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Cap Rates and Condos

I had a condo buyer email me recently and tell me they were looking to buy a resale condo with a 6-7% cap rate. This would be a somewhat rare but achievable cap rate if you were buying a multi-unit freehold property in the core of Toronto, however, for a condo, this kind of cap rate is unheard of. Cap rates for condos downtown would be something more like 3%.

Cap rate, or capitalization rate, is basically a measure of return on an investment property you would get if you bought the property with all cash (no debt/no mortgage). It is calculated by dividing the annual income a property generates AFTER expenses by the purchase price of the property. So if a property that costs $300,000 generates $2000/month after expenses, then the cap rate would be 8%.

What are cap rates like for Toronto condos? Take for example the listing that I have at 16 Yonge Street right now. The numbers break down like this

• Asking Price $329,900
• Current tenant pays $1575/month
• Expenses: Maintenance fee $327/month, taxes approximately $167/month, insurance approximately $20/month = $514/month

So if you do the math it works out to ($1575 – $514)*12 / $329,900 = 3.8% cap rate. This is actually a very good cap rate as the rent:price ratio for this unit is quite high compared to most downtown condos, and the maintenance fees and taxes are relatively low. To acheive a cap rate of 6%, the rent would have to be increased to about $2200/month if the expenses stayed the same. Finding a condo that you can buy for $329,900 that will rent out for $2200/month is basically impossible in Toronto.

So why are cap rates typically much lower for condos than for multi-unit properties (i.e. duplexes and triplexes in the core of Toronto)? One simple reason is that with condos, there is almost zero maintenance a landlord has to do. You can very realistically own a rental condo for 5-7 years and spend literally nothing on maintenance and repairs. Try doing that with a freehold property! Low cap rates is one trade off for the relative convenience and simplicity of condo ownership.

But the fundamental reason behind the low cap rates is that condo investment in Toronto is driven by an expectation that prices will increase (appreciation) versus a desire for cash-flow (income). Prices have kept appreciating over the last 15 years in Toronto and thus cap rates have pretty much always been quite low for condos. If prices start to decrease, or rents go up faster than prices, cap rates will start to rise.

Questions or comments about investing in resale condos? Please contact me.

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Sometimes The Best Deals are NOT Advertised

New condos are launching at a rate of about one per week right now in the downtown core. However, don’t be mistaken in thinking this means solid investment opportunities are coming at a rate of one per week! In fact, there is usually a negative correlation between the number of new condo launches and the number of quality investment opportunities available. The opportunities are actually quite rare right now in my opinion. There are only a handful of projects that I am comfortable in recommending to my buyers and investors.

As with any other product or service, the best deals in real estate are often unadvertised. If you see a billboard or glossy ad in a magazine proclaiming the “suite of the month” or “special offers on now”, chances are there is no deal to be had here. You won’t find the best deals on a billboard or in a glossy magazine or taking up a page in the Globe and Mail. As with any other product or service of any value, the best deals in real estate are often the unadvertised ones.

This past weekend, some of my investor clients were able to take advantage of such an opportunity at a A1 condo project downtown. I received nothing more than a good old fashioned phone call from one of the developer’s sales reps informing me that if the developer sold a certain number of units in a certain period of time they would get a better rate on their construction loan. The developer was motivated and thus, offered significant CASH discounts off the list prices of their remaining inventory. Not a dime was spent on marketing or advertising this deal. The only people who heard about it were a handful of Realtors like myself who were called directly. My clients are very happy and the deal is now done. Prices are back up to the list prices.

My reputation and track record as one of the top Realtors downtown for pre-construction means my clients get access to these exclusive, unadvertised deals from time to time. To get on my list for these types of deals in the future, simply contact me and I will be happy to include you on future opportunities.

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Quality Investments in Pre-Con Becoming an Endangered Species

Hype-driven marketing seems to be at an all time high in the pre-construction condo market. I am finding it harder and harder to find quality investment opportunities to recommend to my clients. This at a time when a new condo project is launching almost every week. Prices are soaring. Suite sizes are shrinking. Every agent and their mom is calling themselves a “VIP” agent. Something has got to give.

