Baby, we got a bubble!?

[interested]

I just can't see how it will be better.
That said, in Germany now the 10 year Bund (German Bond)is -ve. It was oversubscribed for people to be returned less than they put up. The reason....people are betting with QE in Europe the bonds will go even more negative and they can sell these at a profit.
So is it possible that simply treading water will be worth more? Yes but it seems unlikely.
It will take Toronto's status as a world class city, worsening economics or something for this to happen.
Also, remember there is the currency play and while to a foreigner we are "on sale" if he / she is comparing to the USD, I am not so sure that is the case for a Chinese person in Yuan or European in Euro which have also devalued. For an American, it would make little sense if their currency is going to appreciate further vis a vis the C$ but who knows what will happen with currency.

 

[gentlepuppies]

^^^^
Vancouver has lead in price if not volume I believe

Not in the last few years. Sales in Vancouver have been disproportionately lower than Toronto (even factoring population), between 25,000 and 30,000 sales annually, compared to Toronto's 85,000-95,000. So 1/3 the population of Toronto, just over 1/4 of the sales volume, but with about 40% the # of $1M sales, roughly equal number of $2-4M sales, and 3 times the >$4M sales. It's interesting how condos comprise a greater proportion of the high-priced sales in Vancouver.

screenshot of the Sotheby's report:

 

[UD2]

Someone tell me again how buying a $350,000 500 sq ft condo in prime downtown Toronto (CBD, entertainment district, king west, etc.) And leasing it for 1550/monthly makes for a reasonable investment grade opportunity?
Even w/ 2.59% mortgage AND 20% down payment.
Maintenance fee $ 275/M,Tax 200/M, Ins. 40M.

to be more precise, the monthly property tax rate for a $350K property in Toronto will be around $230 and insurance is around $20.

$1550 a month rent, take away taxes, maintenance, insurance, and one month rent for agent fee will still leave you with a 3.07% return from cash flow if you purchased the condo with $350K cash. Add in a strikingly conservative 0.5% increase in property value per year, the annualized return for the investor is 3.57%.

3.57% is not something that'll make you rich, but it isn't unacceptable if you already are. To bring more prospective, stocks of real-estate investment trusts such as Riocan provides an annualized dividend of around 4% and very low growth in the value of the equity it self. So in this comparison investing $350,000 in a rental condo will generate a return that is more or less in-line with other real-estate segment investment products.

Also note that the scenario has a number of potential upsides.
1. property value increase have a high likelihood of exceeding 0.5% per year. Given the investment scenario is for 100% cash purchase of the property, every % increase in property value will result in proportional increase in return.
2. the monthly rent commanded by a $350K condominium is generally in the $1650 to $1800 range depending on the property. Every $100 increase in monthly rent represents $0.34% in annualized return.
3. the scenario assumes agent fee expenditure equaling one month rent to be incurred every year. This expense represents 0.44% in annualized return and may not be incurred if the tenant stays longer.

A more optimistic scenario of $1750 collected in monthly rent, with the tenant turn-over at once every two years, and an annual property value increase of 1.5% will net you a total return of 5.45% (3.95% cash flow return and 1.5% equity return).

So the above is why a $350K downtown condominium is a reasonable investment product.

 

[interested]

^^^^
A few points:
Current 1 bedroom average rent is $1600 in downtown (without parking).
Assumes absolutely no vacancy:
Assumes no expenditures.
Does not allow for maintenance e.g. just painting the suite in between rentals..OK on the first but not therreafter.
Also, while over time property value will increase due to "inflation", we are certainly not in an inflationary environment.
There can be prolonged periods of price stagnation of outright deflation.
In Canada: 1989 to 1996. In the US from 2008 to 2011.
Usually there is a price adjustment every 10 years...prolonged since 1997 now due to QE and a forever declining 5 year bond rate.
Money flowing to real estate as it provides an alternate revenue stream for income seakers.
Must keep for at least 5 years as 10% equity disappears if one eventually sells (commissions/land transfer taxes on purchase, closing costs/ legals etc.)

