The Condo Market This Week – With Andrew la Fleur
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During this special “solo” episode, Andrew la Fleur discusses financing micro condos, Canadian bonds, and how to get in on the best condo investing opportunities in Toronto.
What You’ll Learn About This Episode
Financing Micro Condos
There is a myth that banks will not finance small condos. This is not true.
Yield Curve – Canadian Bonds
People smarter than you or I are betting that rates in 5 years will be only 0.5% higher than they are today.
The Rich Get Richer
The best opportunities in the condo market get snapped up by the most seasoned investors.
Episode 22 Transcript
Andrew la Fleur:
Hello and welcome back to the show. This week we’re going to do something a little bit different. It’s just going to be me talking for a few minutes about a few subjects that are on my mind lately this week. A few educational things for learning more about condo investing in the market and also just hopefully adding some more value to you, the listener, the condo investor as you’re seeking to get the highest returns for your money in the market or if you’re a new investor just getting into it, learning how to get your feet wet and get started in the game.
I had a great interview lined up this week but unfortunately changed of plans with the person I was interviewing and we’re going to just push that one back to next week. I didn’t want to leave you hanging, all my loyal listeners out there. I know on the podcast that I listen to it listen to it really bugs me when somebody misses a week or doesn’t follow their schedule. I am committed to doing this podcast every single week. With that in mind, here is today’s episode.
The first thing I want to talk about are small condos. There was an article, once again this week, on the Micro Condo Phenomena and I was fortunate enough to be interviewed and featured in that piece once again. For whatever reason, I seem to have become known as the expert in micro condos or condos under 400 square feet in the City of Toronto. that’s okay, I’m cool with that. I’m a big fan of these units. I own four of them to-date myself and I’ve sold countless other units too like that to my investor clients over the years.
This article is great because it’s helping to debunk one of the greatest myths about small condos and that is that they’re hard to get financing on. There seems to be this pervasive belief out there that if you buy a studio or if you buy a unit under 400 square feet or 500 or 600 square feet depending on who you talk to will tell you that you can’t get a mortgage or you need to put 50% down or you’re going to have to pay outrageous interest rates. Banks won’t touch them. They’re persona non grata in the condo market.
This is absolutely false. I’ve been telling my clients this and practicing what I preach on this point for many years now. A lot of people just still believe this to be true. Yes, there’s some truth to it. It’s not completely false. There’s some truth to the fact that some banks do not like smaller condos and they will not lend on condos under a certain size. We know that’s true, but there’s more than five banks in Canada.
There seems to be this thing in Canadians heads perhaps that there’s only five places you can get a mortgage from in Canada, which is of course totally untrue. There are hundreds of lenders out there that we now have access to and many of those big five lenders themselves will lend on small condos.
RBC is the bank that I use myself. A lot of people that believe this myth are often shocked when I tell them I have multiple mortgages on condos under 400 square feet with RBC. Last I checked I think they’re the largest bank in Canada.
They do not have any size restrictions at RBC, but the point that I made in the article and the point that I’ve been hammering home is that listen, bank policies are not written in stone. Every bank has different policies but they’re changing them all the time. What’s true today may not be true tomorrow. I might have to switch from RBC if they suddenly change their policy. Go somewhere else.
More likely, what’s going to happen is the other banks who are restricting on smaller units are going to come around, finally wake up, get their heads out of the sand and realize that these units are great units for them as lenders to provide financing. The reason is because they are the safest investments out there.
Quite contrary to what somebody might tell you, these are not risky investments, these are the safest investments to buy. Here’s why. there’s three reasons. One is that they’re the easiest to rent out. That’s right. Studio condos are the easiest to rent out.
The smaller the better for the simple reason that they are always the cheapest units on the market. If you have something that is cheaper than everyone else on the market, you will have an endless supply of people willing to buy it from you. This is just basic common sense. This is Economics 101. A lot of these big bankers, I don’t know, maybe they skipped Econ 101 back in the day in university. They seem to miss this point that if you have something available that you’re selling and it’s the same type of product as the competition but you’re cheaper than everyone else, you’re obviously going to have the most number of potential customers.
Second point why they’re the safest type of investment is because they provide the best cash flow of any unit type. The reason is because they have the best price to rent ratio. While they’re significantly cheaper than the next unit size up, the amount of rent that you can get from a studio is only marginally less than the next unit.
When you break down price to rent ratios for different units you’re always going to find in every building that the studios give you that best ratio and the studios give you the best cash flow. You can have a two-bedroom unit that costs you $500,000 and maybe if you’re lucky it gives you 300 bucks a month. Positive cash flow. You could buy a studio for 200 or 220,000 and it’s also going to give 300 bucks a month. Which one is a better investment?
It’s not a black and white answer. I’m being a bit facetious there. There are pros and cons to different unit types. If you’re a cash flow investor, if that is your goal, if you’re a long-term investor, if you’re not in the market to flip, if you’re not thinking about selling but rather you’re thinking about buying and holding, then studios are absolutely great units to have.
The third reason why they’re the safest investment is because they have the lowest vacancy rate. Again, that’s going back to the cheapest units, they have the largest number of potential renters looking for them and so they will have the lowest vacancy rates.
I don’t have any hard evidence to show you that other than do a quick search on LMS for studio units for rent and then do another search for one bedrooms and two bedrooms. What you’re going to find is, at any given point in time in the downtown core especially, you might see 5, 10, 15, 20 studios for rent in the entire downtown core on the market and you’re going to see hundreds of one bedrooms, hundreds of two bedrooms available if you look at the entire city.