I am getting more and more calls from buyers who have felt pressured into signing contracts to buy pre-construction condos without really thinking through what they are doing. So far this week I talked to 2 people who were in their 10-day rescission period and they flat out told me they don’t trust their agent who they used to buy the condo and were unsure if it was a good investment. They attended one of these hype-driven “VIP” sales events (VIP has really become a meaningless term), everyone there told them it was a great investment and they would make a lot of money, and so they signed on the dotted line. [Side note: Often I find that the agents used in these scenarios know nothing about the pre-construction condo market (or worse, the condo market in general), and there is often a family connection - the agent is the buyer's uncle, friend's uncle, god parent etc. Hire a professional who you trust!]

I am not thrilled with the tactics some developers are using to sell their projects, but more importantly, it’s the pricing that is automatically precluding me from recommending several projects to my investor client base. Buying at $600+PSF when comparable resales are selling at less than $500PSF just doesn’t make sense. To be clear, I am not in the camp that believes it is only a good investment if pre-con prices are LOWER than equivalent resale – I just think the gap needs to be about $50-$75PSF in most cases to make sense from an investment perspective.

Questions or comments? Wondering what projects I am recommending to my clients for investment and which ones I am not? Please contact me.

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What is Your Money Doing for the Next 4 Years?

At the risk of sounding trite, do you work for your money, or does your money work for you? Is your money sitting around collecting dust in a savings account at 1% interest, or worse – going up and down like a yo-yo in the stock market? Have you been thinking and talking about buying an investment condo for years but never acted on it and keep watching the market pass you by? The time to get into the market is now.

Every week I get contacted by would-be first time investors, fed up with seeing their savings do nothing in the traditional methods of investing, and looking for guidance to get into the condos-as-investments game. Unfortunately, so many of these people who contact me get the information they need to make an informed buying decision but ultimately never pull the trigger and don’t buy anything. They are paralyzed to make a decision. The market continually passes them by and every year they look back and say, ‘Well, I guess I should have bought a unit at ‘ABC’ development, I would have made $$$ already’.

The fact is most people don’t ‘get’ real estate. They don’t understand the key dynamics that make owning and investing in property the greatest investment vehicle in the world (in my opinion). All they see is the risk and all they listen to are those who tell them that ‘there are too many condos, the market is going to crash!’ (Background reading: Losing Mentality vs. Investor’s Mentality).

If you money just sitting around doing nothing for you, it’s time to seriously consider putting your money into some property. A great way to get started in the property game is to buy a pre-construction condo. It’s a passive investment vehicle that over the last decade or so has made many, many people very wealthy in this city.

If you are considering purchasing an investment condo for the first time, if you are fed up with the lousy interest rates the banks are offering you, if the thought of playing the stock market has no appeal to you, maybe it’s time we sit down and have a chat about opportunities today in the Toronto condo market. Contact me today.

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Investor Mentality

In contrast to yesterday’s post, “Losing Mentality“, I wanted to present to you some observations about the people who are successful condo investors. Those who buy (and sometimes sell) multiple condos over years and understand that condos as a great way to accumulate long term wealth.

1. They are entrepreneurial. Either they run their own businesses, or they can at least think like a business person. They treat buying and selling condos as running a micro-business. Money in + time + effort = Profit
2. They are risk takers. Buying a piece of paper and hoping it turns into a highly profitable asset is RISKY. Either embrace the risk, or put your money in the bank at 1%.
3. They don’t follow the flow. Simply put, if your mom/friend/uncle/blog-comments-section tells you shouldn’t be investing in condos because ‘there are too many condos downtown’, you are listening to the wrong advice.
4. They are focused. They decide what they want before they go looking for it. They don’t consider every development and project that appears just because it is the ‘flavour of the week’. They have a set of criteria and they stick to it.
5. They have money. Let’s face it, most people don’t have the typical 15-20% deposit required to buy most pre-construction condos. Those that do and have invested it in condos in Toronto, have done very well. The rich are in fact getting richer.

Some exhibit these characteristics on their first purchase, others learn them in time. Most of these can be acquired and practice makes perfect, but at the end of the day, you either have the stomach for condo investing or you don’t. I’d love to hear your comments and thoughts. If you are a seasoned condo investor, or want to learn how to become one, let’s talk.