I am not saying your math is wrong....just pointing out other considerations perhaps to be entertained.

 

[Mithras]

3.57% is not something that'll make you rich, but it isn't unacceptable if you already are. To bring more prospective, stocks of real-estate investment trusts such as Riocan provides an annualized dividend of around 4% and very low growth in the value of the equity it self. So in this comparison investing $350,000 in a rental condo will generate a return that is more or less in-line with other real-estate segment investment products.

A more optimistic scenario of $1750 collected in monthly rent, with the tenant turn-over at once every two years, and an annual property value increase of 1.5% will net you a total return of 5.45% (3.95% cash flow return and 1.5% equity return).

So the above is why a $350K downtown condominium is a reasonable investment product.

This is at best misleading and at worst false. RioCan (REI.un) is a retail REIT and the largest REIT in Canada. So by definition a conservative blue chip with low payouts and low growth. You have to look at Multi-Family REITs and REOCs to get a comp. They are (with current dividend and one year total return):

Boardwalk (BEI.un) 3.75% & 6.31%
CapREIT (CAR.un) 4.19% & 42.92%
InterRent (IIP.un) 3.59% & 14.88%
Killam (KMP) 5.59% & 12.32%
MainStreet (MEQ) No Dividend & 2.33%
Morguard Residendtial (MRG.un) 5.88% & 10.24%
NorthernProperty (NPR.un) 6.73% & -8.99%
TrueNorth Apartment (TN.un) 8.52% & 11.01%

That gives an average of 11.37% total return and 5.46% income return. If you look at a three year total return the average for that group is 29.6%. I would say that those numbers blow the return of direct holdings out of the water. Then there is the issue of lease-up time, capex, leasing cost, your own labour and MOST importantly there is no adjustment for liquidity risk. On a risk adjusted basis, an investor could sell all of their real estate exposure if they owned those REITs/REOCs in seconds while it could take months in a bad market to sell a condo. Liquidity risk is extremely important and not looked at by a casual investor.

 

[interested]

^^^^
Mithras: what you say is correct. However there is one other factor perhaps to be also considered.
While one can control when one buys and sells a Reit, one cannot control what the reit itself does and its risks.
Owning one's property...one is acutely aware of the investment decision and can buy / sell at the time of one's choosing.

If for whatever reason (eg rising interest rates) Reits get hit, and if there is a lot of redemption, it may trigger selling at less than ideal time of assets. That said, I understand the liquidity and that perhaps the "professional REIT" manager is in a better position to judge the market. However, as said, he answers to "shareholders" whereas owning individually one answers to oneself.
I agree that investment real estate at todays prices is questionable.

 

[Mithras]

^^^^
Mithras: what you say is correct. However there is one other factor perhaps to be also considered.
While one can control when one buys and sells a Reit, one cannot control what the reit itself does and its risks.
Owning one's property...one is acutely aware of the investment decision and can buy / sell at the time of one's choosing.

If for whatever reason (eg rising interest rates) Reits get hit, and if there is a lot of redemption, it may trigger selling at less than ideal time of assets. That said, I understand the liquidity and that perhaps the "professional REIT" manager is in a better position to judge the market. However, as said, he answers to "shareholders" whereas owning individually one answers to oneself.
I agree that investment real estate at todays prices is questionable.

You also don't control your condo board...

The liquidity of a REIT allows you to exit faster if you want to than direct ownership. Selling when markets get bad crystallizes a low selling price in the same way for either a condo or a stock. It's all paper until you sell for cash.

At the end of the day, a REIT management and operations team should, by definition be more experienced and more accomplished real estate managers and operators than the vast majority of condo owners that are renting out their properties. I live in that world and can attest to that. I also own my own house and don't rent so I understand the issues and upsides to both. Mortgages also allow debt gearing in a way that is difficult for most smaller investors to match if they were to buy publicly traded securities on a all cash basis.