Again, these units come up and they’re snatched up immediately. None of my studios have ever been empty. It’s going to the fact that these are safe investments. I hope that more banks are going to get out of the sand on this issue and finance them.
Even if none of them change their ways, I’m not worried whatsoever as a studio investor because I know that RBC and many other banks do not have size restrictions and I’m going to continue to enjoy great cash flows with 20% down and market rates for mortgages. I’m not paying premiums or anything like that. I will include a link to this on the show notes for this episode before we go any further, I should mention that. Truecondos.com/episode22.
The next point is I want to talk about the yield curve. This one is going to be a little bit technical. If you’re not technically inclined you might not listen to this part. Talking to a client, the common thing I find with many would be pre-construction investors they have this fear that I don’t want to buy a pre-construction because I’m worried that interest rates, when I have to close in a few years, are going to be so much higher than they are today. That property is not going to cash flow. I’m going to be in the whole.
there’s a few different points that I bring up on that. I’m not going to go over everything today. I want to talk about the yield curve. If you Google yield curve, I’m going to include a link to the Canadian yield curve for the bond market in Canada here on truecondos.com/episode22, the show notes for this episode.
Basically, the point is the yield curve tracks the same risk level of debt over a variety of terms. I was looking for 60 days out to 30 years out. How much return can you expect to get on your money if you’re locking in for a shorter term versus a longer term?
Obviously, if you’re looking in for a longer term, you can expect higher rates. If you’re looking in for a shorter term you’re going to get lower rates. How this pertains to the mortgage rate question is look at the difference on the yield curve between the 5-year money and 10-year money because that will be very instructive to where mortgage rates, where interest rates are likely going over the next 5 and 10 years.
When you do that what you find is that the spread between 5-year money and 10-year money is incredibly narrow. What’s happening is very smart people, hundreds of very smart people, thousands of smart of people who are betting on the markets every single day, people that are far smarter than you or I are basically saying that the difference between 10-year money is so narrow that what they’re indicating to us is that they do not believe that interest rates are going to be having any significant change in the next five years.
Currently, the spread between 5-year and 10-year, a 5-year bond 1.55 and a 10-year bond 2.06, a difference of about .5. One year ago at this time, the difference was from 1.83 to 2.6. A difference of .8. A year ago it was a difference of .8, today it’s about a difference of .5.
What’s interesting is they actually believe that it’s less likely now than it was a year ago that the interest rates are going to rise in the next five years. If they do rise it’s going to be very minimal. Again, people that are far smarter than you or I are saying, “Interest rates are not going anywhere over the next five years.”
If you’re worried about that you need to stop worrying about that. You don’t need to reinvent the wheel when it comes to condo investing and figuring out what to do with your money and figuring out what’s a good and bad investment.
Follow those people who have come before you, follow those people who are smarter than you. When you do that, you succeed and you’ll make money. You don’t have to figure it all out yourself. Just look at people who have millions and millions of dollars to invest and who have already figured it out for you. There we go. That’s the yield curve. A little bit piece of tidbit of information for you there.
The final thing I want to talk about is this concept of the rich getting richer. What I mean by that is I was at a sales event this past weekend for new condo launch. We had an insider preview as we often get where we’re brought in before any other realtors, in this case before the friends and family even had their sales event. It’s an amazing opportunity. Getting in at the lowest possible prices in a new project.
As is often the case with these types of events, we have a very limited period of time to sell this units. We’re not given weeks or months to sell. We’re given days. Sometimes just a single day. In this case we’re given a weekend. It’s just a fantastic opportunity to buy.
What we find is that even though this event, I opened it up to all of my clients, all the people who are subscribing to my newsletter who have gone to truecondos.com and who have subscribed. By the way, if you go to truecondos.com right now you can sign up for a free five-part video course about condo investing. Head on over there and pick that one up.
Going back to what I’m saying that even though it’s open to all people on my subscription list, what we find is that 90% of the people who actually bought units on this type of event are people who bought before.
The people who haven’t bought, people who are waiting to get into the market, they are constantly missing out on opportunities like this because they’re just not ready to pull the trigger. They’re hesitant for whatever reason. They’re still doing their homework about condo investing, figuring out if it’s right for them. Figuring out if this particular opportunity is right for them. They continually are missing out on opportunities like this.
It’s the case of the rich getting richer once again where the people who’ve already invested in the market, who already have foothold and who are already making money and who have already done this before, they’re snapping up all the best units first before anybody else. The people who are new and trying to get into the game are left on the sidelines because they are just not prepared to make a quick decision on something like this.
The lesson here, I think, for the people who’ve done this before is well obviously, you know what I’m saying. The rich get richer, right? Specifically the people who purchased at this past event on the weekend, congratulations to you. You’re making a great investment. You’re saving a lot of money and you’re going to make a lot of money in the long run.
For those people who are still in the fence who haven’t gotten into the condo market, the lesson is the best deals go to those who are the quickest and who act the fastest in many cases.
If you see other experienced condo investors, people who’ve done this two, three, four, five times before buying units at a particular project or at a particular moment in time, use that as your cue to move and piggyback on their success, on their experience. Again, you don’t need to reinvent the wheel here. Just look at what other successful experience people are doing and follow them.
I currently don’t have anything else to say other than that. That is my three pointers. We talked about small condos and financing them. We talked about the yield curve and mortgage rates. We talked about this concept of the rich getting richer and how to take advantage and get on the property investment ladder as a newbie.
Thank you very much for listening once again. Head on over to truecondos.com/episode22 for the show notes on this episode and make sure you do sign up for my free video course if you haven’t already at truecondos.com. It’s a free five-part video course about condo investing and I hope you enjoy it. Thanks for listening and we’ll see you next week.
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