelowna Mortgage Broker and of course hire us as your guide to expanding your real estate portfolio in BC.

If you want to book a Zoom consultation you can do that right here: Book a Meeting with Kelley

You can always give me a call at 778-716-7527 as well.

The Bank of Canada has Done it Again

Here we are on September 6th of 2022 staring yet another interest rate hike in the face, yes the Bank of Canada has increased rates again by 75 basis points.

In the event you've been living under a rock the last 8 months, this is being done to try and get inflation back to their bench market rate of around 3%. 

We are currently at just over 7% down from a 40 year high of over 8%.

Now before you go and lock in that mortgage (the banks are pushing you towards this) at 5.14% or 5.49%, think about where we are and where we are headed.

Below is a graph of historical interest rates compared to the Bank of Canada overnight lending rate, have a look and see what's happened over the last 15 years.

It's Almost 2007 all Over Again

If you look at the peak between 2000 and 2010 you will notice that rates peaked at just over 6%.

We haven't hit that mark yet but there's a good chance that we will.

Here's why.

Look at the drop in rates right around 2008 and all the way to 2021, why did rates drop to almost nothing?

One word, recession. The 2007-2009 housing/financial crisis in the US had a massive impact globally, Canada did not escape this at all. 

Housing and our economy were affected and we did wind up in recession. So what do central banks do when there's a recession?

They drop interest rates.

Why? To get you, as a consumer, to get out and buy things like cars and houses and boats. You know, the things that you finance.

We didn't see an increase in rates until this year because inflation was way up.

With a recession looming in 2023, and hopefully inflation falling back to manageable levels, there's a good chance that we see rates begin to ease off and likely start to go back to 'recessionary' levels.

All of that said, we are likely to see this as the peak of higher rates with the 'bottom of the market' in terms of pricing (in British Columbia as a whole) peaking in the Spring of 2023.

Where are Prices Right Now?

Believe it or not but prices in the Central Okanagan are up for all property categories including townhomes, single family and apartment style condos.

When you listen to the media, they always talk about SALES when they talk declines and yes, sales are most certainly down but compared to what?

Compared to 2021?

Of course sales are going to be down compared to 2021! Last year set records in the Central Okanagan in terms of sales and price increases for every sector of the market.

The Canadian average is about 400,000 moved per year and that is where we are trending towards right now, so yes, sales ARE down to the tune of about 30% but we are getting back to some sense of normalcy.

Where is the Kelowna Real Estate Market Headed?

My crystal ball has never really worked, but let me put it to you like this...we in a balanced market right now and I do see us moving to a bit of a buyer's market into the Spring of 2023 if interest rates don't correct.

The average days on market right now is sitting firmly at 46 (average of all segments).

Inventory levels are up over 100% in all segments and demand has been tapered due to rising interest rates. 

There is still a serious lack of inventory in this part of BC and that will continue as they just aren't 'making' anymore land. Where are builders able to build? there are only a couple of communites (Wilden, Black Mountain to name two) that have new construction opportunites.

Will those two communities continue to feed the demand?

Likely not. 

This is why I am still very bullish on the Central Oakangan market, because we have a shorted of land that can be developed and not everyone wants to live in a condo.

It's time to stop listening to the sexy numbers put out by the media and to start talking to your Kelowna Real Estate Professional about what is taking place in the market.