But on a risk adjusted basis very few investors are going to outperform a listed real estate vehicle through renting out a condo they have bought. There might be other reasons for doing so, but if you're only looking at actual returns it's not the best avenue. Also all too many condo investors seem all too happy to get a negative or very marginally positive income return on their investment while waiting for capital appreciation. Like I said, it's all paper until you sell and it's faster and easier to sell a stock than a home.

 

[UD2]

This is at best misleading and at worst false. RioCan (REI.un) is a retail REIT and the largest REIT in Canada. So by definition a conservative blue chip with low payouts and low growth. You have to look at Multi-Family REITs and REOCs to get a comp. They are (with current dividend and one year total return):

Boardwalk (BEI.un) 3.75% & 6.31%
CapREIT (CAR.un) 4.19% & 42.92%
InterRent (IIP.un) 3.59% & 14.88%
Killam (KMP) 5.59% & 12.32%
MainStreet (MEQ) No Dividend & 2.33%
Morguard Residendtial (MRG.un) 5.88% & 10.24%
NorthernProperty (NPR.un) 6.73% & -8.99%
TrueNorth Apartment (TN.un) 8.52% & 11.01%

That gives an average of 11.37% total return and 5.46% income return. If you look at a three year total return the average for that group is 29.6%. I would say that those numbers blow the return of direct holdings out of the water. Then there is the issue of lease-up time, capex, leasing cost, your own labour and MOST importantly there is no adjustment for liquidity risk. On a risk adjusted basis, an investor could sell all of their real estate exposure if they owned those REITs/REOCs in seconds while it could take months in a bad market to sell a condo. Liquidity risk is extremely important and not looked at by a casual investor.

as much as i agree with some of the facts that's outlined in this post, i have to point out that the question i was addressing was wither a $350K king st west condo is a resonable investment product.

There are will ofcourse be more profitable investment products in existence and your post has outlined that with a fair degree of clearity, but the existence of more profitable investment opportunities does not errod the reasonablility of Toronto's condo market from an investment prospective.

I personally will try to avoid labelling posts by other members as false or misleading, but that's personal style.

 

[UD2]

^^^^
A few points:
Current 1 bedroom average rent is $1600 in downtown (without parking).
Assumes absolutely no vacancy:
Assumes no expenditures.
Does not allow for maintenance e.g. just painting the suite in between rentals..OK on the first but not therreafter.
Also, while over time property value will increase due to "inflation", we are certainly not in an inflationary environment.
There can be prolonged periods of price stagnation of outright deflation.
In Canada: 1989 to 1996. In the US from 2008 to 2011.
Usually there is a price adjustment every 10 years...prolonged since 1997 now due to QE and a forever declining 5 year bond rate.
Money flowing to real estate as it provides an alternate revenue stream for income seakers.
Must keep for at least 5 years as 10% equity disappears if one eventually sells (commissions/land transfer taxes on purchase, closing costs/ legals etc.)

I am not saying your math is wrong....just pointing out other considerations perhaps to be entertained.

You're correct in that transaction costs of real-estate is high and will significantly decrease return if a property is purchased and sold with high frequency.
To me real-estate purchase should be long term investments that are held for at least 10 years, preferable longer (30 years +). Generally as much as property values fluctuate, rental rates remain fairly stable unless the region experiences a systematic economic downturn (i.e. Detroit), so long term real-estate investment when viewed from this prospective is comparatively low risk and therefore low return.

There are some extraordinary costs that i did not account into my scenario, however the cost of painting, repair etc. should account for a fairly small portion of the annual return. Vacancy will also decrease return but given that our rental market vacancy rate is historically low (currently below 2%), that too should not be a large concern. Keep in mind that this scenario purchases the property with Cash, therefore the owner have room to lower the rent to the lowest level on the market without needing to worry about cash flow and this will alleviate most of the vacancy concerns.

