Is buying a Condo Unit a Good Investment
Though it may seem like a straightforward question, it’s challenging to answer it effectively unless you understand the facts about the particular investment property of interest. After all, any potential income-generating investment may turn out to be profitable or unprofitable. In Toronto, condos are some of the highly sought-after properties, and a larger number of investors aren’t sure whether or not it’s safe to take the plunge. Acquiring a condo is a bold choice, and you must consider a few factors, particularly if you plan to rent a new space.
An overview of Toronto’s condo unit market (2019)
Currently, the demand for condo rentals is skyrocketing. Rent is on the rise, vacancy rates are going down, and there’s an intense competition between condo buyers. In response to these market forces, an increasing number of investors are acquiring condo as rental units.
For any forward-looking investor, the condo market in Toronto is attractive due to its stability. Statistics show that the average-term appreciation rate of properties in this region is 5% to 6%. Though the past market performance isn’t an accurate determinant of its future performance, it is fair enough to say that acquiring a property in Toronto has historically been a sound investment for many people.
Studies reveal that the GTA’s population is likely to grow by 2.8 million by 2041. Besides, the number of people working and living in this city grows daily, and the new residents are in desperate need of housing facilities. This is a growing pool of potential tenants in an urban real estate market where demand is already increasing.
Do the math
It is recommended to assess each investment opportunity. Analyzing the numbers is an essential process, and cash flow is among the most critical elements to consider. Simply put, cash flow is the amount of revenue you will gain from your condo, less all expenses associated with the property. These expenses include condo fees, taxes, and ongoing property maintenance expenses. If you get more than enough cash to take care of these expenses, you’re likely to get positive cash flow.
However, a condo that isn’t providing positive cash flow may not necessarily be an unwise investment, and understanding what makes a profitable property investment can help you make the right choice. Begin by establishing the overall revenue potential you’re likely to get from rent. This will depend on many factors, such as the amount of rent you will charge your tenants. The specific amenities your condo unit, fees linked to the building, and the amount of rents in a comparable neighbourhood are some of the significant determinants of the amount of rent you will charge.
Next, estimate all the expenses associated with owning a condo. In addition to taxes and regular maintenance expenses, you need to factor in costs that might arise from time to time. For instance, special assessments cannot be covered by reserve funds from a condo board.
In case you intend to make a cash purchase, determine the condo’s capitalization rate to know the expected rate of return on your investment. To determine the cap rate, divide the condo’s net operating income (the property’s revenue less operating expenses) by the property’s purchase price. A higher capitalization rate is better, with most people in Toronto considering 4% a decent rate.
Note that the capitalization rate will not accurately reflect your returns if you opt for mortgage financing. This is because ROI is a metric that takes financing option into account, and that means you must factor in the monthly mortgage instalments.
What makes a good condo unit?
Before getting to financial math, you must know the hallmarks of a good condo. If you’re purchasing it for rental purposes, you must understand the nature of your target market. For instance, if you target luxury buyers, it is wise to look for high-end finishes and somewhat upscale property features.
The condo’s location is also a crucial factor. Is it in a desirable neighbourhood in the city and provide easy access to transportation? Are there shopping areas nearby and other essential conveniences? Making these considerations can help you establish whether or not a given property is worth your financial attention.
The property’s size is matters too. Smaller condo units rent for more per square foot. Most people prefer larger condos but are increasingly hard to find. Remember, real estate markets are complex, and you need the help of an excellent real estate agent to determine the right target market and find the condos that rhyme with that specific market.
For investors who make their property acquisition choices wisely, buying a condo unit in Toronto is a wise investment decision. However, there is no one-size-fits-all solution when it comes to real estate investments. Your choice will depend on your investment goals, financial stability, and target market.
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