Prognosis Grim For Toronto Investors

RESPONSE TO GLOBE AND MAIL’S RECENT ARTICLE: “PROGNOSIS GRIM FOR TORONTO CONDO INVESTORS”

Another poorly researched, or should I say, biased researched article in the Globe and Mail on Tuesday, July 2, 2014. The writer Sheryl King (an independent macroeconomic strategist with 20 years experience) states that the prognosis is grim for Toronto condo investors. Her calculations are deliberately designed not to show much of a return on invested capital. Residential and commercial landlords earn cap rates today of 3.5-6.5% depending on the asset. Squeezing all costs and pushing all revenues is part of the business of staying in the black. If we can’t deliver condo units that offer a reasonable return for investors, then neither can the high-rise office or apartment businesses. Of course, this is bunk; dozens of high-rise office buildings are currently being built by savvy Canadian and international developers.

For point of reference, I will show real numbers, based on real property and events. The landlord business is a business of nickels and dimes. It is essential to get the numbers right or nothing will ever work; condo, office, or apartment.

BASED ON ACTUAL RECENT PURCHASE IN KING WEST, TORONTO
Purchase Price: $321,000
Size: 575SF (1 bedroom plus den)
25% Deposit: $80,250
75% Mortgage: $240,750
Mortgage cost/month: $1164 (based on a 3.2% rate for 5 years, 25 year amortization)
Monthly Taxes: $267.50 (approximately 1%)
Monthly Condo Fees: $250.00 ($0.50 per square foot)
ACTUAL Monthly Rent: $1850/month
Net Rent (cash flow): $168.50/month ($2022/year)
Debt Repayment: $5868 (after 1 year)
TOTAL RETURN: $7890 (after 1 year)
Return on Invested Capital: 9.8% (after 1 year)

As you can see, this is why investors are still buying investment condos in Toronto. The prognosis is not grim. It is great. A 10% return in year one, relying on a zero capital gain is fantastic. It will only get better as more principal gets repaid each year and rents rise by inflation or more. Of course, capital gains through price increases will make the return on equity even better.

Pessimism leads to standing still. Nothing can survive standing still.