Want cashflow? Don’t buy a Condo
People buy real estate for various reasons. There are Investors which include: Flippers, Landlords, and speculators. Then there are the End Users: Buying real estate for you and your family to call home. Both types of Buyers ask us the same question:
How much will this place be worth in a couple years?
Since we haven’t invested in a crystal ball yet, we really can’t answer that question. Fact is, it could be worth more, could be worth less, or could be just the same. If you’re buying as an investor or end user, you should be prepared to hold the property for as long as possible. Sure, there were the days where you could buy a pre-construction condo and make an easy $100K a couple of years later upon completion but the sun has set on that little gem. In fact, buying pre-construction as an investment is not that great right now.
Prices of most new developments have either caught up to resale or even exceeded them in some cases. Think about it, these developers want you to put in up to 20% down over the course of 270 days. Most entry level (under 600sqft) condos will cost you about $330K (sure there are less expensive options out there but we’re talking downtown here). As in investor you’re coughing up $66K that’s going to sit in a lawyers trust account for 4 years while the place is being built not providing any sort of return. Even a Canada Savings bond is a better investment! You can put that same cash into a resale property and have it earn you rental income from day 1. Pretty easy decision there. If you rally really really want to buy pre-construction for an investment, be prepared to hold on for a long time. By the time you’re done paying occupancy fees, development charges, upgrades etc… you may not get your money back on resale for a while. Just get a tenant in there and start building some equity. Want positive cash flow? Sorry pal, not happening. You need to invest in a multi-plex for that. (see below)
Looking at that same purchase from an end user perspective we come across different problems that most buyers ignore. Say you’re 26 years old and you put your hard earned $66K on that same sub 600sqft condo (if you have 66K). Do you think you’ll want to live in a 400sqft condo when you’re 30? A lot can change in your life from 26 to 30. Buy resale, enjoy your 20′s then move on when you’re ready. You’re in total control, not the developer. Now if you’re lucky enough to be able to buy your dream condo or townhouse pre-construction that’s a different story. A place that you’re going to call home for the long run and you’re willing to wait knowing you’ll be staying there for a while…go for it! Just be prepared for tens of thousands of dollars in upgrade charges and thousands more in developments charges over and above typical closing costs. The sales rep will tell you not to worry because they’ll cap the closing costs…think again, the cap doesn’t cover everything.
Be prepared to pay an additional $16,608 in development charges for units under 685sqft – $25, 944 for units under 1350sqft – and $33,044 for units larger than 1351sqft the “cap” offered by most developers will help reduce some of these charges but not by that much in most cases. Contact us for a break down of what’s included in these charges.
Bottom line: Stay in control of your investment, buy resale.
Looking at investing in Freehold property (non condo)? That’s a different ball game that requires much more capital and some balls. For experienced landlords the name of the game is Cash Flow and you don’t get cash flow in single unit properties (like a single family home or a condo), unless you’ve paid an unnecessarily large down-payment. Cash-flow is commonly associated with multi-unit investment properties starting at triplexes and above. A solid duplex may get you some positive cash flow but nothing to write home about. These investors could care less about what the place may be worth in a couple of years, they buy and hold and take their cheques to the bank each month. Barrier to entry is high here with entry level prices are well over $600K in most cases.
Lastly, the End User, the people keeping this hot market going and going. They’re always concerned with how much the place will be worth in a couple of years. Listen, if you’re spending your last penny on a home and think you may need to sell in a couple of years: DON’T BUY. You will not make money, you may even lose money when you factor in closing costs. If you’re buying a place to live, buy the appropriate place that suits your (your family’s) lifestyle and be prepared to ride out dips in the market for as long as it takes.
Love talking about this stuff so contact us to start the conversation.