Anyone look at resale condos in GTA?

Question

Hey, I already have a couple of semi-detached in East York and recently been thinking that resale condos (as opposed to precon) might be a good, easy investments to make. Quickly ran numbers using a few condos currently listed in the downtown core, Vaughan, Regent Park areas to get a sense of what the returns look like.. Not the best positive cash flows and not as spectacular of return as reno-refi ideas but the total return projection seems pretty good in the low to mid-teens, relative to the work required.

The thesis was that precon condo prices continue to escalate while resale condos, yes they're catching up, but will always sell at a discount. But rents, depending on where you are, can be relatively comparable.. as long as it's not too old of a resale condo. Not only that, given where the precon condo prices are.. I don't think it would be shocking if it just stabilizes or has a minor correction or so. At least with resale condo, the rental revenue/income offsets some of that market price risk. IRR might be better on a precon condo with the deposit schedule, but all the risk is with the market. Risk vs reward, I guess?

edit: just full disclosure - I'm not an agent. Just trying to understand if my thesis works - I have zero ties with any of the listings below!

Ming Lim · Answer

@Hosup Lee - I'd be curious to understand your numbers. I did a quick analysis using our investment calculator on our website with the regent park listing, and I'm seeing approx negative $1200 cash flow a month. That's at 3%, 30yr am. So one of us is missing something big here. :)

Hosup Lee · Answer

Cash flow is great. my homes used to cash flow until i refinanced them. But the total return is not captured that way since you need to factor in price appreciation. Have I made money through the BRRR strategy? Yes. Have I completely missed out on the condo appreciation because I've always looked for cash flow? Yes. The supply is tight still regardless of what anyone says due to net migration into the city. Price-to-affordability is a different issue, but regardless the supply is tight.

The Toronto rental market is hot with all the institutional capital going into building apartment buildings. The rental growth rate from some of the institutional grade market research firms are putting out numbers as high as 7%/yr growth. As long as the rent control stays away, that aspect of the market will do well. This is the space my professional career is in - institutional capital, residential development (condos/houses), buying value-add apartment buildings in scale. Institutional capital is buying assets at 3% cap in the city of Toronto. Does that make sense? I'm not sure. But I know for a fact that they're impossible to buy because of that price point.

To both your comments Huong Luu and Hai Loc: as I'm going about this from a top-down approach, how would you evaluate all the individual listings out there and understand whether the market has undervalued units or not? Forget just one particular area. Outside the city the LTT is half of inside the city. That impacts the total return over time (which includes cash flow, mortgage repayment, price appreciation) quite a bit. Essentially we're talking 24% cash (20% down + 4% LTT) for Toronto and 22% outside the City of Toronto boundaries. And on top of that, the condo price to rent rate ratio would have to be different in every area. Oakville-Mississauga-Etobicoke-Downtown Toronto-North York-Vaughan (VMC areas)-East York-Beaches-Markham-Richmond Hill, every single one of those areas the price-to-rent ratios will be different.

The Vaughan Metropolitan Centre has a direct subway access to downtown. The condos are much cheaper there and you also avoid the City of Toronto LTT of 2%. If rents in downtown continue escalate (which I believe they will), will that spill over to areas like VMC with direct subway access? Potentially. Arguably, this area could make a lot of sense from buying resale condo and renting it out. Mississauga with Square One now being developed by Oxford - you also avoid the 2% LTT there. Would that make sense? I don't know, yet.

So while I appreciate the particular cases around DVP-Eglinton and other anecdotal evidence that none of these will be cash flow positive (which could be true), I'm not entirely convinced that I couldn't make money big-ly through this investment thesis, looking at the right areas. This is too theoretical so that's why my initial post included listings from Vaughan (2% LTT), Regent Park (recently built, gentrification upside? after looking at my numbers again after Ming's comment I think my revenue assumption was too aggressive) and King West (probably representative of a typical downtown condo in Fin district and Entertainment district) for comparison purposes, and those numbers came out to around mid/low-teens on a compounded basis over a 5 year period with 3% appreciation applied, 20% down, LTTs /closing costs captured, 30 yr amort and 2.74% interest rate, 3% rent growth and 2% cost growth. That's a really good level of return, on a risk-adjusted basis given my perceived-risk level of the rental market, and I maybe spent 10 minutes looking these up, not even looking for a good deal. Imagine what the total returns would be at 6% price appreciation, the 21-year historical compounded growth rate for Toronto since 1999. That Vaughan condo I posted would generate a low-20s% compounded annual return. That's a Warren Buffet level compounded growth rate!

Hai Loc · Answer

Normally Toronto condo investors are not looking for cash flow but principal paydown and appreciation. Sadly they are happy if their maintenance fees, property taxes, insurance and at least the interest portion of their mortgage is paid off. Remember a true income statement on a property should also include property management, vacancy rate and capex.. I can almost guarantee you there is no resale condo in Toronto for a single tenant that will cash flow if you include that list of expenses on the income statement.  The only time I think it will happen is if you waited out 4-5 years on a pre con bought in 2015-16 that closes in 2020 you will cash flow..  no way a 2020 resale..

Huong Luu · Answer

@Hosup Lee. Don't let 1 post reaction keep you from posting. This forum is great b/c everyone helps make it so.

Let me add something to your theory, as I spent over 10 years looking at resale condos in the Toronto and Edmonton area. Although there may be some undervalued presale condos, the vast majority doesn't cashflow if you use the standard 20% d/p. This is because the units are usually older and the maintenance fees are higher, thus eating into the cashflow. For example, in the DVP area, you can get a 3bdrm condo for $350k but the fees are $1,500/m.

Hosup Lee · Answer

I'm just at work so I can't provide my support right this second, I'll do so over the weekend.

I just wanted to quickly reply after Hai Loc's comment. No offense taken, but as mentioned in my post, I'm testing out my theory. I'm not an agent and do not have an association with those listings. I just don't know how else to test my theory that "the resale condos in certain areas could be undervalued" without a real listing. Happy to discuss at a theoretical level.

In fact, moderator, can you please remove the pics attached in my original post? It says I can't edit.

I can post without the address. let's discuss with real numbers, but not a particular address. I truely believe that there would be undervalued assets out there and can be systematically identified with the right search.

Hai Loc · Answer

Bad idea trying to sell MLS listing here. You can try marketplace but even that is for off market deals..

Daniel Segal · Answer

Hi Hosup, can you please share your Worksheet to come up with your numbers because it is hard to tell where your numbers are coming from

Hai Loc · Answer

Crystal Ball question

Chris Habets · Answer

What was your appreciation estimate?

As a rule I don't buy anything that doesn't cashflow.

Anyone look at resale condos in GTA?

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