Surviving the First Years of Rental Property Ownership: The Pain Cave
March 1, 2025 - Written by Jamie Palmer, President & Broker of Power Properties
Entering the Pain Cave
When I look back at my own real estate portfolio, which Power Properties manages, the first few years after I purchased each property they were, by and large, cash flow negative. However, I recently heard the expression “the pain cave” to describe that initial few years of rental property ownership, and thought “that is the perfect metaphor!” The cave is dark, it’s cold, and you’re not sure if you will ever see sunlight again, you’re questioning why you entered the cave in the first place, but at around three years you start to see a glimmer of light, and then at year five you finally exit the cave and feel the warmth and sunlight on your face. Owning rental property can be exactly like that, your biggest returns, by some accounts 90% of your returns, happen after year five.
Why Rental Properties Struggle in the Early Years
Why is that? As noted above, often properties are initially cash-flow-negative, the expenses exceed the market rent, but rents tend to gradually increase over time. That initial rent of $2200/month increasing an average of 5% a year becomes $2800/month after five years, and almost $3000/month after six years.
In addition, the value of real estate tends to increase over time. In Calgary’s case, the average increase is about 3% annually for the past 20 years (Lethbridge and Medicine Hat were both about 2.5% per year over the past 20 years). That may not sound like much, but you have to remember that you didn’t pay cash for your rental property you got a mortgage, which creates something called leverage, anywhere from 3 to 5 times the rate of appreciation depending on how much a down payment you used. If we use 3% appreciation with a 25% down payment that results in a 12% annual return on investment. Albert Einstein is quoted as saying “Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn't, pays it”.
Exiting the Cave: When Rental Property Ownership Pays Off
On top of compounding interest increasing the rent and the value of the property, debt repayment works the opposite way, initially most of your mortgage payment is going towards interest, but each year more and more of the payment goes to paying down the loan (principal) accelerating the equity you gain each year. So by the time you hit the end of year five everything starts moving in your favour, your rent is covering your expenses, you have seen a significant increase in the property value, and you are starting to see the mortgage get paid down, you have in fact exited the cave.
So remember, just like the cave, owning a rental property can initially be dark and scary, but there are huge gains to be made once you make it through the cave. See you on the other side.
Written by Jamie Palmer, President & Broker of Power Properties
Jamie Palmer is the President and Broker of Power Properties. He holds a Certified Property Manager (CPM®) designation, the highest designation in Property Management in North America. He earned an Honors degree from the University of Toronto, and he has over two decades of experience in property management.
About Power Properties
Founded in 1980, Power Properties has been providing hassle-free property management services to property owners, property investors and non-residents with homes in Calgary, Lethbridge and Medicine Hat for over four decades. Our full-service property management includes everything from move in to move out, so you don’t have to worry about the day-to-day operations of your rental property. With a team of licensed professionals, years of experience, and award-winning service, you can rest assured that your property is in good hands.