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Losing Mentality

Buying a pre-construction condo takes guts. It takes vision. It takes money. It’s not for everyone, but for those who understand the game and play it well, the rewards are huge. Those who are fearful, lack vision, and have no access to capital will continue to sit on the sidelines and wait. And wait…

Every month I meet people who are looking to buy their first investment unit on a pre-construction sale. Some of them end up buying a unit and in time will reap the rewards. But most get stuck and never actually buy anything. They are trapped in what I call a ‘Losing Mentality’ that prevents them from taking part in one of the most incredible investment vehicles ever.

These would-be buyers all suffer from a similar mindset/perspective that prohibits them from getting into the condo investment game:

1. They don’t think like an investor. Investors don’t worry about if a suite is facing the wrong direction, or if the neighbourhood is not one they would like to live in, or if the building only has 3 treadmills instead of 4. The condo is not for you to live in, it is a vehicle to accelerate the growth of your money!
2. They listen to bad advice. No offense to all the moms, uncles and internet trolls* out there reading this, but you don’t know anything about real estate, let alone the specific niche of pre-construction condo investment in downtown Toronto. Stop listening to people who have never bought a condo and start following those who own dozens of them.
3. They don’t know what they want. So many would-be investors I talk to can’t make up their mind – Do I want to buy new or resale? Am I buying an investment property or is this for me to live in? Up and coming area or established neighbourhood? If you don’t know what you are looking for, you’ll never find it.
4. They are risk-averse. Purchase agreements for new condos are downright scary (from the buyer’s perspective), just read one if you don’t believe me. The developers write them, so what else would you expect?! Developers are out to protect their own butts and in exchange they offer you the chance to make a ridiculous return on your investment. If you want safety and assurances that everything will be fine and your money is totally safe, put it in the bank at 1%.
5. They are looking for something that doesn’t exist. The proverbial 2 bedroom condo downtown, close to subway, with parking for $250K doesn’t exist. Get a grip on reality and stop dealing in fantasy. Understand the process and the capital investment involved. Understand where the market is today and where the market is going to be in 5, 10, 20 years.

Check back in tomorrow as I contrast this list with a list of common characteristics for what I call the “Investors Mentality”. Things that many of my most successful investor clients have in common. What do you think about this list? Leave a comment or contact me.

*Tongue-in-cheek representation of the types of people who tell you that buying a condo as investment is a bad idea. Many of my clients are actually moms and uncles, although I try not to associate myself with internet trolls!

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DNA3 Looks Like a Winner

DNA3 is just about ready for launch, but I have been granted VIP access to the project in advance of the wider openings later this month. If you are interested in getting a unit at this project, contact me right away for your best opportunity to buy.

Details on the project are now in. Standout suite features include:

• Built-in, integrated stainless steel European sized appliances including: fridge, range, microwave, range hood (very sexy)
• Engineered hardwood throughout including bedrooms and dens (say good bye to carpet forever!)
• All bedrooms have windows – no ‘buried’ bedrooms without windows in the building!
• Exposed concrete 9′ ceilings
• Balconies or terraces on all units

Exciting building features include:

• 6000 square feet of retail on the ground level including one very exciting anchor tenant (TBA)
• 3 outdoor roof-top terrace areas including a Las Vegas/South Beach inspired “Misting Station” (HOT!)
• Massive gym, multiple party rooms, yoga room, business centre, theatre room (very extensive amenities)

King West has arrived as one of the premier neighbourhoods downtown. DNA3 offers amazing value for the location and features/finishes of the building. Definitely a winner and TrueCondos.com approved investment opportunity. For details, please contact me.

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What Ever Happened to Cash Flow?

Investing in Toronto condos used to be a pretty straightforward proposition: buy a property with as little down as possible then rent it out with the income from the rent covering your mortgage, taxes, maintenance on the property etc. For much of 90s and the first half of the 2000s, this was the way it worked in Toronto and many investors took this approach. Sometime around late 2006 this all changed when property values continued to rise while rental rates began to stagnate and in some cases drop. Positive cash flow with 20-25% down disappeared.

When the market dipped in late 2008-early 2009, prices fell, interest rates fell, and rental rates stayed the same. It was a perfect storm whereby positive cash flow with 25% down reappeared on the Toronto scene, and a few savvy investors noticed this and began to buy once again. The market heated up in mid 2009 and has stayed hot ever since.  Prices rose, and so did interest rates. Today, it’s safe to say that buying a resale condo downtown for more than about $500 per square foot will result in a negative cash flow situation (assuming 25% down). Nobody likes negative cash flow!

