What’s the Best Condo Size to Buy for Investment?
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One question that I get asked a lot from condo investors is what is the best condo size to buy for investment?
If you talk to 5 different people you will get 5 different answers.
Is it best to go with the ever-popular 1 bedroom plus a den? This is the most commonly sold unit type and most commonly rented unit type.
Should you actually go with a 2-bedroom unit? Since condos are getting smaller, fewer and fewer 2 bedroom units are being built, so some suggest that you should take advantage of this trend by buying what will be in short supply in the future.
Should you get a studio? Everyone knows that I’m a big fan of studios for investment because they usually produce the best cash flow, but does that mean they are always the best choice?
The answer is actually none of the above.
When buying for investment, what you want to buy is the smallest unit of a given type.
So for the building you are going to invest in, you want to pick the smallest studio, the smallest 1 bedroom, the smallest 1 bedroom plus den, the smallest 2 bedroom.
There are 2 reasons for this.
1. The smallest units produce the best cash flow
Because rental rates are primarily determined by unit type (and not square footage, features or some other factor), but unit prices are primarily determined by square footage, it follows that you should buy the smallest and cheapest unit of a given type to get the highest cash flow.
In practical terms, a 700 square foot 1 bedroom will not rent for much more than a 500 square foot 1-bedroom, but it will cost a lot more to buy that unit and your maintenance and property taxes will be higher too.
2. The smallest units appreciate at the fastest rate.
There is always a ceiling on the maximum amount a buyer will pay for a given unit type. So buying the smallest, cheapest unit of a given type will leave the most room for appreciation.
For example, over a 5-year period, a 700 square foot 1 bedroom bought at $350K might appreciate to $400K which would represent the maximum price for a 1 bedroom in a particular sub-market. This would be a 14% increase in price.
In the same building a 500 square foot 1 bedroom bought at $300K might appreciate to $350K which would be well below the maximum price for a 1 bedroom, and would represent a 17% increase in price. This is the typical scenario we’ve seen again and again.
When buying for investment, don’t fall into the “Would I want to live here?” trap. Many investors confuse their own preferences for what makes a good property with what criteria makes a good investment – they are not the same.
So don’t worry if you think a unit is too small and you’d never want to live there – you will never have to! Stick to the fundamentals and you won’t regret your decision in the long run.