Will I be Able to Rent Out My Condo?
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One of the most common questions that I get asked from first time condo investors is will I be able to rent out my condo once it is complete? In this episode I look at the latest numbers from Urbanation on the Toronto Condo rental market from Q2-2015. The bottom line is that the condo rental market in Toronto continues to have superhuman strength and investors have nothing to worry about at all.
One of the most common questions that I get asked, and it’s often by first time condo investors, is will I be able to rent out my condo? I think this reflects an underlying fear that a lot of first time investors especially have, that they’re going to be stuck with a condo that they can’t rent out. They’re going to be paying expenses every single month, and they’re not going to be having any revenue or income coming in. Obviously, this is a worst case scenario. This is a terrible situation for any real estate investor to be in, and it’s not something that you ever want to be in for more than a very short period of time; a couple of weeks or a couple of months at the most.
I always find it to be a bit of a strange question, though, given the strength of the Toronto rental market. Maybe it’s just because I take for granted the strength of the market because I have been in the condo game for a long time. I’ve been an investor for a long time, but I always found it to be a bit puzzling that people would think that they’re going to be stuck with these condos and you’re not going to be able to rent it out. The answer is yes, absolutely you will be able to rent out your condo when it’s finished. Pretty much any condo anywhere in the city of Toronto, you will be able to rent out that condo. It just comes down to a question of the price and of the amount of time that it’s going to take to rent out that condo, but absolutely, you are going to be able to rent out your condo.
The reality is it’s probably going to rent out very quickly and for a very good price, especially if you’re one of my clients; if you’ve been listening to my podcasts, you’ve been reading my emails and blog posts, and if you’re following up my advice and buying in the right buildings and the right locations, and most importantly, if you’re buying the right units. I want to talk a little bit more in this podcast about the rental market in general, and again, just to remind you, especially the first time investor, that the rental market in Toronto is very strong. It’s something that I like to say, is that the rental market in Toronto has super-human strength. It’s almost like the super-hero of the condo industry in the sense the condo market is; how strong this rental market really is, and it’s a great boon for us as investors to be able to purchase units in a marketplace like Toronto, where the rental market is very, very strong.
Interestingly enough, this week, Urbanation, the stats and tracking company that tracks the condo market, they came up with their latest set of data and it’s the Q2 Rental Market Report, so that’s for the second quarter of this year, 2015. Depending on when you’re listening to this podcast, it’s either highly relevant or it’s old news, but either way, I think you can learn something from this podcast today, so the highlights from the report were as follows: There’s a 22% increase over 2014, in terms of the number of units that were rented out in Toronto. They tracked over 8,200 condos that were rented in the second quarter; 22% increase over 2014. Keep in mind, 2014 itself was a record, so we’re seeing this trend ongoing, where more and more units are being leased out. The rental market is growing in size; it’s getting bigger and bigger, and this is a reflection, I think, of more and more people moving into the city, and more and more people wanting to live in condominiums, as opposed to other forms of housing.
The other very interesting thing is that the demand is greater than the supply, so again, this goes to the question of will I be able to rent out my condo? Is the rental market strong? What’s going to happen when I go out and I need to find a tenant? There’s a lot of fear around that, but again, one thing I always tell people is look, the demand is greater than the supply. Regardless of what people have told you, or what your aunt or your cousin and your Uncle Frank or whoever said that there’s too many condos going up in Toronto, it’s completely untrue. Just look at the statistics; the numbers don’t lie. The demand is greater than the supply.
How do we know this is true? Well, there’s a few ways of looking at the numbers, but the most basic way of understanding why the demand is greater than the supply, is to go back to Economics 101 and realize that in the basic equation of demand and supply, if prices are increasing, that means the demand is greater than the supply. It’s really quite that simple, so yes, prices continue to increase. Urbanation has reported … This was a very interesting number that jumped out at me … 4.6% increase in the index rental rate for Toronto at $2.48 per square foot, which is a new record high for the average rental price. By the way, per square foot rental price is really the only price you want to look at. The end price for a unit is really not as relevant or as interesting as the rental price per square foot, when you’re trying to understand the market and the direction of the market, and whether the market is growing or contracting.
