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What Is the Best Type of Condo to Buy for Investment?

What is the best type of condo to buy for investment? 2

Congrats – you finally decided to invest in a new condo! Now you’re probably wondering, what is the best type of unit to buy and what is the best type of building to buy into? In today’s episode Andrew la Fleur goes in depth on this important subject.

Click Here for Episode Transcript

Andrew la Fleur: Welcome back to the True Condos Podcast, once again thank you for listening, thank you for your support for this podcast. In today’s episode we’re going to answer a common question and look at in more detail a common question that I often get asked by first time investor’s. That is, after you’ve made that decision to purchase a condo, to make that investment into a condo the next question often is what type of condo should you buy and what type of building should you buy in? Where are you going to find the best investment? I want to look at that question in more detail today. It’s certainly a topic that I’ve written about and talked about quite a bit in the past, but it’s definitely something that’s worth coming back to again and again as a fundamental point that you need to understand as condo investors is how do we need what to buy and what makes a good investment and what doesn’t. What are some of the things to certainly avoid when you’re purchasing condos for investments?

 

When it comes to what type of unit and what type of building to buy in I want to look at a few different aspects here and address a few different sort of sub questions within it. The first is, size. What is the right size of condo that you should be buying? Second is building type. What is the right building type that you should be buying into? Third, what are the different types of units you should be looking at if you’re buying to flip versus buying to rent?

 

Speaker 2: Welcome to the True Condos podcast with Andrew la Fleur, the place to get the truth on the Toronto condo market and condo investing in Toronto.

 

Andrew la Fleur: Well welcome back to the show. Today’s episode as I said in the intro we’re going to be talking about a very common question that a lot of new condo investors have, something that we talked about in the podcast and I’ve written about a lot over the years but it’s definitely something fundamental that we need to understand as condominium investors is what is the right type of unit to buy for investment? What is the right building type to buy in for investment? We’re going to look at that question in more detail here today on the podcast.

 

I want to tackle this question sort of from 3 different angles or look at 3 different questions, sub-questions under that question. The first one is size. I want to look at what is the best size of unit to buy? The second thing is building type. What is the right best building type that we should be buying in for investment? The third part is what is the right unit you should be buying if you’re buying to flip versus if you’re buying to rent? We’re going to look at those 3 questions today on the podcast.

 

Jump right into the first one, what is the right size condo you should be looking at to buy? A lot of people come to me say Andrew, I want to get a condo for investment, my uncle or something told me that a 2 bedrooms are the way to go, I should get a 2 bedroom. My friend says that 1 bedroom’s are the best for investment or they’re the easiest to rent out or the easiest to resell. You know what, studios, I hear that studios are fantastic and they’re great price and I think I would be buying a studio. My answer to this question is always the same, that is the best, just in a general sense, the best unit that you should be buying for investment is not a particular type of unit but it’s the smallest unit of a given type within a building.  The smallest unit within a given type, within a given building is what you should be purchasing for investment, or you could say that is what generally will make the best investment unit. What do I mean by that? What I mean is if you have any given building when you’re buying pre-construction number of different floor plans, you have several 1 bedrooms, different 1 bedrooms, several 1 bedroom and den, several 2 bedroom, several studios and so on.

 

Now the units that are going to make for the best investment properties, the units that are going to perform the best for you are generally in 99% of cases are going to be the smallest unit of a given type. You want to get the smallest studio or the smallest 1 bedroom or the smallest 1 bedroom plus den or the smallest 2 bedroom and so on. Why is that? Well, the smallest units of a given type generally have the lowest price points and they are also the smallest in size by definition. When you have the lowest price point and you have the smallest unit your carrying costs are going to be the lowest of any given unit type. That means, on a cash flowing basis you’re going to perform better than larger units.

 

Let me give you an example.  If you have a building with let’s say 2 different 1 bedroom units, one 1 bedroom unit is 500 square feet and the other 1 bedroom unit is 600 square feet. Now, they’re both 1 bedroom units, they both have 1 bed, 1 bathroom, 1 kitchen, 1 living area, 1 balcony, 1 front door. Functionally they operate the same, but price wise the 600 square foot unit is going to be significantly more in price than the 500 square foot unit because it’s obviously a bigger unit, developers are generally pricing on a per square foot basis so if you’re getting a lot more square footage you’re paying a much higher price.

