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What to Look for in an Investment Condo

What to Look for in an Investment Condo

Feb 25, 2015
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With recent cuts to mortgage rates , we have many clients considering Toronto condos as investment properties. An investment portfolio that includes Toronto condo rentals can be an excellent equity growth strategy because when handled correctly, they pay for themselves monthly with added profit on top and you’re growing equity not just on your down payment, but on the bank’s money.

In addition, it’s a great time to invest in real estate as the rental market is on fire. Condos for rent in Toronto in hot locations can fetch top dollar, typically well above that of Toronto apartments for rent in houses. Plus, condos for sale in Toronto are generally more affordable than houses and less time consuming to maintain.

The key when purchasing is to ensure that the condo you pick will maximize your rental returns now and set you apart from the competition down the road when it comes time to sell. Here are our top tips for investors looking at condos for sale in Toronto as rental investments.

To be a Legit Investment Condo, First and Foremost, Does the Math Make Sense?

51TrolleyWEB-7

51TrolleyWEB-7

*Unit 1405 in River City I currently for sale would make an excellent rental investment as Corktown is rapidly gentrifying.

Investment condos are all about the money, money, money. The goal is profitability for you and affordability for your tenant (don’t exclude an attractive, competitive rental price from your equations). Try to keep emotion out of your decision-making and crunch the numbers on your various options with your investment goals and time horizon in mind.

Remember to account for one-off fees like land transfer tax and closing costs, occasional fees like advertising for new tenants and legal fees on drafting rental agreements (we advise that you use a lawyer), and ongoing costs like monthly maintenance fees, property tax and utility bills if they’re not included in your maintenance fees (or you can exclude them from your rental agreement but it’s less attractive to prospective tenants). Also, budget for income tax so that there are no surprises come tax season. You can read our landlord tax tips here.

Also, err on the side of caution and budget a reasonable amount for annual maintenance costs within your unit over and above what’s covered in your building fees (tenants tend to be harder on condos than live-in owners). If you’re planning on holding the unit for more than five years, plan for future mortgage interest rate increases as well.

And don’t get caught off guard by fees associated with buying pre-construction and selling too soon after occupancy. Have a read of our previous article on pre-construction condos as investments . We’re not saying don’t buy pre-construction–there are still some great value pre-construction buildings to be found with reputable builders–but you need to go in eyes-wide-open. We always recommend viewing newer, re-sale units before signing on the dotted line for pre-construction to make sure that you’re making the best purchasing decision for your particular goals and circumstances.

Who is my Target Tenant? Is the Unit Size and Location Spot On?

Every investor has a different tolerance level for risk along with how much time they’re willing to dedicate to being a landlord. If you’re looking for property that’s easy to rent with low probability of extended vacancies, small (around 550 sq. ft.) downtown Toronto condos that you can rent for less than $1,500 / month are a smart idea. But remember that you’re likely to get students or young professionals just starting out in their careers, which means turnover may be high as they move away after school or continue to move up the property ladder.

If you’re looking for a professional who could become a long-term tenant, then you’ll need to consider a larger space in a neighbourhood that’s still convenient to downtown and transit but has more of a community feel. Liberty Village condos make great investment properties for the young professional rental market as do Distillery District condos .

clear-spirit-view

clear-spirit-view

*The hip, Distillery District location, stunning, rooftop views and coveted pool in the Pure Spirit Condos are a hit with renters.

If you want to maximise your rental returns with a family-sized condo, you’ll likely need to look a little further outside of the core to make the math work. There are some excellent investment-worthy North York condos like Peninsula Place with suite sizes up to 1,628 sq. ft. and St. Gabriel Manor in popular Bayview Village . Mississauga condos are also well worth a look, such as North Shore in Port Credit with generous suite sizes, lakefront views, and an enviable location steps to shopping, amenities and the GO station.

What’s the Local Area Competition Like?

With the entry price of homeownership being prohibitive for many, renting in Toronto is on the rise. Toronto rentals are more in demand than ever. But that doesn’t mean you can charge whatever you want to turn a high profit. You still have to price your unit in accordance with the competition and what the market will bear.

When you find a condo you’re interested in, make sure to check out rental listings in the neighbourhood to make sure that the price you need to charge to meet your investment goals is in fact realistic. You can view all Toronto condos for rent on our website by signing up for free. Click through to the relevant location using our neighbourhood search tool on the main menu or our full neighbourhood guide .

Do Your Due Diligence on the Condo’s Reserve Fund, Property Management Firm and Board

Perhaps the biggest risk to investors is a massive hike in maintenance fees or being slapped with an unexpected special assessment cost. You don’t want surprises as an investor eating away at your profits. Before you buy, it’s critical that you work with advisors (your realtor and your lawyer, perhaps an accountant as well if necessary) to review the condo’s status certificate which will tell you how well the building’s being run and whether or not it’s financially healthy. You can learn more about what a status certificate is here. In particular, find out what’s in the reserve fund. Ask your advisors if it seems like a reasonable amount given the building’s history and profile and how it stacks up to comparable buildings.

Screen Shot 2015-02-25 at 10.55.17 AM

Screen Shot 2015-02-25 at 10.55.17 AM

Also, do some digging with your realtor on the reputation of both the original builder, the condo board and the property management company. It’s really people that have the biggest impact on your monthly maintenance fees (i.e. in terms of how well-built and well-managed the property and budget is). Most well-managed buildings see slow, reasonable increases in fees overtime; some like the Toy Factory Lofts have actually reduced fees. Find out more about condo maintenance fees in our special report on this hot topic.

You can also view maintenance fee historical trends for every Toronto condo on our website for free, along with all of our other unique research tools, by signing up as a condos’ Insider . In particular, watch for the correlations between maintenance fee increases and decreases in price per sq. ft. values. Look for investment condos with stable, historical profiles.

Think About Re-Sale Now

broadview-lofts

broadview-lofts

*The Broadview Lofts is one of the best all-around investment buildings in the city.

No one has a crystal ball but you can make some reasonable assumptions now that will help position you optimally for re-sale years down the road. If you can afford a large 3-bedroom or 2 bed + den condo, this is a great strategy as they’re in such high demand both as rentals and re-sale units. Another strategy is to consider a Toronto loft as loft buildings are rarer and they’re not building many more.

You also want to take a look at historical value trends for each building and neighbourhood on our site and work with one of our Condo PROs to make some logical predictions about future value appreciations.