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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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Time to Give Resale Another Look?

With the pre-construction condo market setting all kinds of sales records this year, and prices for quality product averaging well over $650 per square foot and higher downtown, I’m encouraging my investor clients to once again consider looking at resale properties.

Top-notch resale properties in excellent locations can be had for $600 per square foot or less. Interest rates are still at historical lows and all current signs point to them staying there probably for years to come.

For example, I just listed a 1 bedroom unit at 16 Yonge street with parking and locker on the 24th floor for $329,900. This unit already has a tenant in there and is ready to go for an investor! At this price, and given the rent you can collect on it, this property will actually be cash-flow positive with only 20% down! Try finding something like that in pre-construction these days!

If you are an investor and you’d like to learn more about the resale market, please contact me.

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It’s Christmas Time For Resale Buyers

Resale buyers, now is the time to get out there and shop for bargains. Historically, there is no better time to be a buyer than in December (and January to a lesser extent). This is when the market activity is usually at its lowest point of the year, and for sellers who missed out on the busy fall market, the clock continues to tick.

Many of the properties that are on the market in December were listed back in the height of the fall market – October, and some go back to September. These sellers are often just waiting for an offer, any offer, and often properties sell for much less in December than they would have in October, or than they will in February.

Every year I preach this message to all my resale buyers, however, most buyers are just too busy this month to think about real estate. December is a month full of Holiday/Christmas parties and social gatherings, and most people just go into ‘survival’ mode, waiting for the month to be over so they can return to regular life. But for those who do understand the opportunity, and are ready to ‘hit the streets’ and scour the MLS for properties, they can save thousands.

Ready to go bargain shopping? Contact me to start your condo search today.

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Pricing Starting to Favour Pre-Construction

Once upon a time in Toronto real estate, there was a rule  that investors followed religiously – you only buy a pre-construction condo if the price is lower than that of a comparable existing resale condo. If the price wasn’t lower than existing resale condos of similar quality in the immediate area, then it just didn’t make sense to buy. After all, why take on the risk of buying ‘from plans’ when you don’t know how long it will actually take to be delivered, what the final build quality will be like, and what additional surprise costs you may incur along the way.

When market really started to get hot sometime in mid-2007, and pre-construction condos became the thing everyone and their mom were investing in, this long-held rule was abandoned. Prices of pre-construction started to reach heights never seen in the resale market. $600 Per Square Foot was suddenly a normal rate for pre-builds, whereas resale prices were still hovering around $425 PSF.

Over the last six months, there has been a seismic shift in the resale market. Prices have escalated at about 2% per month since June 1. If you bought a condo on May 1st of this year anywhere downtown, it likely has appreciated about 12% in value. Congrats.

Prices have gone up so much and so quickly in the resale market that the value is now, incredibly, starting to once again favour pre-construction.  Resale prices in several of the ‘prime’ downtown buildings like College Park, The Hudson, The Met, 18 Yorkville, Mozo, are now routinely hitting the $550-$575 PSF range. One upper floor 1+den with parking unit at College Park recently sold for $660 PSF! With several pre-construction projects across the downtown still selling between $500-$550 PSF, it doesn’t take a genius to figure out where the best value for your investment dollar is and where it will be in the months ahead.

If you are interested in taking advantage of some hidden gems in the pre-construction market downtown, let’s talk.

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Condo Market About to Explode

If you have been reading this blog and following the Toronto condo market for any length of time you know that sales are up, prices are up and generally everyone is feeling and acting very bullish on the market right now. Traditionally, this time of year is when the market starts to slow down and go into hibernation for the winter. I don’t see that happening anytime soon. If anything, the market is actually gaining momentum going into the winter months.

Some quick thoughts on the resale market:

• Inventory levels are still dramatically lower than any other time in the last several years
• Sales are up dramatically over this time last year, but remember that this time last year was when the market began to tank. Still, sales are at all time highs
• Buyers are falling into the trap of over-paying for condos because there is nothing else to choose from on the market when they are buying. Be patient! Keep your head on straight in multiple offer scenarios.
• New pricing precedents are being set in buildings all over downtown as a result of this inventory shortage and buyer behaviour.

