Baby, we got a bubble!?

[azureray]

I am guessing that your $330K loft was bought quite a few years ago and that it is worth more than that today. If it was bought 3 years ago and is new, then it is likely closer to $450K. if not and 330K is present value i.e. you just bought it at this value, you are getting fabulous rent.

Yes, I bought it last month...lol...I am happy with the market response...

 

[interested]

I'd like to comment on a few things.

First, no one really knows what the vacancy rate is for condos. No one. The best one can do is throw a very very wild guess into the ether and hope it's accurate. Tons of the condos currently being rented have never ever been placed on the MLS (like mine) and never will because paying an agent to rent your place out is one of the silliest things to do and money down the drain unless you own tons of them. So while .8% might reflect condos rented through an agent, I'd guess there's an even larger market out there. 3-4x larger.

Second, while rents are definitely higher for condos for all the reasons you mention, they have been static for the past 8 years (meaning they have dropped in real terms) and are now dropping. I have several friends who have just recently rented brand new condos and they all managed to get either a)free parking, b) a free months rent or c) both. Also, they all rented independent of an agent on either side and the owners were very very willing to negotiate.

Third, I believe I saw Urbanation say that over the next 2 years we will see 37000 units completed in Toronto. While we could say, conservatively, that 14000 will be investment properties (I would peg the number at closer to 18000), what about all the people currently renting condos who will be occupying these newly completed condos. While I won't hazard a guess at the number, I don't think it's insignificant. The possibility even exists that many people will be like myself, in that I and my partner will be vacating 2 condos, to move into the one purchased. This could add 1000's more into the mix.

The one thing that I think is going in favour of currently owned rental condos is the ridiculous price of new construction. When I first bought in 2003, rent was equivalent to a mortgage at around $1500/month - assuming 15% down on a $200 000 condo ($170 000 mortgage). Now, that same equation makes a $1400/month condo cheap compared to the $2400 carrying costs of a $350 000($295000 mortgage)/condo with 15% down.

In order for prices/rents to get back into line with wages, we need a 20+% correction or the equivalent in terms of price stagflation for the next 5+years. Or, I could be completely wrong, and Toronto is now becoming like New York, London, Paris, etc., and real estate downtown is simply out of reach for 95% of the GTA populace.

simuls, I think you are bang on with your postulates about the size of the market and also correct when saying prices are the same for the last 8 years with minimal variation. The only thing I would state however is that for investors looking for a steady source of income, bonds / GIC's are paying 2-3%. Stock market is a crap shoot. Hence, I think there are a number of investors who will look at lower rates of return on their real estate investment and accept it. however, I disagree with Brian when he says that things will only go up. I wrote and said i expect a decrease in rents over the next couple of years or stagnation. Certainly I do not believe there will be a large increase.
I guess we will find out.

 

[interested]

Yes, I bought it last month...lol...I am happy with the market response...

I guess you are the guy Brian referred to who bought under market value or bought the right property. Certainly you bought very well and very wisely to have purchased a property for 330K that returns $2000/month. Well done. You are a better investor than me, that is for sure.

 

[azureray]

I guess you are the guy Brian referred to who bought under market value or bought the right property. Certainly you bought very well and very wisely to have purchased a property for 330K that returns $2000/month. Well done. You are a better investor than me, that is for sure.

Thanks...I invest carefully and I am fully aware of the potential bubble theory...however in any market there's opportunity. I bought a two storey loft in downtown core of over 1500 sq ft for $330K which rents for $2000 plus utilities easily...as a good investment:

1) dont follow the mass market, buy unique...its always easier to compete in a niche market than in a mass market
2) buy when everyone fears a bubble...and sell when everyone holds back

There are still plenty of these kind of properties on the market, maybe not as big as mine, but for $300K you can get a two storey loft on King west that easily rents $1500+.

Just don't follow the mass and think twice what people say...

 

[interested]

azureray: I am intrigued as to why 1500 sq. ft which can fetch $2000+ sold for $215/sq. ft. This seems very low. I can only surmise distressed seller or why is the property not appreciating more than this. if the intent is to hold "forever for cash flow this makes sense" but one also hopes for capital appreciation. On the surface it would sound like this property should easily fetch more than the $330K you paid.

 

[azureray]

azureray: I am intrigued as to why 1500 sq. ft which can fetch $2000+ sold for $215/sq. ft. This seems very low. I can only surmise distressed seller or why is the property not appreciating more than this. if the intent is to hold "forever for cash flow this makes sense" but one also hopes for capital appreciation. On the surface it would sound like this property should easily fetch more than the $330K you paid.

No, the seller is actually not distressed at all, and the property has just been newly renovated. The only reason is probably this property is not in the "most desirable" neighborhoods in realtor and investors eyes...but you know what, renters think differently.

