If you come prepared and educated about market, there is still money to be made and smart ways to place your capital.
Before we get into the five ways to insulate your condo investment, here is the harsh reality of the market: overall sales have risen 8% from March 2012 and the average price is up almost 10% from this same time last year. However, condo sales remained unchanged for the same time period and in the 416 region, there was a 2% drop in sales.
More specifically, the downtown Toronto area has seen a 13% decrease in sales. So, if this trend continues, what’s next, how do we insulate our capital? Here are five ways to filter your seach:
1. Location, location, location
Even in this market, you can’t beat that age-old adage. If the market does decide to fall, the buildings and properties that will be the hardest hit will be the ones that don’t have location on their side - even if the product is spectacular. Where condos are concerned, the closer to the downtown core, the better. This goes back to simple supply and demand principles.
2. Run the Numbers
I still can’t believe how many investor clients that I meet and they have no idea about cap rates, cash-on-cash returns and other key investment measures. You certainly don’t have to be an investment wizard, but I assure you, speculation hurts the most when you don’t do your homework. What is the point of investing if you’re not making money, right?
Here is a tip: after interest and operating costs, how much money will you be earning from the rental income for that building and at market rates? Are you cash-flow positive? Remember, unless you’re an al- cash buyer, rental rates in Toronto have not risen in the same fashion as price, so it has become increasingly difficult to find a property that has positive cash flow after expenses, despite the low interest rates.
3. Buy Resale
In the last five years, new construction condo prices have risen almost 95% from their 2007 highs ($680/s.f. vs. $350/s.f.). While we can find many reasons to justify these price increases, it has become increasingly difficult to sell them, especially when you can buy the same resale product at a 20% discount and it includes parking / locker. So, unless you’re buying a condo for the ‘new car smell’, keep it used and buy resale. Don’t worry, the developers will be fine.
4. Size Matters
When it comes to buying condos, there is a general rule: bigger is more expensive per square foot. Large suites are hard to come by in today’s market with suite sizes getting smaller and smaller, and with more baby boomers looking to downsize into ‘larger’ condos, so it makes sense to meet the future demand.
But, buying big is not always best. Steer clear of high-rise condos right now. The market is flooded with greedy developers adding extra floors to top up their bottom line. Boutique buildings (South of 15 floors) provide more insulation, stronger communities and are usually end-user buildings.
5. Know the Builder
I can’t stress how important this is, especially in today’s market: if the price seems too good to be true, then it probably is. In today’s market, there are developers everywhere - even Uncle Jim, the bartender has become a developer with that old commercial lot he inherited. Like any product, there are good and there are bad producers. Be aware of them and ask questions. Be sure to research their past. Here is a quick pointer: buy from a local developer. They have more knowledge about the local consumer and tend to care about the end product. If the lead developer or person spearheading the project hasn’t put on a hard hat and visited the site last week, forget it.
Is the sky going to fall? No, probably not. But, as mentioned, you need to be cautious and educated in order to make the right decisions. Having a smart and diligent Realtor will help, but not always. Be sure to do your own homework and ask around. Hopefully, the filters above will help get you started down the right path. Good luck!
Adam Brind is the co-founder of the Core Assets Real Estate team and is also the co-founder of the online cottage rental hub, TwoHoursNorth.com. Email him at firstname.lastname@example.org
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