Real Estate Investing in the Sandy Hill - Follow The Data

Increased student housing development has accelerated appreciation near the university but the encroaching student ghetto is depressing nearby values. Among low risk neighbourhoods, capitalization rates are better than average.

Overview

The proximity of the University of Ottawa to Sandy Hill anchors demand for rental housing in the neighbourhood. Moreover, the cyclical nature of student tenancies effectively eliminates the risk of ultra-long term tenants paying well below market rent. Income property investors looking for non-student tenants will find excellent capitalization rates in the east of the neighbourhood, outside of the student ghetto.

Recent development of student housing has had a pronounced effect on property values throughout Sandy Hill and will likely have marked effects on rents both inside, and outside, of the student ghetto. Real estate investors should ensure they thoroughly understand the effects of that development as well as the opportunities and risks it presents.

To help investors gain a complete understanding of the neighbourhood, the relevant data has been curated here and paired with insight and analysis from investment real estate specialist, John Castle. The data used here is the most recent data available as of 2020.

Ottawa Sandy Hill
Average Capitalization* 4.5% 5.7%
Real Appreciation Since 2010* 22%  23%
Average Credit Rating 759 742
Crime Rate 4.9% 13.1%
Vacancy 1.8% 1.7%

Net Income from Investment Properties in Sandy Hill

Rents, turnover, and vacancy all contribute to realized rental income generated by an investment over its life. In this section we look at how Sandy Hill compares to the rest of Ottawa in each of those metrics.

How much is rent in Sandy Hill?

The median rent in Sandy Hill is 30% higher than the median rent in Ottawa* (October 2019). Rents are highest in the east of the neighbourhood between Chapel Street and Range Rd.

Histogram showing differences in rental income in different parts of Ottawa’s Sandy Hill Neighbourhood
The modest character of the student accommodations in the west of Sandy Hill is reflected in the lower rents on that side of the neighbourhood.

How often do tenants turnover?

In Sandy Hill, the number of tenants who have moved within the previous year is nearly double the rate for Ottawa. The number of tenants who have moved within the previous five years is also notably higher than the rate for the city. Consider the one-year and five-year turnover rates.

Histogram showing differences in tenant turnover in different parts of Ottawa’s Sandy Hill Neighbourhood
In the student dominated western half of Sandy Hill, tenants turnover nearly twice as often as they do in the more senior eastern half of the neighbourhood.

What is the vacancy rate?

The vacancy rate on the west side of Sandy Hill is higher than on the east side. Likely a consequence of the periodic nature of student turnover: units that fail to rent at the start of a term are likely to remain vacant for the duration of that term, which drives up the vacancy rate.
Histogram showing differences in vacancy rates in different parts of Ottawa’s Sandy Hill Neighbourhood
Contra what most investors expect, the vacancy rate near the Ottawa U is actually higher than elsewhere in Sandy Hill.

Price of Investment Properties in Sandy Hill

In this section, we look at the per unit price of income properties in the various parts of Sandy Hill and how those prices compare to Ottawa overall. We also look at the values of non-rental properties, in order to highlight the effects of studentification on real estate prices in the neighbourhood.

Income property prices in Sandy Hill

On a per-unit basis, the median sale price of a purpose built multiplex in Sandy Hill is roughly the same as the median price in Ottawa overall. The median per-unit sale prices are listed below.

Notably, prices are roughly uniform throughout the neighbourhood, despite the markedly higher rents in the east. The disconnect between rents and prices is a consequence of additional investor demand for properties near the university, which seems to be a result of real estate investors buying on the following rationale.

  • People who rent in Sandy Hill are students.
  • Students want to live near the university.

∴ I should buy something near the university if I’m going to buy in Sandy Hill.

For developers looking to build apartments that will attract student tenants living south of Sandy Hill, the non-student tenants in the east who pay higher rents will not occupy their buildings, and so the higher rents paid in the east are irrelevant.

However, for non-developer investors looking for income (and who are not speculating on future values), the above rationale may result in higher income options in the eastern half of the neighbourhood being unduly eliminated from consideration.

Single family prices in Sandy Hill

The median sale price of a single family home in Sandy Hill is 28% higher than elsewhere in Ottawa.

Unsurprisingly, buyers of single family homes (who are typically non-students) prefer to live in the eastern half of the neighbourhood where non-students and families predominate. That preference is reflected in higher demand, and higher sale prices, of single family homes in the east of the neighbourhood.

Histogram showing the per-unit price of investment properties in different parts of Ottawa’s Sandy Hill Neighbourhood
Per unit prices of investment properties are uniform. throughout Sandy Hill despite marked differences in rent, turnover, vacancy rates, and non-rental housing prices. Greater demand for Single Family homes farther from the university has contributed to higher prices of non-rental homes in the east of the neighbourhood.

