Looking to invest in the Toronto condo market? Wondering where to begin and what you should know? To be successful you need to understand the basics and have a plan. Here are some tips and advice that will be helpful for the novice or experienced investor.
GET IN THE RIGHT MINDSET: THINK LIKE AN INVESTOR
When you begin this process, you must resist the urge to think like a buyer and train your mind to think like an investor. Successful investors don’t worry about whether the neighbourhood is one they’d personally want to live in, if the bedroom has a walk-in closet, or whether the building faces east or west. Buying for investment is a completely different mindset than buying for yourself.
WHAT TYPE OF PROJECTS ARE BEST TO INVEST IN?
When it comes to investing in condos, not all projects are created equal. Some projects are more profitable than others; some provide investors excellent ROI, while others do not. So how do you know what to look for when choosing a project to invest in? While there are hundreds of factors that need to be considered when picking the right project for investment; however, here are 4 tried and true ingredients that many of the best condo projects for investment have:
Projects that are not just one-of buildings, but rather contain multiple buildings rolled out over time as part of a bigger master plan, are great for investment. If the project is successful at the start, prices always go up for subsequent phases. Getting in early in a multi-phase project is a proven method of making money in condo investing. The most well known examples of multi-phase projects/communities include Cityplace, Liberty Village, the Distillery District, and most recently the revitalization of Regent Park.
Location With Upside Potential
While it’s hard to go wrong when you invest in an established triple-A (AAA) location like Bloor-Yorkville, anywhere near Yonge Street, or King West, it often takes a little more foresight to see the greatest opportunities are in areas that are still in transition. Ten years ago, no one wanted to live at King and Bathurst. Now this area is one of the hippest and hottest in the city. Today for example, the east side of downtown is much cheaper on average than the west side, which provides an excellent opportunity to invest.
Areas with a Strong Rental Demand
When evaluating potential condo buildings to invest in, be sure to study the rental market in the immediate vicinity to see how much demand there is to live in the area. Look especially for two things: are rents increasing and how many days on the market does the typical rental listing last. Areas with rapidly increasing rental rates and very low time on the market are more likely to outperform other areas. One area that has an incredibly strong rental market right now is Yonge and Eglinton.
On this point, I’m not referring to whether the developer has a solid history of building good buildings and finishing on time (while that is important) – I am referring to their history with their investor-buyers. The best condo projects for investment are often those where the developer understands and puts a high value on the role of the investor-buyer in the sales process. They reward their early investors with great prices and this translates into strong asset appreciation by the time the building is complete.
WHAT MAKES A GOOD LOCATION FOR INVESTMENT?
What makes some condos better investments than others? Why do some buildings have huge demand for renters and buyers when others are passed by? Look for a condo with these 5 ingredients and you are setting yourself up for a successful long term investment with higher rents and higher ROI.
Access to a transit stop (400m or less) is essential to any good condo investment. Bus stops or streetcars are acceptable but access to the subway will always be best. Ideally you also take advantage of “future transit” – transit that is not in place yet but will be in the future.
When buying a house, being close to the best elementary and high schools is great for investment. When buying a condo, the benefit comes from being close to a college or university campus. A large number of post-secondary students in a small area will drive up rental rates.
Restaurants & Cafes
Restaurants (especially the major chains) spend a great deal of money on market research before they set up a new shop. Restaurants bring life to the street and people to the neighbourhood. Today’s urban renters don’t cook much, so they are looking for great options to eat close by.
Having plenty of shopping options closeby, or even better, in your own building is another factor that will drive up resale values and rental rates. Convenience is key for today’s young urban professional, so give them what they want and invest close to where they like to spend their money.
Last but certainly not least, you want to make sure that your condo is located close to where people work. In the simplest of terms, where there are jobs, there is money, and where the money is, you should follow. The ideal location will be a live/work/play neighborhood with everything that a person could need within a 15-20 minute walk of their front door.
A RENTABLE FLOOR PLAN
When you are buying a condo for investment, you want to ensure that the unit and the floorplan you are purchasing is “rentable.” The more functional, appealing, and practical your unit is to the eye of the renter, the more valuable it becomes. Here are handful of things that will help make sure your unit is “rentable.”
Renters today more than anything are concerned about having a location that is convenient for work, shopping and transit. Buy near these 3 and you will have a winner.
After location, renters look at the price of your condo. The lower the price, the more potential renters you will attract. Therefore, for condo investments, buy small and buy cheap to keep your pool of applicants vast.
While some renters prefer a smaller, quieter building with little or no amenities, generally speaking most renters would choose a building with plenty of amenities over one without. The most important amenity by far is a good gym.
Flexible Floor Plan
Floor plans that allow for different uses of the space, for example a den that could be a second bedroom, will once again open up your unit to more potential renters.
This may seem like a small detail but it is very important to tenants. Invest in a good set of window coverings and your unit will be more attractive to tenants and will rent out faster. Remember that most renters have trouble visualizing a space as their own. Any details to make the space more appealing will increase your likelihood of successfully renting out your unit.
PRE-CONSTRUCTION CONDO CONTRACTS: PROTECT YOURSELF
The first step in buying a new condo is to sign the purchase agreement and hand over your cheques. The agreement of purchase and sale and accompanying documents may seem like the beginning of the end in this long and daunting process; however, you must now ensure you have a good contract with favourable terms up front because your contract can be the one thing that makes or breaks your investment in the long term.
Capped Closing Costs
If you don’t have caps in place for things like development levies and utility hook-ups, your closing costs could theoretically be in the tens of thousands (not including land transfer taxes and legal fees). The number one thing you want to make sure your contract includes is a cap on these costs. This is especially true now that development charges are much higher than they used to be 5 years ago. Typical caps these days for a 1 bedroom would be around $3,000-5,000 and for a 2 bedroom – around $7000-$10,000. Utility hook-up caps are typically around $1500. The caps are the maximum amount these charges will be at closing – could be less but will not be more.
“Nickel and Dime” Charges
Most contracts are pretty standard with respect to fees and closing costs, but some developers do try to sneak in charges for all sorts of things related to the purchase. $100 here, $50 there… they can be creative! A good lawyer will point out some of these added expenditures to you and recommend you ask the charges be waived. It’s up to the builder’s discretion on what they will waive and what they will not.
Renting During Occupancy
Most contracts by way of their standard wording forbid the renting of your unit during the occupancy period; however, most developers will grant you permission to rent during the occupancy period if you request this in your contract. Make sure you do request this clause if you are buying for investment.
Your contract may or may not spell out HST implications if you are buying for investment. Most agreements assume you are buying to live in the unit and therefore all HST is already included in the purchase price. However, if you are planning on renting out the unit, you might have to pay a portion of the HST on final closing and then apply to the CRA to receive the money back in the form of an HST rebate. Consult a qualified lawyer or accountant to understand how the HST is handled on your purchase.
An assignment clause allows you sell prior to final closing, usually under some conditions set by the builder and often there is a fee associated with executing the assignment. Hopefully you intend on closing on your unit and holding it for the long term; however, it is always wise to have a back-up plan in case your plans change in the years between purchasing and completion of your unit so make sure you are able to sell by assignment.