Should You Invest in a REIT or Buy a Condo?
Are you better off investing in a REIT (real estate investment trust) in the stock market, or buying a condo and renting it out? In this episode we tackle this popular question for investors by comparing what you could get if you invested the same amount of money in a REIT versus a condo using Capital Hall as an example.
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.
Hi, and welcome back to the show. Well, it seems that we’ve come back down to earth and Toronto Blue Jays have been eliminated from the playoffs at time of recording here of the end of October, 2015. I don’t know when you’re listening to this episode, but that’s where we are here in Toronto and the Jays have been eliminated. So, a little bit sad, a little bit disappointed but what a great, great season, what a fun ride. Congrats to the Jays and all the fans for a really great, great year and hopefully we will in fact get them next year, as he cliché goes.
Okay, so on today’s episode I want to talk about something that’s pretty popular and that is should you invest in a condo or should you just buy a REIT and so a REIT, what I’m talking about, if you don’t know, a REIT is basically Real Estate Investment Trust. It is basically a stock where you purchase a piece of a real estate investing conglomerate, you could say, and you get a little piece of the action. You’re sort of investing in real estate through the stock market. You make a return that way and there’s been a lot of articles and things over the years comparing investing in actual real estate versus investing a REIT, and the pros and cons sort of, of both sides. So, I wanted to just sort of take my take on it, and I’m basing it off of this one particular article I came across recently, which is similar to a lot of different articles you’ll see on this topic. Nevertheless, it is a recent one, so let’s talk about this one.
I will include a link one to this one, this article, in the show notes for this episode. For the show notes on this episode and all the episodes of this podcast, you can go to Truecondos.com/podcast, Truecondos.com/podcast and there you’ll find the show notes for every episode. This is episode number 64.
Okay, so this article, it starts off in terms of, obviously this article is pro REIT, and so obviously I’m going to be taking the position of pro condo. No big surprise there but it starts off the article with a few of the usual myths, I call them, myths about investing in condos. Now, they don’t specifically reference a condo versus a REIT. They’re just talking about real estate in general but these same real estate myths are very pervasive, I find, and a lot of people who I meet with and talk with, people who are thinking about investing in the condo market but they’re nervous, their apprehensive, they are on the fence, they’re undecided for one reason or another, they have a lot of these myths in their minds and these are stumbling blocks that are preventing them from getting into the market. Perhaps as you’re listening now and you’re thinking about investing, some of these are going to be relevant to you so it might be interesting for you to hear this episode in particular. If you already are a condo investor, I think you’re definitely going to be onside with what I’ve got for you today.
So, three of the myths they talk about in this article, so here it goes like this. I’ll read the article. It says, “Many Canadians want to become landlords but who has the patience to deal with all that stuff. Think of what the average landlord has to go through. First, they have to find a tenant. They have to spend some time to show everyone the space. Half the time the tenants don’t bother to show up. Some people can be- Hard to find people that are trustworthy and it can be difficult.” So, you know, I will stop there. The article basically goes on. Basically there’s three, sort of myths. One is talking about the aggravation of finding a tenant. The second one is that the work never stops. “Once the person moved in, the work never stopped,” it said. The third one is, it says, “Well, you could get a property manager and it would handle all this for you but they’re goes all your profits.”
Okay, so those are sort of three myths that are common. Again, with the beauty of investing in condos, and this podcast is all about investing in condos, Truecondos.com obviously is all about investing in condos and we’re not talking about investing in other types of real estate, very important to understand that. There is a big difference and there is a reason why I personally invest in condos and why my clients and so many thousands of people invest in condos and that is because these myths do not apply to the condo market and to investing in condos.
First one is aggravations of finding a tenant, it is so difficult. That is completely untrue. It is so easy to find a tenant for a condo, if you’re buying of course the right property, the one that I am recommending and that I’m approving, but if you do that, if you follow my formula and you’re buying the right condo, it’s so easy, so, so easy to find tenants for that condo. The rental market is huge and has been huge, and booming, and hot for so long and all signs are pointing to that continuing as well. So, finding a tenant is very easy and I should mention, of course, if you don’t want to do that yourself, that is a service that we here at True Condos do provide as well, myself and my team. Every single month we help many, many investors, who bought condos through us, also find tenants and rent out those condos as well. So, if you want more information about that of course, just send me an email, Andrew@truecondos.com.
