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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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Categories
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.