The good news is once again, rental rates are increasing. 4.6% may not sound like a very big number to you, but it is a very big number when you think about if your rents are increasing at that rate every year; that’s a very healthy increase that’s going to really pad your bottom line as a real estate investor. I don’t expect that trend to continue. Over the last five quarters or so, the number has been more like 1 to 2%, but I’d be very interested to see if it does. That’s certainly a great sign, but I’d consider it more of an outlier most likely, but we’ll see if that trend continues at 4.6%. We’ll see what the numbers come out with in Q3 a few months from now, when the numbers are released for that, but that is nevertheless, it’s good news to continue to see rental rates increasing, demand being greater than supply.
Another number to talk about that, the number of leases to the number of listings ratio: It was 74% last year and this year, it’s 79%. Again, when that number goes up… The lease to listings ratio … That means, again, that demand is greater than supply. We’re seeing more units being rented out than new units are coming available to be leased, so that is again, a very good sign for the rental market, and speaking to the strength of the rental market.
Next point: New buildings. Let’s talk about new buildings. There’s been some press and some blogs I’ve read here and there lately; people talking about how new buildings, when they come out, there’s a whole flood of new listings for rent and there’s a glut. People start throwing around words like glut of inventory in new buildings and this and that, or stories of people under-pricing; investors under-pricing each other within a building just to get their units rented out when the building’s brand new. I’m not here to say that doesn’t happen; certainly, that does happen. I’m not here to say that there aren’t a lot of new buildings lately where you’re seeing a large number of units all coming out for rent at the same time. That is certainly true, but the assumption here, the insinuation from the skeptics on the market is that this sort of thing is a bad thing; it’s a problem to have a unit for lease in a new building.
Well, I would venture to say no, that’s not true, and one number that really speaks to that is the fact that the lease to listing ratio for new buildings was 90%, so newly finished, newly occupied and registered buildings, as per Urbanation, the lease to listing ratio was 90%, as opposed to again, the market number overall of 74%, so obviously, again … It’s something I talk about a lot … Is the fact that condos are commodities; therefore, as an investor, it’s always best to be in the newest building and to own the newest building. That is going to be the most in demand; that is going to be the building that the most number of people are going to be interested in renting. Everybody wants to be in the newest, latest, greatest thing when it comes to a commodity like condominiums, so again, to be in a new building is not a disadvantage. It is definitely an advantage and yes, there may be some moments … Very brief moments of insanity, with some investors dropping their prices just to get these units leased out as quick as possible, but that period of time lasts just a matter of a couple of months, and then the buildings will normalize.
The following year, when the building is fully occupied, instead of having a hundred units available for lease, there’s only eight or ten, then the rental rates will rise significantly. We see this time and time again, so more on that perhaps in another episode: The strategy around renting out your unit in a brand new building and what to do after the first year and so on. We’ll probably talk more about that in another episode, but that’s just one point I wanted to make there; that having a unit in a new building is not a disadvantage at all. I would definitely say it is an advantage, and it’s where you want to be as an investor.
Finally, just to finish it all off with the summary points: Something I say a lot is if the condo market was going to crash, it would have already happened. If it was going to crash any time in the last decade, I would say 2014 was really the year for it to happen. We saw a record number of completions in 2014 come onto the market, be added to the inventory of available units, and how did the market respond to all this new inventory? Well, it responded in kind and even more so, as we’ve seen. The demand is greater than the supply; on the rental side, absolutely.
When we look at the resale market, we’re seeing the same thing, as opposed to renting, when we look at the sales side of it in the completed buildings, resales prices again are also up every month this year. They’re up, they’re up, they’re up; the story continues to move forward and the skeptics continue to be left behind, and the people who are getting into the market now are making a really great decision for the future, and things are looking great. This is a great time to get into the market. Things are not rising at a crazy unsustainable pace at all, so the market is very strong. Things are looking great, and it’s a great time to be a condo investor in Toronto.
I hope you found this podcast useful. Once again, if you want to leave me a review, go ahead and do that on iTunes, or you can always send me an email: Andrew@truecondos.com. You can call me: 416-371-2333. That’s my direct line, and of course, you can always find me at Truecondos.com. Thanks for listening and until next time, have a great week.
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