 

On the rental basis when you go to rent out that unit, what are you going to advertise it as? You’re going to advertise them both as a 1 bedroom, 1 bath unit. Right? On the rental basis what we find is that units rent on a bedroom basis, they don’t rent on a per square foot basis to some degree. Not nearly as much as they do on a bedroom basis. In the eyes of the tenant, what is it? I need a 1 bedroom or I need a 1 bedroom and a den or I need a 2 bedroom or I need a studio. That’s what I’m thinking first and foremost and they’re thinking I need it within a certain budget point. They’re shopping based on type and they’re shopping based on budget.

 

Several points down the line is for the tenant is the size of the unit as a consideration. Now of course everybody likes to have more space, it’s nice to have but the primary thing that the tenant is thinking is what the number of rooms in the unit and what is the price?  When you have a smaller unit, when you’ve bought the 500 square foot unit instead of the 600 square foot unit you’ve paid significantly less, your maintenance fees are significantly less so your carrying costs every month are significantly less. But they’re going to rent out for very close to if not the same price on a monthly basis because they’re both going to be seen in the eyes of the tenants as 1 bedroom units, functionally they do the same thing. There’s not going to be much difference if any in the rental price but there is going to be a big difference in terms of the purchase price and the carrying cost price.

 

That means you’re going to get the best cash flow on the smaller unit than on the bigger unit. Bigger unit might be great if you want to live in it yourself, if you like to have the space it’s a great thing to have when you’re buying for yourself. But when you’re buying for investment again, this is something we come back to again and again is you want to think like an investor not like somebody’s who’s buying for themselves, who’s thinking about a million different things. You’re thinking much more pragmatically, much more analytically and you’re not thinking about what the color the counter-tops are or whether the hallway’s facing this way or that way or the texture of the carpet or whatever it might be. You’re just thinking, what is this unit costing me and what is it giving me? Input and output, what revenues this asset going to produce for me versus something else?

 

That is what you want to be looking at is getting into the smallest unit of a given kind. Another reason for that, another reason why this the rule of thumb is a good rule to follow always is that in the resale market, similarly to the rental market, not to the same degree but similarly, the units tend to sell on a bedroom basis more so than on a per square foot basis. If you have a smaller unit of a given type what ends up happening is you’ve paid a lot less, the average price of let’s say a building has a mixture of 500 and 600 square foot 1 bedroom units, over time the price of the larger 1 bedroom units will in effect pull up the pricing of the smaller units. You will, if you’re in a smaller unit, a cheaper unit, you will benefit by effect the average price of the building will pull up, will tend to pull up the price of your unit more than the larger unit. The smaller you are the more you generally tend to feel that upward pull of the average prices in a given building. That’s another reason why it’s generally always best to buy the smallest unit of a given type.

 

Now, that is my rule of thumb that I always provide to every investor as the main thing to consider but there’s another thing you also need to consider a caveat on this whole thing and that is, you also need to factor in and consider when you’re picking a unit is consider the specific unit’s supply and demand equation within a given building and within a given area. For example, if you’re buying in a building that has 600 units and 400 of those units are studios, it’s probably not a good idea to buy a studio in that building. You’re going to have massive amount of competition for rentals and for resales in the future. Now, on the other hand if you’re in a building with 600 units and only 50 of those units are 2 bedrooms, for example, then that’s probably a good building to buy a 2 bedroom in. Just basic supply and demand of course and we can all understand that.

 

Now most buildings have a fairly even distribution of unit types but that is something that you always want to consider. I know there’s 1 building, very popular building that came up couple years back at Yonge & Bloor and it was around 600 units or so and I just remember noticing that out of 600 units it had something like 200 units were all under 400 square feet, out of 600 units. Now that is a massive number of small studio or very junior 1 bedroom units to have in 1 particular building so I would caution my investors in that building to be aware of that and probably want to look at getting into a larger unit as opposed to a building that has essentially 4 different stacks with 50 in each stack all different variations of a studio under 400 square feet. That’s not a great thing to be in. On the other hand if you have a building with 600 units and there’s like 10 studios in that building that would be a great building to buy a studio in because you’re never going to have much competition when you go to rent it out or sell it in the future.

