As we continue our series on Real Estate as an Investment, let’s look at how condos can be a valuable asset to your portfolio.
With stock markets unpredictable, many people invest in real estate by buying a place they can call home and/or one that serves as a rental property.
There are two ways you can make money with an investment condo:
1 – Cash flow from rental income.
2 – Capital appreciation on the property between the time you buy and the time you sell.
Here’s what you need to know:
- The 20% rule – You won’t be able to get a mortgage on a second investment property without a 20% down-payment. That’s okay because you’ll likely need that much equity in your property to break even on a monthly basis. If you can’t break even or make money on an investment condo with 20% down, keep looking.
- Location, location, location – Yes, it’s the cardinal rule of real estate. But it’s even more important when you’re looking for tenants. Desirable locations near public transportation, schools and things-to-do, will earn more rent for you.
- Don’t forget re-sale – It may be tempting to buy that 400 sq.ft. condo overlooking the Gardiner Expressway. Yes, it’s likely to be affordable and renting it out should be easy. But when the time comes to sell it, will there be buyers wanting to live there? You want to buy a condo in a building that will appreciate in value, i.e. no glaring headlights lighting up your living room.
- Money, money, money – There’s more to owning an investment condo then just the down-payment and mortgage. These extra costs (maintenance, insurance, property taxes, etc.) will affect your Return on Investment. Beware of high condo fees – they can make or break your investment.
- The Tax Man – Don’t forget that revenue derived from your rental unit is taxable income. You’ll be able to write off your operating expenses such as utilities and maintenance fees, repairs, insurance, and interest on your mortgage. An investment condo will trigger capital gains tax on the increase in value during the time you rent it out – so it’s not free money. Be sure to speak with your accountant to fully understand the tax implications before your commit to purchasing a condo.
- The Rental market – Rental vacancies in Toronto are at an all-time low (around 1%) so there is clear demand for rental properties. I see bidding wars for rentals all the time.
- Being a landlord isn’t all fun and games – You may have a bad tenant or worse, one who doesn’t pay the rent. Make sure you understand the laws (Ontario, generally favours the tenant). There are great property management companies out there, but those costs will eat into your profit, and they won’t help you recover the lost rent.
As an aside to anyone who hasn’t been following the Toronto condo market…today it’s more expensive to buy a Pre-construction condo than a Re-sale condo. This wasn’t always the case. In setting today’s pre-construction prices, builders try to predict where the market will be in X years (usually 5), i.e. when the project is completed. On the other hand, re-sale condo prices reflect the current state of the Toronto real estate market.
If you’re looking at buying an investment condo in Toronto, I’d love to help. You can send me an email or call and we’ll start a conversation about your neighbourhoods of choice and price point that will make for a good investment.