Appreciation of Investment Property in Sandyhill

Accelerated development of student housing in the western half of the neighbourhood began in 2017. Since that time, the additional demand has accelerated appreciation in the west. However, the influx of students to the neighbourhood has blunted the appreciation of properties in the east where non-students and families predominate.

How quickly is Real Estate in Sandy Hill appreciating

Appreciation in Sandy Hill has lagged appreciation elsewhere in Ottawa for most of the decade. However, it has accelerated during the previous three years – far surpassing the appreciation of property in Ottawa overall.

Appreciation has been most marked near the University where student apartment re-developments and conversions are prevalent. Those new apartments have attracted student tenants who were previously living further south. The growing prevalence of university students has blunted appreciation of properties in the more mature eastern half of the neighbourhood. During the previous three years appreciation in the east and west have tended toward inverse correlation.

Histogram comparing accumulated real appreciation on real estate investments made in the east of Sandy Hill to those in the west of the neighbourhood, and the neighbourhood overall with Ottawa overall.

10 year inflation-adjusted appreciation of real estate in Ottawa’s Sandy Hill.

Appreciation Accelerators and Decelerators in Sandyhill

Domestic student population decrease

The University of Ottawa has acknowledged that its domestic student populations are in (slight) decline.

To make up the lost income, the university is recruiting more international students. There is competition for international students. Consequently, recruiting more international students depends on factors outside of the direct control of the university (this is in contrast to the common belief that university mandated limitations on international enrollment are what limits international enrollment).

The net effect is roughly stable total enrollment. Consider the following domestic undergraduate enrollment numbers.

Stacked column graph showing the proportional increase in the enrollment of international students at the University of Ottawa
Total enrollment is in decline. The university has successfully made up the shortfall by recruiting international students.

This enrollment decline is likely a generational demographic effect: Colleges and universities increased capacity in order to accommodate increased demand from the children of boomers. That increase in demand was an echo-effect of the post war birth rate spike. As such, we may expect domestic-student enrollment to level out.

In line with that prediction, in 2016, the University of Ottawa released projected numbers leading up to 2020 (the current enrollment year). Those projections predicted that the fall in domestic enrollment will taper off.

Stacked column graph showing that domestic enrollment will stabilize

Domestic students are the most stable source of demand for rental properties near the U of O. The University projected that this population would stabilize over the last three years. The university has not yet reported the actual enrollment numbers for those years.

Competition for domestic students is capped by the funding decisions of our federal and provincial governments. There is no such balancing mechanism in the market for international students and competition for those students is growing. As such, domestic students are a more dependable (i.e. less risky) source of demand for rental accommodation. Decreased risk adds to the value of an investment. Accordingly, real estate investors looking for student rental properties in Sandy Hill should consider the trajectory of the domestic student population at the university.

Effects of studentification

The development of new student housing is attracting new students who might have otherwise lived in student housing options south of Sandy Hill. The effect has been slower appreciation in the east, especially for homes on smaller lots that are unsuited for intensification. Multi-family rentals in the east may also lose value (relative to Ottawa values) as a result of this demographic change.

That change and its effects are outlined here.

  • The number of students in the neighbourhood is inversely related to the value non-students realize from living in the neighbourhood. 
  • When the value a resident realizes from living in the neighbourhood falls sufficiently, that resident will leave the neighbourhood. 

∴ As the number of students increases the value of the neighbourhood to non-students will fall and non-students will leave.

  • Renting residents in the east are predominately non-students
  • Renting residents in the east pay more rent. 
  • Students would not pay as much for a unit in the east (farther from the school) than they would for one in the west. 

∴ If the number of students in the neighbourhood increases sufficiently, then non-student tenants will leave, and the units in the east that they vacate will be rentable to students for less than the rent paid for units in the west.

  • The development of new student rentals in Sandy Hill is increasing the number of students in the neighbourhood. 

∴ Assuming development of student rentals continues, rent in the east will eventually be lower than rent in the west.

  • Lower rents negatively affect capitalization rates, which negatively affect property values of income properties. 

∴ Assuming development of student rentals continues, the value of income properties in the west will fall.

Income Property Capitalization Rates in Sandy Hill

Investors come to Sandy Hill looking for student rentals. The focus on student rentals has pushed up prices for properties near the university.

The stock of ultra price-sensitive tenants has kept rents low (for a high-demand safe central neighbourhood). Consequently, cap rates in the western student-dense portion are substantially lower than in the east, where unit values are comparable and rents are higher.

Moreover, compared to the west, cap rates in the east seem high even in light of vacancy differences (vacancies are actually lower in the east) and the rent-lifting effect of turnover (which is not substantially lower in the east when we look at five year intervals). The offsetting consideration is the rate of appreciation, which may remain depressed in the western half of the neighbourhood.

What are cap-rates like?

The average capitalization rate in Sandy Hill is higher than the average for the city, but typical for a neighbourhood where renters predominate.

