GREATER TORONTO AREA REAL ESTATE BLOG
Why Buying a Condo is likely NOT in ‘Your’ best interest!
Thinking of Buying a Condo? Read this.
I have touched on the subject of condos a number of times but this time I’m going into full details why you should think twice before buying a condo in today’s market.
Last few months have been very busy for me and by many accounts we are in a period of one incredible hot run Toronto’s real estate market has ever seen. In the midst of this buying frenzy (which I predicted back in winter) I wanted to talk in detail about Condos and why even with today’s hot market for 8 out of 10 of you it will likely end up being a ‘terrible’ investment.
Somebody told me the other day, “Well, this condo will be worth more 10 years from now, so it’s all good”.
Will that condo be worth more 10 years from now? In my opinion it most certainly will. But does that make it a good investment today? Definitely not!
There are some people who truly swear by the lifestyle that condo living brings, and they are generally the ones who will fall into 20% of people in my books to be qualified for a condo purchase. Others will buy a condo simply because they want to live in the city but for obvious reasons can’t afford anything but a condo. And that is a valid reason as well… sort of (more on this later).
However, big chunk of today’s condo buyers that I know would be categorized as such:
Group 1: “Investment Gurus”
Group 2: “Live in it couple of years, then become Investment Guru”
Group 3: “Live in it couple of years, then sell, make money, & upsize!”
Likely end result:
Group 1: Fail.
Group 2: Fail.
Group 3: Fail.
If you’ve made money doing that previously, great! But you are unlikely to do that if you start today.
The Investment Guru will likely be buying pre-construction… these are my favourites. Honestly, please give me a call! I want to earn my 4-6% commission just for walking you into builder’s office (in particular to the one that pays the highest commission) and collecting a big fat cheque for doing next to nothing. But in reality, those of you who know me, may have noticed that I never EVER post on any of my social media sites or here anything that encourages or promotes people to invest in ANY pre-construction condo projects. Yes, 4-6% commission is nice but my sleep is more important. Ultimately I treat my clients’ purchases like my own, and all this pre-construction stuff is a game that’s been dead for years, so stay away!
2nd and 3rd type of condo buyers are interrelated. These are the people who buy a condo with the plan to live in it for couple of years, then either keep it (become landlords) or sell it, in hopes of making money, and upsize.
Living in North America, we are accustomed to upsizing… I think this is embedded in our blood. We upsize in houses, cars, TVs, I mean even my iPhone apparently is too small and is due to be ‘upsized’ this year.
Thus, many, who buy condos, do indeed plan on upsizing in years to come. Well, guess what, large chunk of these condo buyers have been trying to upsize to a house for years now, and slowly realizing that their condos just don’t have enough equity to afford to make a move into that high demand low rise market.
That is when the Investors are born within them. From my 10+ years of day-trading experience one thing that was learned: bad trader is an investor. When you buy some garbage and start losing money (1 aspect of being a trader), instead of cutting it lose, you decide to hold on to it until it starts making you money (becoming an investor). So you wait and wait in hopes that since the house prices are increasing so much, then my condo will eventually too. Stop ‘hoping’ and get rid of the losers! The old saying “cut your loses fast, and let your winners ride” is that medicine for you.
I have mentioned in one of my previous blog posts how much of a difference there is in price growth between low rise and high rise properties, and I only expect that difference to become wider in years to come.
Today, an average realtor will likely have to do at least 4x more work to find their clients a house compared to buying a condo unit. In many cases you can find the right condo in 1 day… there is a ton of choice with no competition from other buyers for 95% of those units on the market. Houses? The opposite. There is competition for 95% of them in the city. Multiple offers, failed attempts, low listings, months and months of trying, frustration, etc etc.
And it amazes me how many people are sitting on condos which were purchased as far back as 4-5 years ago that are actually going to result in a ‘net’ loss today. Big chunk of them are the Investment Gurus who purchased pre-construction, but in some cases even those who bought resale haven’t fared that much better.
A couple of excellent examples in my personal experience. Only last week me & my clients were bidding on a semi-detached house in the Don Mills & Lawrence area, which ended up selling for over $700,000. That same property was purchased by now sellers for $443,000 back in 2010. That is close to 60% increase in 4 years… an astonishing number, and likely unsustainable.
On the polar opposite of that knowing some people who have purchased condos in around same time (pre-construction & even resale), the prices today are largely flat & in some cases lower compared to their purchase price.
So what is the problem with condos?
Simple. Supply & Demand ultimately determines where the market is headed. You ever ask yourself why Toronto’s low rise market is so hot? Look around the city… do you see vacant land with large scale low rise construction projects? I don’t.
In one of the recent stats released by TD, it was noted that 70,000 units are going to hit the market this year and in 2015. That is basically double the average of the last decade. Some stats are irrelevant and some are questionable, and even if the number here may not be exact, one thing is certain: There are a ton of condos being built in GTA, and all of this at the time when ‘Investment Gurus’ are slowly realizing that they are losing their shirts over their condo bets.
With this being said, I don’t see doom & gloom looming over this in Toronto’s real estate as a whole, but ultimately ask yourself this: If you want to protect yourself from loosing a bunch should a correction ever occur, should you still be investing/buying into condos?
What do I do if I really want to live in the city and can’t afford a house?
Rent. Yes, I said it. Rent, if you think you will live in a condo for couple of years. If you know you will live in it for 5+ years, then buy smart. I don’t believe the condo market as a whole will collapse, but with condo builders and big chunk of agents looking for uneducated shoppers who will invest their hard earned money into some of these overpriced projects, think extra hard.
First rule: You likely want to stay away from pre-construction. There is a lot more information available on the resale units: current selling prices, average price growth in the past ‘x’ amount of years, established maintenance fees that are unlikely to increase 20%/year, status certificate showing essential information concerning the financial status of the condo corporation. The list goes on…
Second rule: Find a good realtor who will find you a condo in the area that you like, but more importantly will find you the one that will be a sound financial investment in the long term. If you have a realtor who is pushing you ONLY on pre-construction purchase, I’d run!
Third rule: IF you somehow choose to buy pre-construction, know all the costs upfront. Adjustments, Occupancy fees, Development charges, higher legal costs, unsustainable artificially low maintenance fee to sucker you in… all of these are your ‘added’ costs when buying pre-construction.
If you can stretch your geographical search area a bit, then see if you can afford something freehold (single, semi, or a townhouse). Guys, “Freehold” is the golden word in Toronto’s real estate today, and will become that much more Golden in years to come. You own the land in this great city, where many folks around the world only wish they could be!
Hope you enjoyed this read & Happy Summer!
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