Pick or Pass: What Makes a Condo a Good Investment?

The condo market in Toronto seems to be unfazed by the introduction of the Ontario Government’s new Fair Housing Plan. In some instances, the number of units bought by investors outnumbers the number of units bought by end users (i.e., those who are going to move into the unit themselves) in buildings throughout the city – which begs the question: should the number of investors versus end users matter to you when choosing a condo building to purchase in?

Investor Owned Units – What Can Go Wrong?

Using the supposition that investor owned units are rented out, knowing the number of investor owned units in a particular development can be integral to determining the long-term finances and sustainability of the condo building (not to mention your enjoyment of it). 

Maintenance Increases and Common Areas: It can be difficult for investors to properly vet all prospective tenants to ensure they treat not only the unit as their own, but the building as well. Condo buildings with a higher proportion of renters can fall victim to inhabitants treating the building like a hotel – not like a permanent place of residence (which is why many condo corporations have banned services such as Air BnB from their buildings). As such, common areas and amenities can suffer and have the possibility for an accelerated rate of deterioration, which then may eventually need to be fixed and replaced. If the condo corporation experiences unexpected expenses in regards to keeping up with the maintenance of the building, it’s possible owners may see increases in monthly fees which can also make it less attractive to potential buyers.

Potential for Volatility: If a building has a high proportion of investor driven units it gives the potential for that building to be more susceptible to market fluctuations. Some investment is speculative in nature, so if it looks like there may be a market fluctuation or that the investment may be less financially viable, units might start going onto the market for sale at a higher rate than in a building with mostly end user inhabitants (as end users didn’t buy the unit solely to make money, but to live in). Simple economics says that as supply goes up, the equilibrium price must drop as well potentially leading to a decreased value for unit owners across the board.

How to Determine if a Building is Investor Driven?

Unit Type Distribution: Determining the proportion of studios and one bedrooms versus the number of two bedroom units can sometimes assist the potential buyer in knowing both the builder’s intent when planning the development and the potential makeup of end users. In some instances, buildings with a higher proportion of studio and one bedroom units (smaller square footage) attracted investors whereas two bedroom units attracted end users. Looking for a building with more two bedroom+ units may be a safer bet when buying.

Status Certificate: Typically, the status certificate will have information regarding the number of leases (units rented out) in a particular building which would be uncovered during the status certificate review by the buyer’s legal representation. Alternatively, the buyer agent should be able to get a rough idea of how many leases there are in the building through an MLS search for rental units at that address.

Next week, I'll discuss the other criteria I look at to help my clients make smarter condo buying decisions. 

Nicole Harrington is a Sales Representative with Realosophy in Toronto. She specializes in using data and analytics to help her clients make smarter real estate decisions, concentrating on Toronto and the GTA, and hosts her own website: SheSellsToronto.com.

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