Real Estate

Toronto Homes: Not Best Investment 2008-2018

I know many people considering real estate as an investment. It is a standard ‘go to’ idea for anyone looking to build wealth.

While you can definitely create wealth with real estate, it certainly isn’t the sure thing many people think. Indeed, real estate investing is high risk (high leverage and high concentration) and a huge pain in the ass (3am clogged toilets, destructive tenants).

To gain perspective, investors need to consider real estate against other investing options.

Toronto real estate is in a bubble. Over the past decade, houses in Toronto have appreciated by over 120%. Many people therefore conclude that a house in Toronto would have been a fantastic – if not the best – investing choice over the past decade.

They are wrong.

The following chart shows 10 year returns for Toronto real estate, stocks, REITs and real estate equities. As you can see, housing price increases lagged.

So how do real estate investors get rich? Leverage. But if you applied the same leverage across the comparison, the relative performance differential would remain.

To be fair, the return for houses was calculated on a price returns basis whereas the other indices are showing total returns. Total returns include the income earned by holding the asset – dividends for stocks and rent for real property. Incorporating rental income would definitely improve the comprison. But would rent have tripled the return to match that of REITs? Probably not. Especially after considering risk, maintenance expenses, taxes and property management costs.

(Note: in an ideal world, I’d incorporate a $ rent assumption to recalculate Toronto real estate returns as a total return. Unfortunately, I don’t have the base data to recompose the returns.)

Despite the wonky comparison, the chart still disproves the incorrect assumption that owning a home was the easy, low risk way to build wealth – even during the biggest real estate bubble in Canadian history.

During the next decade, it’s not reasonable to expect the pace of Toronto real estate returns to continue at the same pace. A more conservative returns estimate would put Toronto real estate at a further disadvantage to other assets.

Moral of the story: do the math, compare against alternatives and factor in all risks before investing in anything.

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Real Estate

Is It Worth Buying a Condo to Rent Out in Toronto?

Once in a while I get the urge to buy a condo in Toronto to rent out. Everyone seems to be doing it, right? So it must be a money maker? Right? Wrong! Let’s look at the numbers.

The following is an approximation that leaves out a few minor details for simplicity’s sake. Please feel free to point out things you’d change or add in the comments below.

The Property

Today I’m looking at a 1 bedroom plus den at the luxury condo called “Sky Tower at Eau Du Soleil”, located at 30 Shore Breeze Drive & 2183 Lake Shore Blvd W, Etobicoke.

This is a gorgeous location with AMAZING amenities, including a indoor salt-water pool, hot tub, fitness centre, rooftop deck, media room, meeting room, yoga studio, squash court, rec room, outdoor patio, tennis court, visitor lounge and more. You get the picture. This is luxury living.

Currently, several units are for sale. A 643 square foot 1+1 including parking is listed at $749,000 with a $449 monthly maintenance fee. A couple others are also listed at a similar price.

With a 20% deposit ($149,800) and 25yr mortgage at 2.79%, this property could be yours for $3,221 per month all-in.

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So Would this Make a Good Investment Property?

A similar sized condo on the same floor rents for $2,200 per month. That’s an instant monthly loss of $1,021 per month, or $12,252 per year. Not only that, you’ve suddenly tied up $149,800 in liquid assets and are now $599,200 in debt. Sounds like a shitty place to be. Especially considering you could have been EARNING $7,490 a year from the $149,800 deposit (assuming a reasonable 5% annual return).

But instead of sitting back and watching your portfolio grow, you’re chasing people for rent and fixing toilets at 3am. And basically paying $1,021 a month for the privilege. But some of that monthly all-in payment is going towards building equity in the house, right? Well, because of the monthly negative cash flow you’d only accumulate $27,954‬ in equity over five years. Alternatively, you’d have earned $37,450 on the investment portfolio.

‬To make up the gap you’d have to depend on the condo price to appreciate . Unfortunately, Toronto real estate is in the midst of a massive bubble and it could burst any time. I’d say it’s pretty ballsy to bet your future on the forecast that prices will keep rising.

And that – ladies and gentlemen – is how I eliminate the urge to buy a condo in Toronto to rent out.

Real Estate

Landlords Beware

Painting: Badminton House from Badminton Park by Giovanni Antonio Canal, 1748

Many, many people believe real estate is the key to wealth creation. While I agree that a leveraged investment in a (generally) stable asset is one way to gain wealth, I must warn you: landlording ain’t easy!

You can do everything right and still get screwed.

