The Best Thing That Has Happened for Condo Investors During the COVID-19 Pandemic

Andrew la Fleur: On today's episode, we're going to talk about the best thing that has come out of the COVID-19 pandemic for condo investors. Stay tuned.

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: Hi there. And welcome back to the show. Thanks for tuning in as always hope you're having a great week. This is Andrew lA Fleur, your host from truecondos.com and on today's episode, as I said in the intro, want to talk about the best thing that has come out of COVID-19 pandemic in 2020.

Obviously a lot of negative news and a lot of bad things have come out of this pandemic. And the condo market certainly has had its share of ups and downs. Over the past few months, it's been an unprecedented time, probably the biggest bad news headline or negative effect on condo investors with the pandemic has been in the rental market. The rental market has taken an absolute beating over the past few months due to the pandemic, mostly because people are just not moving and also many condo buildings for a month or two they're in the middle of the worst part of the pandemic, the middle of the lockdown quarantine period.

Many condo buildings were not allowing showings at all. So, you had a growing problem of growing inventory of listings that nobody could even go and see. So you had buildings where the supply of condo rental units was growing, growing, growing, and that was really putting downward pressure on rents. You add to that the fact that the international student population, particularly in downtown Toronto, that has been cut off. So that's a massive tenant pool that has been pulled out of the system. You add to that the fact that the timing of all this is with the recent change in the Airbnb rules in Toronto. So you no longer allowed to put your property up on Airbnb. A lot of people still doing it, but a lot of buildings where that was very prevalent, all those units have been converting over to longer term rentals. So again, impacting the supply side of it.

And add to that, the fact that 2020 was always going to be a heavy supply year, new supply year in the condo market. In general, as I put out a podcast before COVID talking about how the rental market in 2020 was going to suck for landlords. I put that podcast out in early 2020, before COVID was even a thing, because this was known to be a big year for condo completions. There's up years and down years, and the numbers aren't the same every year. So when you have a year where there's a lot of condo buildings completing all in the same year, then you're naturally going to have an increase in supply and that's naturally going to affect prices and vice versa. We had some years, 2016, 2017, 2018, where the number of condo completions, it was very low. And so that put upward pressure on rents. 2020, we knew was going to be a heavy supply year, a lot of supply coming on stream.

All these factors together has certainly made the rental market really suffer this year. So far for condo investors, hasn't been a great scene. It is what it is. We deal with the ups and the downs. We're always thinking longterm though, of course, longterm, I'm not concerned longterm. I'm not worried and you shouldn't be either about the rental market in Toronto, particularly downtown. When we get the immigration tap turned back on, when we get the international student tap turned back on and when the condo completion rate goes back down to sort of a lower level and all these things are worked through the system, the rental market will be fine. Rents will continue to increase in our city.

Should we expect rental increases as we saw in the heavy days of 2017, 2018, early 2019, where we saw rental rates increasing at 10, 15% a year? Should we expect things to go back there? No, but as I was saying in those years on this podcast and in my weekly emails, I hope you're getting them, make sure you sign up at truecondos.com you get my weekly emails. As I was saying in those years, don't get used to this. Don't get used to double digit rental increases. That's not a normal, sustainable pathway for the rental market. We enjoy those years while we have them as investors, as landlords. But we know that longterm, the rental rates are going to average out to a little bit above inflation. If you look at the longterm trajectory of rents, particularly in downtown Toronto, in the condo market you're looking at four or five, 6% is sort of a normal annual projected trajectory.

So if you get some years with 10, 15%, and if you get some years with negative 10, 15%, as we're of experiencing right now, in the long run it's going to even out to around inflation plus a few percentage points, and that's fine. We can do extremely well investing in condos over the longterm with that kind of rental appreciation.

So, with that being said, that's probably the biggest negative story, but today's podcast is not about that. Today's podcasts, as I said, is about best thing that has happened for condo investors from COVID-19. And now that we've been going for a few months now, we've had a period of no new condo launches for a while there, between April May and pretty much most of June. But now that we are in July, the condo market is on fire. If you haven't heard, if you're not receiving my emails, if you're not tracking things closely, I'm here to tell you the condo market is absolutely on fire again, it's as if the taps have all been turned on, it's as if we're almost right back to where we were first week of March, before all of this COVID stuff happened, things are flying again. Condos are selling out. And it's all interesting. It's all being done in a post COVID sort of world. And it's being done differently than it's ever been before.