Column graph comparing capitalization rates of income properties in Sandy Hill with other Ottawa neighbourhoods.
Income properties in Sandy Hill capitalize well in comparison to the city, but not as well as the neighbourhoods where risk is perceived to be higher.
Cap rates near the University of Ottawa are lower, which seems to be mostly a consequence of the more limited means of those interested in living near the university. It also seems to be a consequence of relatively flat property values in the east – despite increasing rents. Investors should be mindful of what this suggests about the future of property values in the east.
Column graph comparing capitalization rates of income properties in the east and west sides of Sandy Hill
Income properties in the east of Sandy Hill capitalize faster. However, this may be offset by slower appreciation.

Tenant Profile

Residents may have difficulty affording their rents. However, credit is, on average, good. Thorough background checks should all but eliminate the risk of delinquency. There is high demand from young people – especially near Rideau Street. Your investments should reflect that demand.

Do tenants miss payments?

In so much as credit scores indicate reliability, the data suggest that residents reliably pay their rent. The average TransUnion credit score, for neighbourhood residents, is 742. In comparison, the average score for the city is 759, and 655 for all of Canada. 742 is within the high end of the range deemed ‘good’ by most scales.

Are tenants able to afford their units?

With higher rents and low household incomes, residents near the university spend more of their income on rent than most Ottawa residents. Consider the following unaffordability rates (left), median annual rent (middle) and median income of renters (right). Note that the income statistics include scholarships.

Column graph comparing various measures of the affordability of units in rental properties in Sandy Hill.
Tenants in the Ottawa U student ghetto spend more of their income on rent than tenants in every other definable part of the city.

Student loans and family assistance will contribute to the ability of student tenants to pay their rent.

Who rents apartments in Sandy Hill?

In the west, the majority of tenants are students. In the east, the age distribution of residents is much less skewed. Consider the following proportions of residents aged 15-24.

Column graph showing age differences in different areas of Sandy Hill

Students predominate west of Chapel street. The neighbourhood’s population ages quickly as you move east.

Student loans and family assistance will contribute to the ability of student tenants to pay their rent.

How can I ensure that I get good tenants?

Do all your homework.

  • Check credit;
  • get proof of current employment, and proof of current, and previous, income;
  • call the applicant’s current, and previous, employers;
  • call the applicant’s current, and previous, landlords.

Verify that the reference contact information they provided was in fact their actual landlord or employer: check land registries, call the number on their employer’s website (not the one provided), and so on.

Alternatively, you can check with your property manager to ensure that she’s taking these steps in screening tenants. Alternatively, some real estate brokers (e.g. yours truly) offer this service add a no-charge value add for their investor clients.

If you’re renting to students, obtain as much of the foregoing as possible as well as a guarantee, and credit check, from a full-time income earner (e.g. their parents).

Supply and Demand Indicators

Are there many vacancies?

As discussed above, the vacancy rate in Sandy Hill is nearly zero.

Are new rental properties under construction?

New apartments are being built. There are 11 apartments (0.3% of inventory) under construction in 2020. In contrast, Carlington, a socioeconomically similar neighbourhood with a concentration of renters has had zero apartments under construction within the last three years. Whereas, fast gentrifying Vanier currently has 171 apartments (2.5% of inventory) under construction.

How many residents rent their house or apartment?

Residents of the neighbourhood are twice as likely to rent their dwellings as residents of the city are: 68% of Sandy Hill residents reside in rented dwellings vs. 34% of Ottawa residents.

How to Find Investment Properties in Sandy Hill

Look at the listings

Just about everyone who’s really ready to sell is going to have their property listed on realtor.ca.
Classified websites like Kijiji and Facebook Sandy are useful for a few opportunities here and there.

Sleuth for unlisted options

Ultimately, if you can’t find what you’re looking for in the listings, then you may need to adjust your expectations (this is often the case) or you may need to find the opportunities yourself. Call around, do some detective work, and you’ll learn about what’s coming up.

There’s an enormous contingent of investors who would be willing to sell if a reasonable offer were to come to them, but who don’t want to be bothered with the hassle of months of showings and tenant interruptions. Networking and detective work are the best way to find these investment options.

Find a well connected agent

Alternatively, build a relationship with a well connected investment real estate agent who has already done the research for you. Since multi-family properties are a major focus in my practice, I spend a good portion of my time networking and calling in order to build a database of who owns what and who’s in the mood to sell. Many investment-focused agents are doing the same. Reach out to one you trust.

Summary

Investors interested in cash flow who are confident that property values outside of the ghetto will stand up to the influx of students will find promising opportunities in the east of the neighbourhood. Whereas, those looking for more predictable options may wish to look closer to the university. 

If you’re curious how the real estate investment prospects of Sandy Hill compare to those in other Ottawa neighbourhoods, you may want to read my data-driven guide to investment property in Ottawa

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