 

Of course, the other thing other than specific unit supply and demand in a building and also that applies to an area too so if you’re buying in a building and there’s 6 other buildings right next to you and they have an overabundance of 1 bedrooms or 2 bedrooms or whatever it might be, then you probably want to again avoid that unit in the building you’re getting into. Not just in your specific building but in the surrounding buildings in the area you want to consider the supply and demand forces but the other half of this caveat is you want to look at other outside forces I call them. General market conditions like for example, right now downtown we know in Toronto we know that there is a shortage of 3 bedroom units, of larger units particularly over 800, 900 square feet.

 

There’s a growing growing demand for those type of units because essentially because … Well 2 things, one is they’ve been building less and less of them in the newer buildings over the past few years but also because the prices of low rise housing has gotten so crazy and out of control but the average house in Toronto now well over a million dollars that families, young families, young couples that normally would be purchasing houses, 5, 6, 7 years ago are now completely priced out of that market. Now more and more people are turning to condominiums and they’re looking at having kids and raising families in condominiums so the 3 bedroom units right now are a great unit type to get into right now.

 

That is again, you also want to consider outside forces and what’s just happening in the market in a general sense as you’re picking the particular unit size that you want to purchase. But if you go by the rule of thumb of buying the smallest unit of a given type and you’re always going to do well with that and your units are always going to perform for you on a rental and on a resale basis.

 

Moving on to the second part of this equation of what’s the right type of unit to buy, I want to look at building types. Another common question is Andrew should I get into a … Well I guess the most common thing people say, I want to buy a condo, I want to be in a small building so that there’s not a lot of amenities, very basic building so the maintenance fees will be low. What do you got for me Andrew? That’s something I hear a lot from buyers but that is a bit of a red haring, a bit of a myth I would say this myth of the low maintenance building. There aren’t really any, or very very few so called low maintenance fees building. It all tends to wash out in the end and all buildings tend to be around the same level over time. What I mean but that is, in the market what tends to happen is bigger buildings tend to have more units and they more amenities. Smaller buildings have less units and less amenities.

 

The bigger buildings with more units they can spread the costs over those units. The smaller buildings they have fewer units so they don’t have as many units to spread the costs over so they can’t afford to purchase the unit to have these kind of amenities in the building. But in the end it’s whether you’re a small building with no amenities or a big building with a lot of amenities maintenance fees tend to be about the same. The long term average for the city of Toronto for all condominiums average maintenance fee just to keep this number in mind I always tell people is about 60 cents per square foot. That is just an average that you’re going to see across the board for all condominiums.

 

That will be the first thing, is beware of the myth of the low maintenance fee building and you sort of get what you pay for. If you don’t have any amenities in the building it’s probably because you are a small building and in most cases it’s better to be in a bigger building. You might as well have the amenities if you’re in a condo I always say, you might as well have some good amenities if you’re in a condo. Because the maintenance fees are really going to be about the same, around that 60 cents per square foot mark as an average whether you’ve got the amenities or not. Because if you don’t have them it probably just means you’re in a small building. If you do have them it means you’re in a bigger building with more units.

 

The number 1 predictive factor for what type of building you should get into is really the builder and that is who is building the building. When you’re buying pre-construction in particular that is the number 1 thing that you can sort of use as a predictor moving forward of is this going to be a good building to buy into? Ultimately there is some risk to that when you’re buying pre-construction you really don’t know how a building’s going to turn out exactly. But if you look at the builder’s track record and the builder’s history that’s the number 1 way to sort of predict moving forward for years down the road when the building is finished and then a few years after that when it’s an established building, what kind of building is this going to be? Well just look at the builder and their previous history and what those buildings are like, what their reputations are, what the maintenance fees are like. That is really the best piece of advice that I can give anyone is really look at the builder closely before you purchase.

