It’s my first post of 2020 and already – just two weeks into the year – I’m angry, mad, and annoyed. Not a good way to start but when I read something that is fundamentally flawed based on one very important detail that makes the whole story, I have no other feelings other than simply: anger.
To start, here’s the story in question: https://www.thestar.com/news/gta/2020/01/12/condo-prices-are-set-to-put-many-investors-in-the-red-as-rents-fail-to-meet-carrying-costs-experts-warn.html (hidden behind a paywall but don’t worry I will show you what the problem is in case you didn’t get a chance to read the whole thing).
The main thesis of the argument is this. Rents will need to keep rising dramatically in order for new condo investors to have their properties not be cash-flow-negative. How dramatically? So far the “average” rent for a condo in this article is $2500.00 – which will need to be $4000 per month by the time these units are all ready, in order for them to be cash-flow neutral. And since so many of them are coming online in the next 36-48 months, that rise in rent is not realistic.
(Are you scared yet?)
Here is the fundamental problem with this article. The price of the unit that this author is basing this on is wrong. Now, I’m not a Realtor but immediately when I saw this “BUY ME NOW GET SCARED” headline, I thought I’d dig a little deeper. So I did.
The “average resale price” of the units in question for this article are $617K vs the “Average pre-construction unit” is selling for $866K, or a $249,000 difference. So this brings up a few points:
- What investor would pay $249,000 more for a pre-construction unit that’s currently available for $617K?
- What does “the average” mean, exactly? Are we talking apples to apples comparison? Same finishes, size, layouts, location?
- Who gives you these stats?
- How do they get the caramel in the caramilk bar?
So I turned to the Twitterverse to figure this out a little better because I have some real good friends on there with real good insight. And (gasp!) surprise! this $249,000 spread is easily explained:
So, wait. The “average” price from BILD – the industry association says that it’s actually UNSOLD condos? and the SMALLER units are already sold so we can’t get data on that to do an apples to apples comparison? And nobody thought they should compare each unit to a similar resale unit to figure out if this $4000 per month “necessary rent” is accurate? Say it ain’t so, Pulitzer!
So what’s my take on all of this? Talk to experts. People who live and breathe this stuff. If you choose to get your information from your newspaper, do so at your own peril. Numbers can be skewed in many different ways but when you base your argument on numbers that are wrong, and logic that isn’t there, it’s easy to make things look a lot worse than they are.
Using real world numbers, let’s compare, then, at 25% down what the truth is:
Buying a resale condo today for a purchase price of $617,000 will yield you a mortgage of $462,750, a payment of $1946 on 30-year amortization.
Plus: your maintenance fee (estimate $500/month) and property taxes ($250/month) = $2696 per month.
Rental income: $2500.00
=-$196 per month loss or $2352 per year.
If your condo goes up in value by .41% per year, you’re “even steven” in the big picture.
So – do the math! And decide: do you want the newspaper to give you the most objective analysis? Or someone who eats, sleeps, lives and breaths this stuff.