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Baby, we got a bubble!?

The thing is, you’re advising people (their own decision granted, you are just trying to maximize their return on a chosen investment) to buy a condo to rent out that is generating somewhere (if you’re lucky) 3-4% free cash flow. That cashflow is then taxable as investment income. The rest of the hoped for return is not income return but expected capital returns through price appreciation.

To get that return you are also shouldering financing risk and interest rate risk, cap-ex risk from poorly made condos. You have lease-up risk which with only one asset of maybe a handful is pretty lumpy. Most of all though you have liquidity risk. Should you ned to get out of the investment it takes at least 90 days to unwind if you’re lucky (and assuming an appreciating market). So with house prices going up by what, maybe in this market 4%/annum you’re getting somewhere between 7-8% total return of which 4% is taxable as regular investment income and the other 4% is differed until asset disposition.

OR

You buy units in a multi-family apartment REIT. You have the same exposure to the rental apartment market. You have little to no liquidity risk. Lease-up risk is smoothed by the thousands of rental units under management. You do carry the same interest rate risk though probably can only at best match the CMHC insure financing that the REIT receives. You also don’t have the other costs involved transacting the deal. You pay between $5 flat to maybe $0.025/unit in fees to your broker (depending on order size) as opposed to 5% for broker plus lawyer plus appraisal, mortgage broker etc…

For that you get 3% (on the low end for Boardwalk or InterRent) to 8% (for True North Apartment REIT) in income return through their dividend yield (which is a dividend so taxed on a more favourable basis) and capital appreciation (which for the last 3 months has averaged more than 5% for the multi-family market). Again with no liquidity risk, you can sell in minutes.

That’s a higher return with more of it in a tax enviable position. No liquidity risk and the same exposure to the rental market.

Why am I buying a condo again?
 
Mithras -- thank you, that was a very clear comparison. Valuable insight for those who will take it.

I've read a few places that a good income property investment "rule of thumb" is the need for about 1% of the purchase price per month in gross rents.
 
the numbers do not work based on your recommendation:

ie. 500 sq ft 1 bedroom unit

purchase price = $300,000 (based on your suggested $600 psf * 500 sq ft)

mortgage with 25% down payment = $225,000 = $300,000 - 75,000

monthly mortgage payment @ 3% / 5-year term / 25-year amortization = $1,065 /m
http://calculators.mackenzieinvestments.com/mackenzie/jsp/MortgLoanAmortScheduler/mortgloanscheduler.jsp?$dir=self

maintenance fees = $300 / m @ $.60 psf * 500 sq ft
property taxes = $200 / m
property insurance = $100 /m

rental income = $1,500 / m = 500 sq ft * $3 psf
===================================
NET INCOME = - $165 / m = - $1,980 / year
^ ^ ^
that's with sizable 25% down payment and doesn't include:
* the costs for property manager that may be used (10% gross rents = $1,800 + HST),
* lost income from vacancy/turnover (15 days to 1 month isn't abnormal = $750 to $1,500),
* 1 month rent paid to realtor to find tenant ($1,500 + HST),
* costs to clean and fix minor repairs/paint unit for next tenant = $2,000
______________________________________________________________
- $9,000 / year



the numbers would be revenue neutral at $500 psf with $3 psf/m rental income but still NOT provide a contingency fund for approximate $7,000 in annual expense for property manager, lost income from vacancy/turnover, cost paid to realtor to find tenant, costs to clean and fix minor repairs/paint unit for next tenant.

