One of the biggest factors to consider if you’re thinking about taking the leap into condo investing is, “Will the unit I can afford provide me with the monthly cash flow I’ll need to cover my mortgage?” If the rental amount you can get covers or exceeds your fixed costs i.e. your mortgage payments, property taxes and maintenance fees, then you’re golden. If it doesn’t and you’re expecting to lose money every month, yes you can claim the loss on your taxes, but that’s about the only benefit you’ll receive.
Are Condos a Good Investment as a Rental Property?
Ideally, condos are a good investment if they can offer you the monthly cash flow to cover your mortgage while appreciating in value. As obvious as it might sound, as your tenant pays off your mortgage, your equity will build if the value of the condo remains the same, or better yet continues to increase. This gives you capital appreciation, so you can make some profit when it comes time to sell.
For an investment property, you’re required to put down at least 20 per cent. As with any mortgage the more you put down the lower your mortgage payments will be.
Once you add up to the total of your monthly mortgage payments, maintenance fees and annual property taxes (don’t forget about utility costs if you’re planning to cover these instead of your tenant), you then deduct the total from the going rental rate in the area. According to Urbanation, the average condo rent has risen to $2,206 for a typical 740-square-foot unit and $2,432 for a downtown unit of 711 square feet. BUT we’d like to point out that there’s a shortage of rental units in Toronto, and we’ve seen tenants duking it out in bidding wars that’ll knock that rent price right up. It’s a thing and it happens a lot.
Our last thought on the finances: as long as you break even each month it’s fine as ultimately your goal should be to pay down that mortgage to build equity. Since all you paid is the down payment, the lion’s share of the profit (after taxes) is yours.
Are Condos a Good Investment Considering Taxes?
Ah, taxes. In theory, you’re thinking all you’ve got to do is keep an eye on how much you owe on your mortgage and then sell when it looks like you’ve built up enough equity. However, the taxman might make what you think is a massive profit shrink like a Speedo after a dip in a cold lake!
The awful truth is that there’re four different ways you get hit up for taxes when you invest in a condo:
- At the time of the purchase: Ontario and Toronto land transfer taxes are applied to the purchase price
- Owning the condo: Income taxes are paid annually as your rent becomes part of your income (there are deductions as a landlord as well)
- Property Taxes: Ideally added to your mortgage payments to make it easier
- At the time of the sale: Capital gains taxes which are a whopping 50 per cent (yep) of your profit
When it comes to capital gains, living in your rental condo for some of the time you own it can work in your favour as you’re entitled to a principal residence exemption for the years you live there – which brings us to our retirement condo option.
Using your Rental Unit for Retirement
Investing in a condo first as a rental unit and second as a potential retirement property for yourself is another consideration. The beauty of this plan is you can buy a condo, rent it to pay off the mortgage and then sell your home and move into your condo when retirement arrives.
This works well as a) You’ve got a plan in place for an affordable, low maintenance housing option in your retirement years b) You’ve got a nice little nest egg to live off when you sell your current home c) You get your principal residence exemption when you sell and d) You can always decide to continue renting or sell the condo if your plans change.
So how does one decide where to buy an investment condo?
Location, Location, and YES Location
A common rookie mistake is thinking if you buy a condo for a lower price you’ll be able to make more money. BUT, location and amenities always top the list for tenants’ wants AND, usually paying a lower price means the perceived value of that unit is lower, which in turn means it’ll be harder to rent, not to mention harder to sell to see any profit.
If you think you’re getting a great deal on a property say in Scarborough that’s a 30-minute bus ride to the closest subway station, miles away from restaurants and shopping in a rundown suburban area, chances are you aren’t going to find a high demand for this unit and won’t be able to charge as much rent as you’d like.
Likewise, if you pay more for a unit in Libertyville which is close to everything anyone would ever want you’ll pay more for the unit but get more for rent. One more BUT: If you opt for a unit with tons of high-end finishes and a killer view you’ll pay a higher price for the condo, but not necessarily be able to charge as high a rent as you think. Investing extra for views, counters and sparkling appliances doesn’t ALWAYS get you your money back in rent. The reason? What’s important to you as a buyer, isn’t as important to a renter and therefore they might not necessarily be willing to pay for all the shiny, sparkly bling. So, the lesson here is, location is always number one for renters.
Are Condos a Good Investment Outside the Downtown Core?
Although there are many tenants who want to live in Toronto condos, not all of them can realistically afford them. This is good news as it means it’s not just downtown TO condos that’ll make a good investment. You can look at many options that people will be just as anxious to snap up as long as they’ve got the proximity to easy transportation and amenities.
According to TheRedPin, the costs of condos varies greatly depending on location. For example, the average cost for a 600 square foot condo in the Bay Street Corridor is $744,129 compared to $502,185 in Mimico. You can see how a location outside the core can help make your mortgage more manageable, while allowing you to collect a respectable monthly rent. (Oh, and another thing, maintenance fees tend to be lower outside the downtown core as well.)
We keep an eye out for just such opportunities not only for our regular clients looking for affordable homes, but also for our clients who ask, “Are condos a good investment?” There are many areas in the GTA that are ideal for tenants looking for an affordable rental option within a doable commute to the downtown core.
Purchasing New Pre-Construction Condos
The last of our condos as an investment scenario is purchasing new pre-construction condos. This can be a good plan as long as you’re in a market where the price of condos is rising. Down payments are generally 20 per cent but are often spread out over a few payments every 30 to 90 days. As part of this plan, you’ve got to include what’s called an “Assignment Clause” which allows you to sell your unit without having to move into it first.
Your estimated completion date is where the ROI comes in. In theory, the value of new pre-construction condos will rise during construction. So, with a 20 per cent investment, once the unit is complete and the market sees a strong climbing rate of say 5 per cent per year you can make a nice profit with little effort. But we always wave a red flag here, because there’s the risk the rate might not climb and, in some cases, could potentially drop, but hey that’s the risk of any real estate investment. On the positive side, condo prices are on the rise, especially when compared to houses. In March condo prices rose by 6.19 per cent over last year compared to detached homes which actually declined by 14.3 per cent.
Get the full scoop on purchasing new pre-construction condos here.
Work with Someone Who’s In The Know
The final word on the resale condo as a rental property is to remember that you’ll become a landlord. It’s easier renting a condo than a house because they’re in higher demand, and the maintenance fees cover many issues that’ll arise with the unit. BUT it doesn’t cover things such as broken dishwashers, so you’ll be the one called for that. On the flip side, purchasing new pre-construction condos frees you from the landlord position, but leaves you having to sell the condo in a shorter period of time so you need to see an increase in value that’ll make it worth your while.
So, are condos a good investment? If you can find the right location, the right price and the right mortgage, the answer is Yes! Just make sure that you’ve done your due diligence on the factors we mentioned above.
If you’re considering the idea of condo investments, we can help you find the best investment options for you. And even if you’re considering a pre-construction purchase, we can offer unbiased information on the location, and other considerations that will affect resale value. Give us a call #416-291-7272 or email us and let us help you find that perfect investment property!