Once again, the question asked for reasonability of our condo market and i don't think anyone is saying that this is the most profitable investment product on the market

 

[sentiant]

There is so much product out there. Vacancy rates in downtown are growing and rental rates holding but definitely not increasing.
At this mature stage of the game looks the only ones making real returns on condos are the industry players ie.developers, building company, real estate sales.
not much magin left when retail investor arrives.

 

[Migos]

You're correct in that transaction costs of real-estate is high and will significantly decrease return if a property is purchased and sold with high frequency.
To me real-estate purchase should be long term investments that are held for at least 10 years, preferable longer (30 years +). Generally as much as property values fluctuate, rental rates remain fairly stable unless the region experiences a systematic economic downturn (i.e. Detroit), so long term real-estate investment when viewed from this prospective is comparatively low risk and therefore low return.

There are some extraordinary costs that i did not account into my scenario, however the cost of painting, repair etc. should account for a fairly small portion of the annual return. Vacancy will also decrease return but given that our rental market vacancy rate is historically low (currently below 2%), that too should not be a large concern. Keep in mind that this scenario purchases the property with Cash, therefore the owner have room to lower the rent to the lowest level on the market without needing to worry about cash flow and this will alleviate most of the vacancy concerns.

Once again, the question asked for reasonability of our condo market and i don't think anyone is saying that this is the most profitable investment product on the market

3% seems like a paltry return when compared to the risk of property depreciation, damage to unit, vacancy, problem tenants, etc.

 

[sentiant]

What is realistic in todays market is a 350k 500 sq. Ft. Lower floor unit in an upscale new building under occupancy w/ tenant paying 1500 + hydro.
new owner gets to subsidize unit costs and handle closing costs for the privledge of capital appreciation when its time to sell.
Any takers?
Lots of sellers......

 

[TorontoMike$$]

I am getting about $1550-1600 a month for one bedroom units with similar spec as ^ post. During occupancy phase these units are typically $300-$500 cash flow positive(depending on when you bought and what was paid) New owners can pocket the positive cash or use it to lower closing costs. Even after final closing at the current rates they generally cover the costs and provide a high single digit return when you factor in the principal repayment on the mortgage from my experience. Bonus if the unit is purchased for less than fair market value and typically rental rates go up slightly after final closing as amenities are usually in place and no more construction to deal with.

 

[UD2]

Agreed with above. Depending on how you leverage the capital, the returns can be very good (assuming you don't sale). I have seen units with break even cash flow but generates annual equity return of over 15%.

 

[treasureseeker]

to be more precise, the monthly property tax rate for a $350K property in Toronto will be around $230 and insurance is around $20.

$1550 a month rent, take away taxes, maintenance, insurance, and one month rent for agent fee will still leave you with a 3.07% return from cash flow if you purchased the condo with $350K cash. Add in a strikingly conservative 0.5% increase in property value per year, the annualized return for the investor is 3.57%.

3.57% is not something that'll make you rich, but it isn't unacceptable if you already are. To bring more prospective, stocks of real-estate investment trusts such as Riocan provides an annualized dividend of around 4% and very low growth in the value of the equity it self. So in this comparison investing $350,000 in a rental condo will generate a return that is more or less in-line with other real-estate segment investment products.

Also note that the scenario has a number of potential upsides.
1. property value increase have a high likelihood of exceeding 0.5% per year. Given the investment scenario is for 100% cash purchase of the property, every % increase in property value will result in proportional increase in return.
2. the monthly rent commanded by a $350K condominium is generally in the $1650 to $1800 range depending on the property. Every $100 increase in monthly rent represents $0.34% in annualized return.
3. the scenario assumes agent fee expenditure equaling one month rent to be incurred every year. This expense represents 0.44% in annualized return and may not be incurred if the tenant stays longer.

A more optimistic scenario of $1750 collected in monthly rent, with the tenant turn-over at once every two years, and an annual property value increase of 1.5% will net you a total return of 5.45% (3.95% cash flow return and 1.5% equity return).

So the above is why a $350K downtown condominium is a reasonable investment product.

Wow what a detailed answer. Your points are very insightful and helpful. Thank you.