So, the second myth here is that the work never stops. You’re always, you’re you know, your tenant, it’s the myth; it’s the thing that you always hear is, “I don’t want to get called in the middle of the night about a leaky faucet, or broken toilet, or whatever.” Again, I can tell you I have been investing in condos for many, many years. I have never, ever, ever once got a call in the middle of the night about anything ever. Again, the beauty of condos, especially when you’re buying, as we recommend, brand new condos is there’s virtually no maintenance. That’s the point. That is the whole point of this. That is why we’re investing in condos is because we don’t want to have all these headaches and things and that is the beauty of a condo, especially a new one, is there is virtually no work to do. So, this idea of the work never stops, you’re constantly being hounded by your tenants, this is a complete myth, especially when it comes to condos and new condos.
The third thing is that, “Well, you could just hire a property manager but they would take all your profits away.” Again, that is not applicable to condos. You do not need, one of the things I always tell my investors and something I personally believe in, some will disagree but I strongly believe that you do not need a property manager to be a condo investor. You do not need a property manager unless you are, and every situation’s different I suppose but, and if you’re owning, you know, three, four, five, six condos you can easily, easily self-manage all those condos yourself with minimal, minimal effort every single month. We’re talking about maybe one hour per month, per property on average in terms of management time required if you’re buying the right properties, if you’re putting the right tenants in place. So, save your money, skip the property manager, self-manage those properties. That is my advice to our clients and our investors.
Okay, so let’s get back to the article. So, it starts off like that. It talks about the myth, some of these what I call the myths, but they are obviously sending them forth to be true about owning a property and saying, basically they’re setting themselves up to say you should buy a REIT instead. You should just get some money, put it in a REIT, and then it goes on to recommend a specific REIT, which I won’t bother mentioning but obviously they’re selling this particular product to their readers and that’s fine but it goes on to say that if you buy this particular REIT, the article, the whole premise of the article is how can you make a thousand dollars per month from a REIT? How to get a thousand dollars per month of income from a REIT. Basically they do the math and they figure out that you would have to invest $221,000 into this particular stock, into this particular REIT and $221,000 would give you $1,000 a month in income. That works out to a return of 5.4% so this is a dividend.
It’s essentially, what they’re talking about in real estate is a cash-on-cash return. So, 5.4% cash on cash return to get a thousand dollars a month in your pocket you’ve got to invest $221,000, okay? So, then it goes on to say, “Here is a REIT,” it’s sort of the finishing line, “That is dripping dividends, it’s just dripping dividends.” Another stock that’s just dripping dividends, well, I don’t know about you but I don’t, you know dripping dividends sounds fine, but I would rather have flowing cash than dripping dividends. So, I’m all about cash flow, cash flow in real estate. I want that flow to be nice, and heavy, and thick, and not so much of a drip.
So, let’s talk about how can we get some cash flow on the real estate side of things? Let’s do a comparison. What if instead you put that $221,000, what if instead you put that into the condo market? What could you get by comparison for the same investment? Well, first of all you wouldn’t just buy one condo with $221,000 of course because of the beauty and the magic of leverage and the beauty of mortgage financing. So, when you’re buying real estate, unlike other types of investments, you can get a mortgage and finance the property so you’re not putting down 100% of your own money to buy these properties. You’re putting down only, in 95% of the cases, you putting down 20% of your own money. So, that $221,000 is actually multiplied by a factor of five. 20% is a five times leverage factor and so you can actually purchase 5 times $221,000 in real estate.
So let’s look at one specific example and I wanted to look at Capital Hall Condos. Capital Hall Condos is a student rental condo project next to Carlton University. This is a very interesting and great investment opportunity. Let’s take a look at how the numbers would look. So, $221,000 can actually buy you six condos at Capital Hall. So, first of all you could buy, again you’re comparing with a REIT, you’re buy a $221,000 of a stock versus you’re buying six properties, six actual, real pieces of real estate that you own, six properties. So, six studio condos, each one purchase price approximately $179,000. Each one of those properties, based on today’s mortgage rates, would give you about $280 a month in positive cash flow. So, that would give you, if you work it out, that’s $1,680 a month in cash, $1,680 a month in positive cash flow versus the REIT’s giving you $1,000 a month so obviously much higher return there with the condo. So, it works out to about 9.3% cash-on-cash return at Capital Hall versus 5.4% with the one particular REIT.
Now, let’s go back to those three myths they were talking about. The one is aggravations of finding a tenant. The second one was that the work never stops and the third one is that property managers taking all your profits. This is straight from the article itself. So, the beauty of this investment, particular at Capital Hall is that the first one, aggravations of finding a tenant, well, that is already included. It is done for you. You do not even have to find a tenant at all. There’s no cost. It’s done for you with Capital Hall. The second one is that the work never stops. Well, that is taken care of as well. The property is professionally managed and so there’s nothing for you to do at all.
