 Digging for Condo Gold - Toronto Sun Jan 29, 2006 Digging for condo gold
The future looks good, but do the math before investing
By LINDA LEATHERDALE, BUSINESS EDITOR, TORONTO SUN
January 29, 2006
The view took my breath away.
Toronto's skyscape reflecting on the shimmering waters of Lake Ontario, with Bronte Harbour's trendy shops and newly appointed yacht club only a block away.
This stunning 15th-floor condominium cried out to me. Granite countertops, built-in wine chiller, stainless steel appliances, and a bathroom to die for -- with Jacuzzi, fancy fixtures and heated floors.
The investor who snapped up this two-bedroom fixer-upper last August for $159,900 spared no detail in his masterful renovation. Staging the furniture, complete with plasma TVs in the master bedroom and living room, made such a powerful presentation, a buyer would be tempted to ink the deal then and there.
But wait! What did Don Campbell, author of Real Estate Investing in Canada tell me? "Buy with your head, not your heart."
I remembered. I've got to make the numbers work if I want to be successful at real estate investing.
This baby was now selling for $224,900, a pretty sizable gain in just six months -- yet still a reasonable price, considering across the street you can't get into the towering waterfront buildings without paying at least $450,000.
But the key question was how much rent could I get for this two-bedroom beauty?
"It's all about positive cash flow," said Russell Westcott, general manager of Campbell's company, the Real Estate Investment Network.
In Campbell's book, on page 260, a property analyzer helps prospective investors know whether the property is an alligator that will keep eating up money, or whether it has potential.
In short, if what you can get in rent in a year divided by the purchase price equates to 9%-10%, then it's okay to proceed.
NEEDED $1,875 A MONTH
Now I had do some homework. When I crunched the numbers, I'd need to get $1,875 a month in rent. A quick comparison of rents for two-bedroom units in the neighbourhood showed I was on the high side. And besides, not far away, in suburban areas north of QEW, you could rent a whole three-bedroom home for almost the same price.
Sure, I could speculate that our record, hot real estate market would keep steaming ahead to push the price of this two-bedroom baby through the roof. And I could use the gains when I sold to offset losses in rent. But now I'm a fly-by-night speculator. In the end, I followed my head and walked away.
Some would say that's a good thing: Why would I want to invest in an overbaked condominium market that surely must, sooner or later, go bust?
But like Warren Buffet's strategy, it's all about finding gems to buy and hold, in good times and bad. And besides, according to the market analysts at Canada Mortgage and Housing Corp. (CMHC), the sky ain't falling, even though we had record condo starts in Toronto last year, with even more starts expected this year.
One of the big reasons for no bust is we don't have a speculator-infested condo market, like we did in the late 1980s, when buyers were flipping units before the ink dried on the deal. New rules have deterred such speculation.
Fact is, today only 19% of registered condo apartments are owned by investors -- compared to 30% back in 1995.
Who's buying are young people who can't afford the high cost of a detached home and empty nesters who are downsizing. They'll be more of them as baby boomers age.
"This market is driven by ownership. And with steady employment growth and low mortgage rates, we're still seeing price increases above inflation," said Jason Mercer, CMHC's senior market analyst for the GTA.
DEMAND FOR RENTALS UP
As for investors, here's encouraging news: The vacancy rate for apartment rental buildings is falling from a record high of 4.3% in 2004 (a result of low interest rates encouraging renters to buy homes) to 3.7% in 2005 and possibly 3.5% this year.
But the vacancy rate for condo units is even lower at 0.9%.
And that has led to a 1% increase in average rents for two-bedroom units, which now fetch $1,760 a month, up from an average of $1,735 in 2004, according to the latest Rental Market Report by the Toronto Real Estate Board.
Interestingly, a condo apartment fetches more rent than a condo townhome -- and, of course, rents vary from neighbourhood to neighbourhood.
But let's be real. A 1% gain is still below inflation. And that's why homework is important for the serious investor.
Bottom line is that for investing and tax reasons you want to make sure you've got positive cash flow.
Your costs include the cost of carrying your mortgage, condo fees, utilities costs (will the tenant pay them or you?) property taxes, repairs and maintenance.
You've also got to factor in a vacancy allowance, because no unit is occupied 100% of the time. In Toronto, factor in a vacancy rate of 3% to 6%.
Toronto real estate lawyer Alan Silverstein also cautions there's a difference between buying a new condo or a resale.
"If you're buying a brand new condo, you may not be able to rent it out until it is registered, which could mean several months of down time while you have possession but no title," he said. More advice:
- Before you buy, check out the status certificate of the condo corporation, plus the reserve fund. If it's an older building, will there be major maintenance costs, which could push condo fees higher?
- Know your obligations as a landlord. Go to the Ontario Rental Housing Tribunal (orht.gov.on.ca) for info.
- Do a thorough check on the tenant, including credit checks.
- Have a lease. You can ask for but not demand post-dated cheques. You can ask for first and last month's rent. Security deposits are banned.
- Hire an accountant. "Show positive cash flow from day one to keep the taxman off your back," said Silverstein.
Posted January 29, 2006 by Linda Leatherdale |