Some quick thoughts on the new condo market:

• Over the next 6 months I expect to see at least half a dozen major new condo launches – X2, River City (West Don Lands Phase 1), DNA3, Number One Bloor, ICE 2 (already underway), U Condos Tower 2 (already underway), and more!
• Line ups and camping out for weeks will once again become commonplace as buyers rush in to invest in this next wave of development in Toronto
• Buyers need to keep their heads on and compare existing projects’ remaining inventory with these ‘new’, ‘flavour-of-the-month’ condo projects. Just because it’s new, doesn’t make it better than the building next door that is 90% sold out. BUY VALUE!

Some of you might write this off as more drivel from a real estate agent / blogger-hack who is just doing his part to artificially inflate the market, but my loyal readers know that I tell it like it is. Questions? Thoughts? Leave a comment or contact me direct.

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Supply and Demand

We are in the middle of a mini-bull market in the resale property market downtown. When TREB released their mid-month statistics last week, many people were surprised that they showed for the first time in a year that prices and sales were actually higher for the city of Toronto than they were a year before. 

Realtors all over the city have known for weeks that a significant change in the market had taken place. After months of growing inventory and stagnant demand, suddenly buyers were everywhere, and now that the dust is starting to settle, there’s no inventory left!

If you are thinking of selling, please do! We need the inventory. I’ve got several clients who are just waiting for the right property to come up. They are ready to buy now, but there is a major shortage of (good) inventory right now. As a result, just about every property that comes up that is priced well and shows well has been receiving multiple offers and bidding wars.

Looking closer at just downtown condos:

• In C01 (downtown west), April saw 290 sales versus 271 in April 2008. Average prices are $329K versus $346K last year. So sales are up 7% but prices are still down about 5% for April. 
• In C08 (downtown east), April sales were 125 versus 84 in ’08. Average prices were $319K versus $355K last year. That translates into a 48% increase in sales and a 10% drop in prices.

The trend that is developing means that I expect sale prices for the month of May (when they come out in a couple weeks) to be close to equal with that of 2008 prices and the number of sales will probably still be about 5-10% over last years numbers.

Is this just a spring boost? Or will this trend continue through the summer and fall? More thoughts on this in a couple weeks once I see the May numbers.

Questions? Comments? You know what to do.

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Toronto Resale Market Slows; New Developments to Follow?

Interesting article in today’s Globe and Mail about more anecdotal and factual evidence that the Toronto resale market is slowing down.

Agents are starting to see conditional offers more and more, negotiations are actually taking place, and sellers who price their property too high are getting a rude wake-up call to the new realities of the marketplace.

Gone are the heady days of 2007 when a seller could simply list their property at seemingly any price and they would usually be rewarded with an offer.

So what about the market for new condos? What is the market like today and what will it look like heading into the final quarter of 2008 and into 2009? I spend most of my time helping buyers enter into the pre-construction condo market in Toronto.

A new report from Urbanation, a research firm run by the folks behind Market Vision-a brokerage specializing and new developments-seems to suggest that new condos will be following the trend currently happening in the resale market.

“We’re expecting a slowdown in 2009,” said Jane Renwick, editor and vice-president of Urbanation, a condominium market research company.

“So we would say that we were at 22,000 [condo] sales at the end of 2007. We’re predicting 16,000 sales to round out this year. And we’re expecting sales to dip beyond that in 2009.”

Urbanation released a report yesterday about the Toronto condo market’s second quarter of 2008.

Following record condo sales in 2007, she said, the market is now back to 2005 and 2006 levels.

Anecdotal evidence, evidence on the ground from my own experiences and the experiences of my colleagues who also specialize in new condo developments, suggests that the market is currently still hot. People are still lining up for condos (overnight in many cases), and prices are still rising. However, there is a sentiment that slow times are ahead and smart buyers are proceeding with caution, not just jumping into any development that comes along. If you are looking to flip a condo and make a quick profit overnight, it is probably not the best time to buy.

If you ever have any questions about new condos or Toronto Real Estate, please give me a call or send me an email.

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