So the condo market is doing great once again, and things are flying. There's a lot of pent up demand that's driving it. As I said, there was no launches for a number of months there when normally there would be many launches and many condos would be sold. None of that happened. So you have a lot of pent up demand in the market that's pushing things right now. But the biggest thing, that was the longest drawn out intro ever by the way. But the biggest thing, the best thing that has happened in the condo market for condo investors, as far as I'm concerned, is the fact that developers are putting lower deposit structures out, lower deposit structures.

When typically in a pre-COVID world, every pre-construction condo would pretty much have the same deposit structure. I'd say 90% of pre-construction condos would have a typical 20% deposit structure. And that 20% would be spread out over a 12 to 18 months at the most. 20% would be required deposits on your condo. Now we're seeing pretty much almost every single new condo launch that's come out, has come out with less than 20%. The Beverly Condos by Daniels was sort of first out of the gate in early June. They were the sort of the first ones to test the waters. And they came out with an incredible deposit structure on theirs, which was extremely successful launch. And that was only 10% deposit, 10% deposit on the Beverly condos by Daniels in Thornhill. There are still some units left there by the way, if you're interested in that one. So that was fantastic to see.

And many other developments have followed with also less than 20%. So district condos in Oakville, 28, Eastern downtown, Westport condos, in Port Credit. These are all launches where the deposit charges 15% instead of 20. And they've really done a great job of stretching out that 15% to much more than a year, in some cases up to about two years for that 15% to be paid out, as opposed to the usual 20%. As I said, in a year or so, Artsy Condos is also launching now by Daniels in Regent Park. That one is 10% as well. It's not just 10%, but 10% gradual deposits. So it's 10% paid out over, more than a year, actually, in for most units there.

That is great news for condo investors. That's something that I've been hoping and wanting to see for the past couple of years. As condo prices have risen dramatically over the past few years, so have the deposits required to purchase and invest in a condo as well. It's just made it harder and harder for the average person to get into a pre-construction condo investment, because the average price, five, six years ago, you could buy a condo downtown for say 300,000. There was lots of condos to choose from. So you only needed 20% of 300,000. You could get into a nice downtown condo for around 50, $60,000, if you had that money you could do it, but now prices have more than doubled of course, since 2014, call it till today.

So you're looking at required deposits instead of 50, 60K, just to scratch the basic lowest entry level point. Downtown Toronto, you're looking at 650, 700K for like a one bedroom. So you need 120, 140K deposit money. The amount of deposits that you need to get into a downtown condo is more than doubled over the last five, six years. That's shot a lot of people out of the market. It's driven a lot of people to investing in the outer areas and other parts of Ontario and other parts of the country as well.

We've been involved with markets all over the place with our condo investors, from Ottawa to Kitchener, to Hamilton, of course Oakville, we've done a lot of work in Oakville, and of course Calgary, even Calgary has been a market that we've been very involved in over the last year as well. Big reason for that is just affordability. Being able to get a great condo at 300, $400,000, you still do it in a lot of these markets as opposed to downtown Toronto, where we typically have always worked up until recently. Again, your entry level point here now, 650, $700,000. It's just out of reach for more and more people.

So, it's great to see, great, great, great to see for condo investors to see lower deposits coming in. Again, 20% to 15%, if you're not a seasoned investor, if you haven't thought about this, you might not think that's big of a deal, it's a huge deal actually, just knocking it from 20% of 15%. That's essentially reducing your risk as the investor. It's reducing your risk by 25%, if you want to think about it like that. Your exposure, your need for appreciation of the asset to go up is reduced by 25%.

So, you can get the same ROI on your condo, even if prices increased by 25% less, than somebody who's putting it in at 20% versus you at 15. A lot of people think about doubling their deposits. So if you put 15% down on something, that's going to take typical four years to get built, you only need to see that property appreciate and value by 3.75% a year, in order for you to double your deposit by the time you take possession, in terms of the equity growth in the property, 3.75% a year, versus if you're putting 20% into it, then you need to see that property increased by 5% a year, 5% a year versus only 3.75% a year.

Again, the less we can put down as investors, when we're buying pre-construction, the better, the lower the deposit that we can put into it, the better. And so when we see a drop from 20% to 15, which we're seeing on many of these launches now, that's a great thing for us as condo investors, and very happy to see that. And I hope that this trend continues, but given the velocity of sales in the market right now, I have a feeling that it probably won't. So get it while you can. The market is so hot, I think developers will go back to the typical 20%.

