Making an investment in condos can provide investors with two very lucrative streams of income - cash flow and appreciation.
When you invest for cash flow, such as a rental property, you might begin to make an immediate profit. When you invest for appreciation, you choose a property that you think will increase in value over time. In a perfect world, both streams would be continually overflowing.
Unfortunately this is not the case. Investors and especially those who were not lucky enough to start investing in properties in the GTA or Vancouver prior to 2015, often find themselves choosing between chasing cash flow or appreciation.
It may sound like an unnecessary choice for investors to make. Some investors, including yourself, may ask "why can’t I have it both ways?"
Just as there is no single “Canadian real estate market” there is also no single “condo market”. Every city is different, and you need to plan your condo investment accordingly.
Make no mistake, investing for cash flow is a worthy and entirely sound strategy. A cash flow investment does make the most sense in markets where investors can not comfortably rely on appreciation to make their investments worthwhile.
Investing for cash flow works in soft markets in areas like Calgary, Edmonton, Saskatoon, and St. John’s. There are tons of renters and the price-to-rent ratios that are justly enticing.
Properties there can carry with them the risk of neutral or negative appreciation, which makes positive cash flow the only dependable way investors in these cities can make money year after year. At least until the markets tighten up and price momentum swings in the right direction.
Detached investors who can afford the additional $100,000 it would cost to add a second unit to their homes are turning a monthly profit in the GTA. Condo investors are having to get both creative and risky to stay in the black.
Furnished executive rentals and short-term vacation rentals are great ways to maximize rents. They do require far more management, and in the coming months and years, are likely to have much stricter regulations placed on them.
In markets like many of the ones you will find in the Greater Golden Horseshoe, prices are climbing so rapidly and tenants move on from affordable rental properties so infrequently that it can be difficult to find a condo that is cash flow neutral. Let alone one that is cash flow positive.
The key to succeeding in the Toronto condo space is by getting a little Zen. Accept that you are now operating in a space where positive cash flow is unlikely and open your mind to where the real money is made.
Your new mantra in 2020 is “No cash flow, no problem.”
It contradicts conventional wisdom to say cash flow is not important, a few hundred dollars a month in short-term profits cannot be your only concern when considering the purchase of a GTA condo.
Think of it this way, if you buy a $500,000 property in Windsor that has a cash flow of $500 a month but only appreciates two percent a year, by the end of the year, you’ve banked $6,000 and your property has increased in value by $10,000. That is not a bad investment at all.
A property like that will leave most resale units in the dust when it comes to appreciation. During the construction phase alone, that condo will appreciate, at minimum, 10 percent per year. Even without having a tenant in it, the unit will earn you at least $50,000 in its first year alone. These numbers shatter the returns you were getting in Windsor.
Even if it is ultimately cash flow negative once it is rented out, after four to six years of appreciation that unit will have inflated in value by at least 50 percent by the time you have taken possession of it.
If an investor is serious about making money, appreciation needs to be the goal. It’s the same thinking that fuels most REITs. Those companies, with billions of dollars’ worth of investor money to take care of are not the ones buying apartment blocks based on modest cash flow projections.
Have you heard of the Multiplier Effect ™ ?
They are buying because of a building’s potential capital appreciation, which will allow them to grow their portfolios faster. That is the way to do it people.
There’s never a shortage of pre-construction news in the GTA. Here are two projects we can’t wait to show our clients.
There’s a fantastic opportunity taking place in one of Mississauga’s most beloved neighborhoods, the redevelopment of the Port Credit Waterfront.
Brightwater, gorgeous scenery and a master-planned community by Diamond Kilmour, will be bringing thousands of units as well as transit, retail and office spaces. Getting in early on this master-planned community is a very wise investment move to make.
The other fantastic investment is 411 King which is going up at the corner of King and Spadina, one of downtown Toronto’s most desired areas to live in for so many reasons
Contemporary restaurants, King West club scene, the stylish Fashion District as well as Toronto Raptors/Leafs and Jays games (will all be back after the coronavirus is under control) are all within walking distance for the growing cohort of young professionals, who have yet to balk at the astronomically high rents.
Great Gulf, the company behind 411 King, is one of the largest developers in Toronto, if not all of Canada. They have completed several projects where our clients have done tremendously well.
Let our team help you focus and make the right decision on where to invest your money. The future is now and units are flying fast.
Article originally posted on Canadian Real Estate Magazine
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