The obvious question is how sustainable is a market like this where investors are buying condos by the thousands priced at $600-$800 per square foot that they know for a fact will not generate positive cash flow? So many investors are counting on their properties to appreciate so that they will make a profit. This could very well happen, but by definition this is speculation rather than investing.

I’d like to know what cash flow rates in the larger cities like New York or London are like. Any of my readers with experience in these markets, feel free to comment on how investors approach this issue in one of these cities that Toronto is being compared to more and more often these days.

Questions or comments? I always welcome my readers’ feedback!

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Buy to Sell in a Buyer’s Market

While the title of this post may sound confusing at first, the meaning is simple: whenever you buy a condo, make sure it is a unit that would be easy to sell again in the future – even in a strong buyer’s market. This is advice I always tell my clients, especially investor clients. May seem like common sense, but it is worth exploring a little further.

Besides a brief 6-month window between October 2008 through April 2009, the Toronto market has basically been a seller’s market for the better part of the last decade. Anything sells in a seller’s market, and hopefully when it comes time for you to sell you reap the benefits of a strong seller’s market, but what if you sell and the market is slow? What if there are 10 listings for every buyer, instead of the other way around? Make sure you buy smart and buy a condo that will be easy to sell and sell quickly even in a buyer’s market.

Some more tips to consider when thinking about selling in a buyer’s market:

1. Always buy a property that a wide range of buyers would be interested in.
2. Avoid one-of-a-kind units. Cookie cutter condos are not always a bad thing when it comes to investment!
3. Be wary of units with special features like terraces, multiple parking spots, customized kitchens etc. Not all buyers appreciate these features and therefore they will not be willing to pay extra for them.
4. When in doubt, buy the smaller of two units. Smaller=Cheaper=More potential buyers
5. Go as high as possible. The 25th floor will sell before the 2nd floor in a slow market.

In a hot market like we are in, it is easy to lose sight of the fundamentals of real estate investing. Buyer’s often ‘settle’ for a property that does not meet the above criteria just to get into the market. Don’t settle and always think about what if you had to sell during a buyer’s market.

Questions about buying investment condos in Toronto? Contact me directly or leave a comment here.

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Why No One is Buying Your Assignment

Around this time last year I predicted 2009 was going to be the year of the assignment. I was wrong. While assignments did begin to take a greater role in the overall Toronto condo market, they still have not gone ‘mainstream’. Quite frankly, this method of buying and selling real estate will probably never go mainstream, however, in 2010 it looks like assignments will be seen as a “Third Way” of buying condos in Toronto (the traditional two ways being pre-sale or resale).

People contact me just about every day and ask me about assignments - I want to buy an assignment! I want to sell my condo by assignment! The truth is, most people have no idea what is involved when buying and selling an assignment. When the Average Joe learns just a fraction of what there is to know about assignments, 95% of the time Average Joe ends up returning to the comparatively simple world of pre-sales and resales.

So for all the sellers of assignments, as well as those who may be thinking about buying a condo by assignment, I’d like to introduce to the the top-5 reasons why many assignment listings never sell:

1. No Market Exposure. You are not allowed to advertise assignments on the MLS. Many assignment listings don’t sell because no one knows about them!
2. Lawyers. Most lawyers hate assignment deals. They often look for reasons to kill the deal – and with assignments, you don’t have to look to hard.
3. Price. This is probably the #1 reason why many assignment listings don’t sell. You can’t price an assignment like a resale property. Investors buy assignments and investors don’t pay current market value for property!
4. Closing Day Too Far Away. Buying a pre-sale condo then trying to flip it a month later is a fool’s game. The unit must be at or very close to occupancy so that market value can be accurately predicted and the investor can safely determine if they are getting a deal.
5. Closing Costs. Did you get your closing costs capped by the developer when you first bought your condo? If not, there is no way to tell exactly what they might be. Buyers of assignments need some degree of certainty as to what closing costs they will incur, otherwise they will move on.

Bottom line, assignments are not for everyone, but for the right buyer and seller, working with a good Realtor and co-operative lawyers, they can be a fantastic way to transact in real estate. Questions about assignments? Contact me.

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