purchase price = $250,000 (based on your suggested $500 psf * 500 sq ft)

mortgage with 25% down payment = $187,500 = $250,000 - 62,500

monthly mortgage payment @ 3% / 5-year term / 25-year amortization = $887/m
http://calculators.mackenzieinvestments.com/mackenzie/jsp/MortgLoanAmortScheduler/mortgloanscheduler.jsp?$dir=self

maintenance fees = $300 / m @ $.60 psf * 500 sq ft
property taxes = $200 / m
property insurance = $100 /m

rental income = $1,500 / m = 500 sq ft * $3 psf
_________________________________________________
NET INCOME = $13 / m = $156 / year



only at $350 psf with 25% down payment at $3 psf/m rental income would you get $200-300 cash flow monthly:

purchase price = $175,000 (based on your suggested $350 psf * 500 sq ft)

mortgage with 25% down payment = $131,250= $175,000 - 43,750

monthly mortgage payment @ 3% / 5-year term / 25-year amortization = $621/m
http://calculators.mackenzieinvestments.com/mackenzie/jsp/MortgLoanAmortScheduler/mortgloanscheduler.jsp?$dir=self

maintenance fees = $300 / m @ $.60 psf * 500 sq ft
property taxes = $200 / m
property insurance = $100 /m

rental income = $1,500 / m = 500 sq ft * $3 psf
_________________________________________________
NET INCOME = $279 / m = $3,348 / year



drewp said:
Plenty of affordable bachelors around the Fort York neighbourhood that give you $200-$300 cash flow every month with a 20-25% down payment. I usually tell my clients to look at a unit that can be purchased for $600 a square foot or less, that can rent for at least $3 a square foot. This usually gets you cash flow.....again certain variables will affect that result, specifically maintenance fees.

What i am saying is, these are only guidelines to look for when purchasing a condo investment. Again, there are many variables to look at, but this is the blueprint that I use to help people understand the numbers. I have had many clients who might not be seasoned investors find this approach helpful.

The numbers work in certain locations. Buying a 600 square foot condo would not be advisable. Looking for something 500 square feet or less is the best option, because the rental rate per square foot would be better than a larger condo.
Click to expand...
 
Thank you very much for your forensic analysis. People, please, don't take advice from any real estate agent, developer, or people that work for them claiming to just "have an interest in real estate and love cool architecture and love to talk about it".

They all care about ONE thing: to make money. And that's exactly what they are doing as long as they push projects that make them rich and you poor.

And trust us, and others like those clear-headed individuals above, who will tell you that there is zero money to be made. When Agents get stumped, they just say that "depending on your particular situation," or "the numbers will work under these circumstances" or other BS just to reel you in. Don't trust them or you will regret it.

Do the REAL numbers and don't rely on unproven promises or wishful thinking. A true sales person will twist around numbers to make you see $$$$$ to invest your hard-earned money. They won't lose any money. Only you will. And forget the poor me, "developers take on a lot of risk" victim line.

At the end of the day, investors are relying on price appreciation. Once everyone takes their cut, there is nothing left for your bottom line. Don't agree? Then good luck with your financial future.
 
Nice post CDR. Appreciate you breaking down the actual numbers for simpletons like me. :D

As I said before, I just don't get how people could invest in condos in Toronto today. I understand the decision to buy one to live in, but I cannot for the life of me understand how investors think they are going to make money.
 
DearSummer said:
Nice post CDR. Appreciate you breaking down the actual numbers for simpletons like me. :D

As I said before, I just don't get how people could invest in condos in Toronto today. I understand the decision to buy one to live in, but I cannot for the life of me understand how investors think they are going to make money.
Click to expand...

It only makes sense if you still believe that condos will appreciate 10% each year forever. People who are investing in condos feel this way. I haven't invested in a condo in 5 years. The only way I would buy another condo is to live in and believe me, I would buy a house if I could. Condos (especially pre construction) are not good investments at all IMO. Way too many costs associated with a product that is often times mediocre.

I think we'll see things flatten out in a couple years.
 