 

Now unfortunately sometimes you are purchasing from first time builder and you don’t have that predictability and track record to go on. That again is just part of the risk and part of the game of buying pre-construction is you might encounter cases like that. If you’re somebody who needs all the certainty in the world then just buy from a builder who has a long track record. If you’re okay with undertaking some risk then understand that that may be the case when you’re purchasing from a builder who has not built condos before.

 

We’ve covered a couple of points so far. To recap we’ve covered what size of unit is the best to buy, we’ve talked about the building type to buy into and the fact that it’s a bit of a myth to look at smaller buildings versus bigger buildings and thinking you’re going to get lower maintenance fees. My advice would be generally buy in a bigger building because your maintenance fees are going to be about the same and you’re going to get much more amenities which is something that tenants will really love to have is amenities in a condo.

 

Now, we’re coming to the third point. The third point I want to talk about is again as I said in the beginning is you want to look at what type of unit should you be buying if you’re looking to flip versus if you’re looking to buy to rent.  Well, my answer to that might surprise you but my advice would be don’t buy to flip. If you’re looking to buy a condo to flip it, my advice would be don’t. You’re thinking about it the wrong way. Always buy with the mentality of buying to rent, even if you’re not going to actually do it or if plans change or this and that of course things happen in life. If you’d always buy with the mentality of buying to rent. You always want to buy something that no matter what it will give you positive cash flow, it will give you a high desirability from a rental point of view for many years to come. That is a personal philosophy of mine but it’s also just a prudent investment philosophy that has proved itself many times over the long run in the condo market that is, if you’re buying properties that give you a positive cash flow that are going to be high in demand from a rental perspective then your always going to be in a good position.

 

When you’re buying with the mentality to flip you’re basically a speculator, you’re essentially just counting on the market to continually and always go up. Then you’re going to make all your money off of appreciation and you’re not thinking about cash flow, you end up just having the wrong mindset in my opinion of what real estate investing is all about, how to create wealth in the long term. A good sort of summary way of thinking about buying to flip versus buying to rent, buying and holding for the long term is how you generate wealth. Buying to flip and flipping properties is how you can generate a little bit of income, a little bit of cash here and there. But if you really want to create long term wealth then my philosophy is to always buy for the long term, buy and hold, buy and rent out. You should really never sell, if you can. If you have an asset that’s performing for you you should never sell that asset. Continue to hold on to that asset as long as it continues to perform, as long as it continues to appreciate and as long as it continues to put money in your pocket every month with minimal effort. Hold on to that property..

 

As I’ve said many times in other podcasts and other articles that I’ve written over the years, condominiums are not something you want to hold forever. Usually condominiums have a certain life span of around 7 to 10 years. Once a condo is about 7 to 10 years old that is sort of in my mind that is a long enough to hold any 1 particular condo because after that point in time most condos start to be considered an old condo. Once a condo is considered an old condo the desirability begins to decline and the appreciation rates and the rental demand begins to decline and the maintenance fees tend to increase significantly after that 7 to 10 year mark in most buildings. Not always, but in most buildings. That would be a good time in most cases to sell and reinvest that money into another pre-construction condo or hopefully 2 or 3 with the profits that you have made over that time.

 

Okay that was a bit of a tangent we’re getting into a bit of a different answer to a different question, that is when is the right time to sell a condo. That was a little bit of bonus info there hopefully you appreciated that. That concludes today’s this weeks episode of the podcast. I hope you enjoyed that. We talked about what is the best type of unit to buy and what is the best type of building to buy in. Hope you found that useful, if you did you can go ahead and share this podcast with somebody that you know or somebody that’s thinking about investing. That would be much appreciated. Of course, if you ever have any questions about investing you can always reach me, andrew@truecondos.com. You can call or text me at (416)371-2333. Until next time I hope you have a great week.

 

Speaker 2: Thanks for listening to the True Condos podcast. Remember, your positive reviews make a big difference to the show. To learn more about condo investing become a True Condos subscriber by visiting truecondos.com.

 

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