Looking for digs in Vancouver? Kijiji alone has 2,700 apartments to chose from this week. In Calgary there are 3,200 units available online. And in Toronto, Kijiji today has 15,545 rental places to hang your hat – a whopping number of them condos bought by speckers and flippers. By the way, there are 1,885 more listed for rent on the MLS system – which means you have seventeen thousand reasons to cherish being a tenant more than a landlord.
In fact, now that the real estate market’s running out of gas – and with another 17,000 condos set to flood Toronto alone this year – it’s hard to fathom what investors are thinking. Do they research the market before they buy? Do they know what it costs to carry a Big City condo these days (fees and taxes alone can be $1,200 a month for a one-bedder)? Do they really think their concrete box will soar in value in cities stuffed with them? Or are they merely seduced by a cheap downpayment, flashy brochure and a shapely babe in the sales centre?
For those who were still filling their Pampers when the last condo crash hit – 21 years ago – let me tell you, it was ugly. At the end of a housing boom (like this one) developers went nuts and overbuilt (like now) and about 30% of all sales were to speculators (just like now). Within two years it was impossible to sell without losing money, and equally futile trying to collect enough rent to carry a place even if it was paid mortgage-free. I know. I had two of them.
As I’ve mentioned before, a failed investor who owed me big bucks swapped his debt for two, new downtown condos on the waterfront. The taxes and condo fees were $1,400 a piece and the market rent was $1,200. I was happy to find tenants at all – and had to sit on negative cash flow for five long years until the market started to sputter back to life (and I had no financing in place).
So, I’ve seen this movie before. Know how it ends. Only this time, on the heels of the greatest condo orgy in Canadian history, boatloads of idiot investors are about to understand economics. Especially those who bought with minimal downpayments, whose leverage will magnify losses exponentially.
One of my working rules has always been, never, ever buy a single residential housing unit to rent out. And never, ever, ever buy it from plans.
Far better to buy a SFH which can house a couple of tenants, or a triplex or a small apartment building. As I write this, for example, there’s a five-plex (fully rented) in downtown Windsor for $250,000 or another giving an 11% return, for $169,000, or a cash-positive 8-unit apartment building in Guelph for less than the price of a Lesleyville shanty.
But there’s another option available for those who want to put their investment bucks into residential real estate, instead of those scary stocks or bonds. They’re called REITs – real estate investment trusts – and for the past couple of years the returns have been impressive. While my own preference are REITs that invest in top-notch commercial properties (last year they jumped more than 20% while kicking out a 5% dividend), trusts that own rent-collecting residential properties are smoked.
In fact, this week a research paper by Macquarie Capital Markets Canada underscored exactly what I’m talking about. The company compared owning a condo in Calgary or Toronto with investing in units in one of two REITs – Boardwalk or Canadian Apartment Properties. The assumption was a 900-square-foot, one-bedroom unit for 40% down, generating market rent and appreciating (or depreciating) at the same rate as all similar properties in the same city.
Calgary: “If an investor purchased a standard condo as an investment with a three-year holding period from January 2008 to December 2010 (while achieving average market rents), the investor would have realized a 31.7% decline in equity value. In contrast, had the investor purchased units of Boardwalk REIT, the investor would be up 8.4% – an absolute difference of 40%.”
Toronto: “If a condo was held from January 2008 to December 2010, the investor would have realized an aggregate net rent income (after expenses) of $1,825 against an initial equity investment of $122,000 (approximately 1.5% income return). On the other hand, had the same investor purchased $122,000 of Canadian Apartment Properties REIT (7,656 units), the investor would have received $24,800, or a 20% income return.”
But there’s more. In a crappy market, condos are illiquid. REITs can be sold in 15 minutes. Empty condos need to be filled with tenants who actually pay on time and don’t pee on the hardwood. REITs require no maintenance. Rental properties with mortgages need to be refinanced every few years, at interest rates you cannot control. Worse, condo owners have to pay monthly fees and escalating property taxes. REIT owners, in contrast, collect money.
And here’s the ultimate strategy: Move into a speck condo and let the idiot investor subsidize you. Use your down payment money to buy an apartment REIT.
Or maybe a whole damn building.