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The mortgage paid needs to be split into principal repayment and interest costs.
Aprroximately $500 is going into principal repayment for below scenario.
Thus even if you make 0 dollars after paying all your bills, your principal is being paid off $500 per month.

purchase price = $300,000 (based on your suggested $600 psf * 500 sq ft)

mortgage with 25% down payment = $225,000 = $300,000 - 75,000

monthly mortgage payment @ 3% / 5-year term / 25-year amortization = $1,065 /m

Out of 1,065/m the interest cost per month is 562.5/m
.03 X $225,000 = $6750 per year = 562.5 per month
Thw rest $1065 - 562.5 = $502.5 is going in paying off your mortgage.
 
As an investor myself, I'd like to think that others have also re-aligned their purchasing strategies as well, specifically, to move away from acquiring any new Toronto residential in the last 4-5 years. I don't even think this is a debate.

Any real estate investor I know of is only acquiring Ontario residential outside of the GTA. I'm talking about 519, 613 and 705. Can you still make money in the 416 on residential buying now? Yes, but primarily from appreciation, as noted numerous times already. Cash flow positive is largely a pipe dream unless you've invested a massive down payment. Anyone can still make money on it but the bottom line is the risk to reward consideration. Just because you make money doesn't mean it was the best investment.
 
James said:
As an investor myself, I'd like to think that others have also re-aligned their purchasing strategies as well, specifically, to move away from acquiring any new Toronto residential in the last 4-5 years. I don't even think this is a debate.

Any real estate investor I know of is only acquiring Ontario residential outside of the GTA. I'm talking about 519, 613 and 705. Can you still make money in the 416 on residential buying now? Yes, but primarily from appreciation, as noted numerous times already. Cash flow positive is largely a pipe dream unless you've invested a massive down payment. Anyone can still make money on it but the bottom line is the risk to reward consideration. Just because you make money doesn't mean it was the best investment.
Click to expand...

519 and 705 takes you to Ontario's rustbelt. Windsor, Sarnia, St. Thomas, London, KW, and to the north. Those spots are absolutely land mind regions for long term real estate investment due to the ineptitude of our provincial finances and the decaying industries in this small cities and towns. I wouldn't stake anything on those areas. Whereas you can swing down 10% or 15% in the GTA, those markets get completely obliterated and hollowed out. No bids, no sales, no hope.

It's a huge mistake to reach so far just for yield. You will get burned.
 
ahhh, more creative math I see.
the principal repayment is still an expense and part of the cash flow calculation. to remove it is being less than truthful.

the principal repayment may be categorized differently for your tax return, but that's not what is being discussed here.


http://realestate.about.com/od/knowthemath/qt/rental_profits.htm



Sher said:
The mortgage paid needs to be split into principal repayment and interest costs.
Aprroximately $500 is going into principal repayment for below scenario.
Thus even if you make 0 dollars after paying all your bills, your principal is being paid off $500 per month.

purchase price = $300,000 (based on your suggested $600 psf * 500 sq ft)

mortgage with 25% down payment = $225,000 = $300,000 - 75,000

monthly mortgage payment @ 3% / 5-year term / 25-year amortization = $1,065 /m

Out of 1,065/m the interest cost per month is 562.5/m
.03 X $225,000 = $6750 per year = 562.5 per month
Thw rest $1065 - 562.5 = $502.5 is going in paying off your mortgage.
Click to expand...
 
I think it depends on the measure being emphasized. If it is a cash-on-cash metric like CDR's links example, then I think he is right, but if it is another measure like Cap Rate, principal repayment would matter.

It might be better to use "interest only" numbers for these examples.
 
ponyboy said:
I think it depends on the measure being emphasized. If it is a cash-on-cash metric like CDR's links example, then I think he is right, but if it is another measure like Cap Rate, principal repayment would matter.

It might be better to use "interest only" numbers for these examples.
Click to expand...

Indeed it is more correct to use interest only financing for profitability purposes, but it is not fun to have an "investment" that you is cash flow negative and requires feeding every month.

A truly good RE investment would be at least cash flow neutral with some sort of principal amortization, such that over time you end up with equity while not having to suffer through negative cash flow. From what I gather such opportunities are currently rare to non-existent in Toronto...
 
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