Let’s assume you’ve bought a property at a reasonable valuation in an area that has a low vacancy rate and good long-term prospects. Let’s also assume the potential rental income on the property leaves you in a ‘cash flow positive’ situation, meaning the rent covers the mortgage, insurance, utilities, property tax and a decent profit.

You Might Also Like: How to Become a Better Investor

So far so good. All you need now is someone to rent the property from you.

This is where things can go very wrong. I highly suggest you consider all the downsides before jumping into the rental game.

Below are 6 horror stories from various landlords around the country. If you’re thinking about becoming a landlord, read these accounts directly from landlords who have been to hell and back.

Reddit user krustyy:

We have always run credit and background checks from the beginning and once let our personal impressions of the potential renters skew our judgement, only to be hosed.

We had a renter who was a nice single mother looking to rent our small 2 bedroom apartment. Credit report came back at like 450 with a previous court judgement on her record. Since she was the only applicant at the time we decided to take the risk but asked both for first and last month’s rent as well as a larger deposit.

She wrote us a check. We gave her the keys.

Then the check bounced and we were stuck being strung along a 6 month eviction process. I think in the end we got 1 month of rent total.

Reddit User Monkey-Tamer:

Happened to my mom. I warned her, but she bought in to the woman’s sob story about being a victim of domestic violence. No credit check. She couldn’t pay first month rent and security deposit. My mom waived that condition in the lease. A month later I’m being called to do the eviction action since no rent is being paid. I told my mom I’d draft the paperwork but her or my stepdad would be paying the filing fees and appearing in court. I wasn’t going to burn vacation days going to a county two hours away after she didn’t listen to me. I had advised her to rent the house to college kids since it is mere blocks away from a university. The house has been vacant for years bleeding her in property taxes. It’s like she does the opposite of what I tell her. House has been on the market for 5 years.

Reddit user TMKF2:

Used to be in the property management business and had a renter who was so good at gaming the system that she managed to occupy the same apartment for nine months on having paid only three months rent.

Moves in, pays first month and security deposit. 30 days pass, no rent collected. Give the usual notices and process for eviction on day 49. She paid in full on day 64. So far three months collected.

Restarted the occupancy clock. 49 days later still no rent, start legal eviction again. (Day 113)

Court date gets set for day 138. She gets the court date pushed out due to her “disability” (day 160).

Applies for rent assistance and some disability benefit, and gets an extension on the court date to the end of the application process (day 180 ish).

Rent assistance comes through, of which she’s responsible for 60% of the rent, but we have to settle and close the case to collect the funds. We decline and move for judgement and eviction.

Judge grants the eviction, but not before griefing us for “dragging this out”, and not being accommodating. As a parting gift the judge gives her 6 weeks to move. She left the place empty, but filthy on day 274 and had the audacity to literally take the keys and lock off the door when she moved out.

I left the business later that year, but I’m certain the owners never recouped on the rent or damages.

We were the first of three properties she’d eventually do this to.

Reddit User alopgeek:

Happened to me… I had a vacant house, nice grandmother applied… Seemed super nice. She told me upfront that there were problems with her credit, and that I didn’t need to check it, because it was bad and she knew it.

Should have been the red flag, but I fell for it anyways. She gave me first month + deposit… and was OK for about 6months. Then she started being late, then there seemed to be “out of pocket” repairs that she had done without calling me, then she just stopped paying…

I ended up selling the house after a lengthy eviction

Reddit User deadinsidelol69:

My mom used to rent her 2nd house, she didn’t run the background check, but they gave her cash. Then they immediately brought their 4 pitbulls into the house, destroyed all the furniture, carpet, and walls over 6 months, then ditched the house and never contacted my mom again.

Reddit User GenericUserBot5000:

Even the background checks are not fool proof. I had a lady rent from me pass the criminal and credit check stiff me after the first month. She paid her sd and first months rent and I never got another cent.

The kicker was that it was a duplex and I lived in the other half. I saw her almost every day and made sure to ask for the rent when I saw her. Took 4 months to get her out and I’m still trying to get the 4k she owes me.

On a side note, if you are thinking of getting into the rental thing you NEED to have at least 3 months property expenses saved up. My goal is 6 and I’m at about 4. Also don’t include the sd in this as usually you need to give it back when the tenant moves out.

Also, and I can’t emphasize this enough, YOU WILL NOT GET RICH. At best you will break even or come out a little ahead until the mortgage is paid off. Maintenance costs money, things break, natural disasters happen. One years gain will supplement next year’s loss.