I can name a few neighbourhoods right now you can still find properties like this:

new toronto / mimico / parkdale / regent park / moss park

I think these undervalued neighborhoods will one day even out with the rest of Toronto, just like East London in London England (earlier experience back to where I was from again). Bubble exists in some neighborhoods for sure, in my opinion, Yorkville is No.1...and then there are these out of the spotlights locations that have every reason to worth more.

And you know what, renters confirm that...and Brad J lamb sees that...

 

[ponyboy]

1500 sq foot is larger than the standard semi-attached house in Toronto (minus basement). That is a big place. In our search, we looked at a few nicely designed 2bedroom 2 bath condos in the King West area, some two-level, but I didn't see anything much bigger than 1000-1100 sq foot (most were about 900 sq ft). However, a few of these fairly small but well located places were asking 2200-2400 per month. We might have bit at a 1500 sq foot loft for 2000 per month, but anything this size was asking a lot more money. In fact, a lot of the newer 2bdrm/2bath units are like 900 sq ft, but many of those are still asking rent of 1700-2000. I'm not sure what these cost to purchase. The place we settled on for 2200 a month plus utilities is about 1150 sq ft plus a big 300 sq ft terrace. I know there is a range of deals out there, and we may have also benefited by looking in the winter.

from recent experience, I can say that a 750 sq foot 1-bedroom loft in Kensington Market Lofts soldl for 330K, and had rented for 1500 per month. But I suspect this is a premium rent for such a small unit given the unique characteristics of KML.

 

[azureray]

1500 sq foot is larger than the standard semi-attached house in Toronto (minus basement). That is a big place. In our search, we looked at a few nicely designed 2bedroom 2 bath condos in the King West area, some two-level, but I didn't see anything much bigger than 1000-1100 sq foot (most were about 900 sq ft). However, a few of these fairly small but well located places were asking 2200-2400 per month. We might have bit at a 1500 sq foot loft for 2000 per month, but anything this size was asking a lot more money. In fact, a lot of the newer 2bdrm/2bath units are like 900 sq ft, but many of those are still asking rent of 1700-2000. I'm not sure what these cost to purchase. The place we settled on for 2200 a month plus utilities is about 1150 sq ft plus a big 300 sq ft terrace. I know there is a range of deals out there, and we may have also benefited by looking in the winter.

Yeah, thats why asking for $2000 + utilities I am still getting multiple offers...I think a golden rule for investment is to leave some room for potential risks...I believe my purchase is kind of "bubble proof"...I may rent for more...but at $2000 I can carry the place even the mortgage rate goes up to 7 - 8%...I have room to absorb impacts...

 

[ponyboy]

you did well, especially in terms of rent to purchase price ratio for a single-unit property. really good job!

 

[BrianPersaud]

simuls, I think you are bang on with your postulates about the size of the market and also correct when saying prices are the same for the last 8 years with minimal variation. The only thing I would state however is that for investors looking for a steady source of income, bonds / GIC's are paying 2-3%. Stock market is a crap shoot. Hence, I think there are a number of investors who will look at lower rates of return on their real estate investment and accept it. however, I disagree with Brian when he says that things will only go up. I wrote and said i expect a decrease in rents over the next couple of years or stagnation. Certainly I do not believe there will be a large increase.
I guess we will find out.

I remember back in 2005 when I was renting out units...no one would call you from November to March. Tenants only started to look in May June and July. Give it some time, the last two years we've been spoiled with a year round buoyant market

If you follow a proven formula for your ads and you close your tenants Im sure you will be ok.

I don't believe there will be a large increase either...but I dont expect them to go down.

Condos now have a premium on them that don't justify them for a buy and hold with 15% down, real estate is not always priced based on income the property would generate. There are other demand factors the drive values. It would be nice if we can put 5% down on everything and get cashflow

It's a simple business, but not easy.

 

[BrianPersaud]

Yeah, thats why asking for $2000 + utilities I am still getting multiple offers...I think a golden rule for investment is to leave some room for potential risks...I believe my purchase is kind of "bubble proof"...I may rent for more...but at $2000 I can carry the place even the mortgage rate goes up to 7 - 8%...I have room to absorb impacts...

Good for you

 

[daveto]

You got a great deal living in a 650K loft for 2200 per month. I am currently renting my 330K loft for $2000K...and I receive multiple offers for the lease...I guess both of these are unique cases...

What are the condo fees?

 

[azureray]

What are the condo fees?

$300 / mo except hydro...

 

[cabbagetowner]

not sure what the cap rate on this condo is but it's been my experience that condos aren't able to generate the income that multi res can. Is this condo even hitting a 6 cap?

If you're holding onto a portfolio of re that is generating less than 6, these next couple of years will be very painful.

i agree that for many people real estate is not priced based on income they generate, but for investors that's paramount.

 

[Chromeboy007]

Not bad at all. Right?