South of Bloor, east of DVP and west of Dufferin to Lake Ontario
We often get asked: “Should I buy an investment condo?” Years ago, it was a no brainer. Pre-construction condos were sold below market value and by the time they registered (4-5 years later) they would have appreciated for a decent profit if sold immediately.
There are 2 factors to look at when evaluating an investment condo:
- Price per square foot relative to the area
- Demographics / Affordability
Nowadays, some investment condo projects sell above market value with the hope of the market catching up to the new project pricing by the time the building registers. Buying above market price is speculation. Example: if the neighbourhood is selling at $600 per square foot and the project is selling at $650 per square foot.
What happens if the prices don’t appreciate to catch up to pre-construction prices?
What if there is a market correction ?
What if interest rates rise by 1% and the carrying costs are higher after registration? Will the investor be forced to sell quickly to cut their losses?
Due diligence is analyzing the local area to understand what resale investment condos are selling for versus the pre-construction project .
Demographics / Affordability
Per Toronto Real Estate Board’s April 2017 Market Watch report, the average prices in the 416 are:
- Detached homes: $1,578,542
- Semi-Detached homes: $1,104,047
- Townhomes: $793,129
- Condos: $578,280
There is an affordability challenge in the city of Toronto. Per RBC’s Housing Affordability Report, a 2 storey home requires 67.5% of household income, which means if there aren’t 2 incomes in the household, affording a 2 storey home is not feasible. A condominium, requires 33.8% of income to cover the costs of the mortgage, property tax and utilities. Once income can afford condos.
As millennials grow older and settle down; move in with their partner, get married or have children, they will outgrow the 1 bedroom & junior 1 bedroom condos they are renting or their mom & dad’s basement. Since ground level housing is not affordable, the demand of growing millennials will shift to large 1 + den or 2 bedroom condos.
As the great one, Wayne Gretzky, once said: “I skate to where the puck is going to be, not where it has been” Developers are building numerous 1 bedroom and junior 1 bedroom condos but the puck is going towards the 2 bedroom condos. A 2 bedroom investment condo has a strong upside potential.
Increased demand equates to strong appreciation and higher rental incomes. Positioning your investment where the market is going is key in building long term wealth via real estate.
You can either buy a resale or a pre-construction investment condo. With resale, the real estate investor knows exactly what they are buying:
- Space: exact square footage
- Costs: maintenance fees and property taxes for the investment condo
- Features: layout, views, finishes, building amenities. It’s all there and existing
- Immediate Returns: The investment condo can be rented shortly after closing and cash flow/return on investment is immediate
Both investment options are viable: It really depends on the following factors:
- Does the investor prefer a tangible investment condo purchase or ok with buying off floor plans and drawings?
- Does the investor have the capital now to buy and close on an investment condo or needs some time to build up savings and closing costs?
- Does the investor prefer to get cash flow / return on investment now or are they ok waiting for a few years?
- Does the investor make decisions on concrete numbers (resale investment condo numbers are accurate and based on current market conditions) or are they ok working with estimates and projections?
There is a waiting period for pre-construction condos; from the time the purchase contract is signed to the time the investor take title of the property (typically 3-4 years depending on size of project)