Why would they do that? Why doesn't everybody just always do lower deposits? Well, couple of things. One is it's their risk exposure. So the less money that you have into it, the more risk that they have to take on inherently. And also it increases their financing costs and their ability to get great terms for their loans to build these condos, the less money that they have from each purchaser, the higher their financing cost is going to be because the banks are going to look at them, and each deal is going to be seen as more risky to the bank.

So what happens in a lot of these cases, if you're putting less than 20% down, again, it's depends on ... It's not a blanket rule for every single project. Depends on the builder, depends on the lender. But you're putting less than 20% down, a lot of times the builder themselves are going to have to front up the 5%, put in more equity into the project themselves in order to get that debt, that loan from the bank to build these condos. Of course, they're thinking the same thing. They want to put less and less of their own money into a project to get it built in the same way that you as an investor want to put less of your own money into the pre construction unit, to see it get built as well.

They're reluctant to do that, in most cases they don't want to do that, but here we are in the COVID world, and that's where a lot of these builders have come out. And I think a lot of them they weren't sure how the market was going to react with these new launches. Would things be slow? Would the market be where it was before? Is the sky falling and nobody's buying condos anymore? Clearly that's all been proven to be untrue and people are returning to the market in droves and the market is doing very, very well again. I think that this lower deposit thing might be short-lived. I hope it isn't. I hope we continue to see this. I hope it's a new trend that sticks with us for a long time to come. I'd love to see some more 10% deposits as well, like Daniels is doing. That I think is going to be extremely rare, but even the 15% spread out over a long period of time, that's great as well. We hope that continues.

So that's the main thing that I wanted to talk about in this podcast. Some other cool things I think that have come out of the pandemic for investors, one other thing would be fully digital signing. So a lot of builders have finally, after many years of us sort of prodding them on the broker side to say, "Hey guys, we really got to figure out this, it's 21st century here. Let's figure out how we can do fully digital signings so we don't have to make our clients physically come in to sign paper and stuff like that."

Pretty much every builder is fully on board now, in terms of fully digital signings, where you as a purchaser, you as the investor, you don't have to come in, and take hours out of your day to come in just to sign some paper. We can do things completely remotely now, which is great. And just the whole virtual condo launch model, that's been really cool to see. 199 Church just did a launch this week. They did a drive in movie theater launch, which was pretty cool to see, nobody's ever done that before. We're seeing a lot of builders doing these live to Facebook or live to YouTube launches. Normally that would be an in person event with everyone in a theater or some kind of venue, to generate that excitement and hype amongst the broker populace. So we're seeing that move to a virtual model, which is cool to see. And people are experimenting with different things and different ways to do it. As I said, the drive in model, that was great to see.

And another thing I think is just when there are in-person meetings, or if you do want to come and sign a contract in person, instead of digitally, which some people do, they're much more efficient, much faster, you're in and out with your signing appointments, as opposed to in the past, there's been a lot of launches over the years that I've been a part of. And maybe you have to, if you're listening, if you're a seasoned condo investor, where you end up sitting around and waiting for hours and hours for your turn to sign or for your executed copy to come to you or the mistakes are made and you go back and forth thing. So a lot of that has been cleaned up tremendously.

I've been really impressed with the builders that have been launching these projects. As I mentioned, many of them here, Beverly, District 28, Eastern Artsy, Westport, 199 Church, Minto Oakvillage. Everybody has really gotten a lot better about those very efficient in-person meetings and signing appointments where you're in and you're out and things are cleaned up. I think another great thing is just there's a lot more respect, I think, for the purchaser, for the client, for your time, for your money and just respecting you as a customer and just making sure you have a good experience, a seamless experience, a quick, great experience, from signing the contract, the full experience right on through it. That's always a good thing. That's good to see as well.

Okay, there you have it. That is today's podcast, I hope you enjoyed that. I hope you're noticing these lower deposits and you're ready to take advantage of them. And you understand the power of a lower deposit, especially when you're buying pre-construction versus a higher, typical 20% deposit. So if you have any questions, again, if you want to reach me, Andrew@truecondos.com or call me, text me, (416) 371-2333, if you want to find out about the latest condo launches that we're working on. If you're interested in talking about your investment portfolio, your goals, love to hear from you, love to speak to you myself or somebody from my team. Be glad to be in touch with you. So let's talk soon. Until next time. Hope you have a great week and happy investing.

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