If you’re interested in real estate, you may be wondering: is buying a condo a good investment in 2019? Although Toronto condos are highly sought-after properties, many investors are unsure about whether to take the plunge. Purchasing a unit is a big decision, and there are many factors to consider—especially if you intend to rent out your new space.
If you’re on the fence about investing in a condo in 2019, here are some of the most important things to think about before making a decision…
The condo market in Toronto in 2019
Recent demand for condo rentals in Toronto has been exceptionally high. Vacancy rates are low, rent is on the rise, and competition between buyers is intense. In response, many investors have been purchasing units as rental properties.
For forward-looking investors, the condo market is just as attractive for its stability. The average long-term appreciation rate of real estate in Toronto is a respectable 5-6 per cent. While past performance isn’t always an accurate predictor of future performance, it’s fair to say that purchasing property in the city has historically been a good investment.
In terms of growth potential, the GTA’s population is expected to increase by 2.8 million by 2041. The number of people living and working in Toronto grows every day, and these new residents require housing. For investors, that means a larger pool of potential tenants in a market where demand is already high.
Doing the math on your condo investment
Of course, it’s important to assess each investment opportunity individually. Running the numbers is crucial, and one of the most important considerations is cash flow.
In the most simplified terms, your cash flow is the revenue you’ll generate from your condo, minus your expenses. If you receive more than enough money to cover costs like taxes, condo fees, and ongoing maintenance, you’ll have positive cash flow. A condo that doesn’t provide positive cash flow isn’t necessarily a bad investment, but knowing the difference will help you make an informed purchase decision.
Start by determining the potential revenue you expect to receive from rent. Many factors will determine the sum you should charge tenants—from the rents in comparable buildings in the neighbourhood to the features and amenities your unit offers, and the condo fees associated with the building.
You’ll also need to estimate expenses. In addition to regularly-occurring costs, you should factor in those that may come up from time to time. Special assessments—which are typically levied when a building repair can’t be covered by a condo board’s reserve fund—are one example.
If you plan to buy with cash, you can find the rate of return on a property by determining its capitalization rate (cap rate). To calculate it, you would divide your net operating income—the revenue from the property minus its operating expenses—by your purchase price. In general, higher cap rates are better. Four per cent is considered a decent rate in Toronto.
Your cap rate won’t accurately reflect your return if you obtain mortgage financing. Return on investment (ROI) is a similar metric that takes financing into account, but you’ll have to factor in your monthly mortgage payments to find it.
What to look for in a condo in 2019
Before you get into the financials, you should know what a good investment condo looks like. First and foremost, if you’re buying a condo purely as a rental property, you need to consider your target market. For example, if you determine that your ideal market is luxury buyers, look out for high-end finishes and upscale building amenities.
Location is another important factor. Is the building you’re looking at in a desirable Toronto neighbourhood? Does it offer easy access to transit? Are there shopping districts and other conveniences nearby? Answering these questions can help you make a smart investment.
Size also matters, since smaller units tend to rent for more per square foot. On the other hand, larger condos are increasingly hard to find, and many Toronto families are looking for them. Your real estate agent can help you identify an appropriate target market and find properties that align with it.
The bottom line
Is buying a condo a good investment? For Torontonians who invest wisely, it certainly can be. There’s no one-size-fits-all approach—it all depends on your goals, your financial situation, and your target buyers. Are you ready to learn whether buying an investment condo is right for you?
For over 30 years, our clients have trusted us to minimize risk, offer unbiased opinions, and ensure their best interests are served. Contact us today to talk about your needs, by emailing us at [email protected] or calling us at 416-441-2888 ext. 772.