Many people have received solid returns from purchasing an investment property in Canada over the last two decades. However, as the cost of real estate and interest rates rise, jumping into the real estate market may be different from the slam dunk it used to be.
Like any investment, buying a condo requires careful consideration. You need to think about how it fits into your budget, current market conditions, and whether you want to be a landlord. Here are some tips for buying a condo as an investment property.
Check your financials
When considering a condo as an investment property, the first thing you should look at is your finances. Many investors prefer to buy a pre-construction condo as it doesn’t require them to get a mortgage. However, if you’re purchasing a pre-build condo, you’ll likely need to put a deposit of 20% down.
This deposit is typically paid out in installments and might look something as follows:
● $10,000 on signing
● Balance of 5% in 30 days
● 5% in 90 days
● 5% in 180 days
● 5% at occupancy
Even though occupancy may not be for a few years, you’ll still need to come up with 15% of the cost within half a year. If a pre-construction unit is sold for $600,000, you’ll need $90,000. Assuming you have that money available, you must ask yourself if buying an investment condo is right for you. For example, paying down debt or topping up your retirement fund might make more sense for your finances.
Consider the market conditions
Market conditions can change at any moment. Interest rates and the economy can shift markets, but even inventory can impact the price of real estate. In Vancouver, many single-bedroom condos have entered the market as investors demanded them. However, end users (buyers) don’t necessarily want investor-friendly small units. As a result, the market has been flooded with units, which has lowered prices. While prices may go back up, no one can tell you exactly when.
Additionally, even though rent prices have gone up on average, it’s almost impossible to be cash flow positive - where your income is more than your expenses - these days. You’d be losing money every month in hopes that you make up the difference when you hopefully sell at a higher price later.
Assess the potential condo
When considering a condo as an investment property, one of the first things you should do is research the developer. Find out how many properties they have developed previously and what their track record is. It’s worth noting that there’s both a developer and a builder. Even though the developer might have a good reputation, the builder they select might not have the best record. You’ll want to research both.
While researching, you’ll also want to find out how far along they are in development. Having plans and a showroom is one thing, but having all the permits and city studies completed is another. Additionally, see if the marketing materials match up with any public information. For example, if a developer says that a subway or shopping plaza will be built nearby, make sure those plans are firm.
Decide if the unit makes sense
Many people looking to buy a condo as an investment property will opt for a cheap unit as it helps with their cash flow. That usually means you’d be looking at a small studio unit. If the layout is decent, then this might be marketable. However, if the layout is awkward, expecting a lineup of people who will want to rent it later is unrealistic.
Purchasing a unit that appeals to different types of people or families will help with your overall return. That said, these types of units will cost more, and you may need more capital.
Ask yourself if you want to be a landlord
Buying a condo for future appreciation sounds nice: You buy the unit with a small deposit, and the rent you receive will offset your mortgage costs. When you eventually sell, you’ll hopefully make a nice profit.
But as we’ve already established, most condos are no longer cash flow positive, so you’ll be putting in extra funds each month. In addition, you’ll need to find a tenant, which makes you a landlord. Being a landlord is not a hands-off job, as repairs and maintenance may require your attention. Yes, you can outsource this work to a property management company, but that further increases your expenses.
Be aware of common pitfalls
Overlooking hidden costs and underestimating expenses happens more often than you would think. For example, there are interim occupancy fees if you’re buying a pre-construction condo. These fees are mandatory when the builder gives you possession of the property, but the condo is not registered yet. Since the condo isn’t registered yet, you can’t get a mortgage or lease it. These fees are often referred to as phantom rent.
Even when you rent the unit out, you need to account for any vacancies. You’ll rarely have one tenant move out and a new one move in immediately. Even if you make the timelines work, you need to factor in any repairs that need to be done before the new tenant moves in.
Final thoughts
Buying a condo as an investment property could make financial sense, but it’s not a guaranteed return. Your best bet is to look at current market conditions and work with a realtor who can advise you. That said, real estate agents work on commission and only get paid when they make a sale, so you should always do your due diligence.
Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog
Money We Have is one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.