So you want to buy an investment condo…
It’s no secret that as house prices in the GTA have risen over the past 10 years, many of us have become overnight “millionaires”. Who would have thought that the little brick bungalow you bought would one day be worth over a million dollars? And that your home purchase would turn out to be one of the best investment decisions you ever made? While it feels good to “feel rich” the problem is our homes are not liquid investments – if cashed in and sold, we’d have nowhere to live… and well – that would be a problem.
However, what the rise in our home values has done, though, is given our generation access to capital. And this is important. We all know that to make money, you need money. As home owners we have access to the equity in our homes. We have mortgage products that let us borrow against the value of our homes… at low interest rates. Unlike our parents’ generation, we have access to a lot of “cheap” capital that we can use to actually build wealth. For some many of us, we are the first generation that can actually “accumulate wealth”- thanks to our property values.
And we have been – borrowing to invest… Over the past 10 years, many Torontonians have added real estate to their retirement planning portfolios. We’ve been replacing RRSPs with rental properties. And why wouldn’t you. Between 2007 and 2017 the average home price in the GTA grew from $376,236 to $822,681. That’s a 119% increase.1 That’s very impressive growth (especially when you compare it to many stock portfolios over the same time period).
Also, don’t forget that with real estate investments, other than the down payment, the tenant is subsidizing your investment with their rental payments. With a small down payment you could buy a rental condo in Toronto, and watch the value of this investment rise while a tenant helping you pay down the mortgage. And so over the past 10 years investment properties, condos in particular, have become a hugely popular wealth generator and retirement savings tool.
But times have changed. It’s now harder to make huge profits in Toronto. Of recent, there are several key factors influencing investment returns on rental properties. The first is tougher qualification criteria for mortgages. Gone are the days of 0% down (or even 5% down) on a rental property – a minimum of 20% now applies. Also, rental properties are no longer eligible for CMHC insurance and so interest rates for Rentals are now higher than for other mortgages. Second are rising interest rates. Even with higher rents, it’s difficult to cover the cost of the mortgage payment and condo fees. And then there’s rent control which limits your flexibility to increase rent. This can be a challenge if interest rates rise (and mortgage payments go up) and if maintenance fees go up. A study by Ubanation found that in Toronto, 44% of condo investors with a mortgage that took possession in 2017 were in a negative cash flow situation.3 This means that for these investors, the monthly costs of carrying the condo are greater than the monthly rent they are bringing in – 44% of condo investors know now plan on subsidizing their rental investment.
Now the flip side to this is of course these same condo investors have significantly gained in the value of their properties. For those same condo investors that took possession in 2017, the average sales price per square foot for units that turned over in the newly registered buildings was 51% higher than the average pre-sale price per square foot, with the length of time between pre-sale launch and registration averaging five years.4
All this to say – if you’re looking today to become a condo investor in Toronto, it’s a different ballgame. In most cases, the rental income will not carry the costs and you will have to supplement your investment. This is not entirely bad, as the monthly loss is tax deductible (so if you own other properties making a positive cash flow, this may even be appealing). The question of course remains as to whether or not condo prices in Toronto will continue to grow in the future as they have in the past. But you’ll face this question no matter what you decide to invest in.
My personal thoughts on this… If you do the math and don’t want to, or cannot afford to, be in a negative cash flow investment situation – you may have missed the boat on the Toronto condo rental market. However all is not lost. I once read in the book “99 Tips For Canadian Real Estate Investors” something to the effect that, like all long term investments, it’s always a good time to invest in real estate. The question is where.
Up until about a year and a half ago Montreal investment properties were rendering positive returns. Investors clearly noticed and as of recent prices have soared.
While I am sure there are many – I have personally looked at two areas of interest that I can share as examples: Ottawa and Niagara Falls.
Having investigated the Ottawa market, I found that you can still find nice one bedroom apartment, in good downtown locations, where the rent will exceed the mortgage costs and maintenance fees. On the flip side though, Ottawa has always been the “steady Eddie” of housing markets and the property value growth in Ottawa may not be a sexy as those Toronto experienced. Over the past 10 years, Ottawa saw the lowest percentage home price increase of Canadian urban centres. This could also mean that its’ time is yet to come. Christopher Alexander, EVP at Remax Integra recently reported for Yahoo Finance that “Ottawa is set for its own boom soon”. Time will tell as they say. (But while you wait, at least the rental income is covering your costs.)
The other example I can give is Niagara Falls. Niagara Falls still has plenty of single detached homes in the $400 K range, many of which can fetch over $2,000 a month in rental income. Niagara Falls is also expected to be connected to Toronto with a new daily Go Train route by 2023.
The point here is that, while the market has changed, if your goal is to get into the real estate investment game, it’s still not too late to do so. We still have relatively cheap access to capital through home equity mortgages. As always, I still maintain that borrowing against your home to finance your lifestyle is silly – but borrowing against your home to invest in relatively secure investment can be a diving board into generating wealth that future generations in your family can benefit from. And who doesn’t want that?
And finally – my pitch. If you are thinking of investment properties – the right mortgage is vital. This is not a straightforward mortgage transaction, and the right mortgage strategy can make a huge difference in your current and future investment capability and capital returns. We should discuss
1,2,3,4 – Source: Urbanation, “A Window Into The World Of Condo Investors”