The third thing is the property manager, as they say you could get one but they’re going to take all your profits, well, again the beauty of Capital Hall is your property management, your professional property management is included for free for three years. So, there you go. So, the property management, it’s all managed. The tenants are found for you. It is free for three years and on top of that these returns that I’m mentioning, this income that I’m mentioning is based off of a guaranteed rent, a rental amount, which is also for three years. So, you are guaranteed that for three years, unlike a stock where of course you’re never going to get a guarantee ever of any kind on a stock, if you’re buying that. So, boom, boom, boom, obviously right away you can easily see that the condo is a much better investment just looking at a purely cash-on-cash return basis.
This is the part where I say the famous line that every marketer loves to say, “But wait, there’s more!” Okay, so, there is a lot more to real estate and that is the beauty of real estate. It’s a multi-faceted investment asset. It’s a multi-faceted asset that gives you income from many different channels. So, it’s not just about cash-on-cash return. You’re also getting equity so every single month the tenant who’s paying the income is paying down your mortgage so you’re not just getting the $1,680 a month in cash, just cash flow in your pocket. You’re also getting $1,800 a month in equity approximately. So, those six properties together, they’re each contributing about $1,800 a month in equity, so $1,800 plus $1,680 a month in cash. That’s giving you over a 19% return on investment. So, suddenly you’re comparing now a 19% return versus a 5% return with a REIT.
Once again, with this particular opportunity at Capital Hall, there is no management. There are no repairs to be done. There are no calls in the middle of the night. There are no vacancies in the sense that the rent is guaranteed for three years minimum so minimum three years you’re getting that guaranteed every single month. Again, you are never going to get this with a REIT or any other kind of stock out there.
Now, you might say, “Oh, Andrew, it all sounds well and good but you know, things don’t always work out in reality as they are on paper. What happens if, I don’t know, interest rates soar or I don’t know, like some mortgage insurance, suddenly government issues some new thing and some new expense for real estate investors comes out of nowhere? I don’t know, let’s say something bad happens?” Again, your rental guarantee is in place so it’s not like we’re worried about the real estate market tanking or anything like that or nobody wanting to rent your unit. That is a guarantee in place with this particular opportunity but let’s say, I don’t know, interest rates soar or some kind of extra expense comes out of nowhere that you didn’t expect.
Well, I like to say, “Well what if it only works out half as good as expected?” So, instead of 19% return, what if you only got around 9 or 10% return instead?” It’s only half as good as we think it should be. Well, you’re still, even at 9 or 10%, half as good as it’s supposed to be, you’re still way above the 5.4% that you would be looking at in the case of a REIT. Again, we have not even said a single word, I’ve never, as you know, I’ve never mentioned the word appreciation, appreciation of the actual asset itself if the condo actually goes up in value itself. I haven’t even mentioned that. That’s a whole other potential income, or revenue, or a component on your return on investment as well, which again, historically in Canada you’re looking at 5-6% over the long term for real estate appreciation. We have not even mentioned that. We’re only talking about cash flow and we’re only talking about equity.
So, again, you know even if it’s only half as good as planned, you’re still making about 10%. This is not including any appreciation. This is why I say that if you’re not making at least double digits, at least 10% ROI over the long term with your real estate investments, you are doing something wrong. You are really, you are really doing something wrong if you’re not making at least, a least 10% a year over the long term with your real estate investments.
So, that was a bit of a longer episode than I thought but a bit of a longer explanation, but hopefully you found this episode interesting, useful, food for thought. Hopefully you’re considering this idea a little bit more. If you have money in the stock market, or in REITs, or in anything else, hopefully that gives you pause to think, “Hmm, maybe it is time to put some money into the condo market.” Again, Capital Hall Condos in particular, I just pulled one example because it does have this very interesting component of a three year rental guarantee, three years of free property management, and it’s in the booming sector right now of high end student rentals, which is just a very exciting segment of the condo market moving forward.
So, if that sounds interesting to you, I’d be happy to talk to you more about it. If you want to get the investor package for Capital Hall and learn more about how the numbers work and breakdown, happy to send that to you. Just head on over to the show notes for this episode and we’ll get them over to you. You can always send an email of course, as well, Andrew@truecondos.com or you can call, text me, 416-371-2333, that’s 416-371-2333 and that is my direct line. Okay, thank you very much for listening to the True Condos podcast. Until next time, hope you have a great week.
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