The Higher Floor Factor: Is 50 really better than 20?

When investing in a pre-construction condo, a question that always comes up is: “Is it better to buy on a lower floor and pay a lower price, or to buy on a higher floor but pay a higher price?”

The Higher Floor Factor

When selling a building in the pre-construction phase, every developer will have a base price for a particular unit, then charge what is known as a “floor premium” as you ascend the building. Floor premiums in most Toronto condos are $1,000 per floor up.

Custom analysis by Urbanation: Examining Burano by Lanterra

I am a subscriber to Urbanation. I pay thousands of dollars per year to get access to data on the Toronto condo market that I can’t get anywhere else. Why do I pay money for numbers when 99.9 per cent of all other Toronto realtors would not pay for this information? (Urbanation’s primary clients are developers and enterprise customers.) Because when it comes to condo investing, knowledge is power.

So, I asked my friend, Shaun Hildebrand at Urbanation, to run some analyses relating to this higher floor factor. Shaun looked at Burano by Lanterra Developments (at 832 Bay St., 50 storeys), which had a large number of leases. Instead of showing what you will be able to resell your unit for if you pay an extra $1,000 per floor for it, we were able to show how much more you will be able to rent your unit for if you buy on a higher floor. I took a few insights from this data:

Insight #1: Higher floors yield higher rentThe numbers for Burano show that as you go up in the building and pay more for the privilege, you will get higher rents. This is very important because some investors still believe that they will not get higher rents if they buy on a higher floor and they will use this as a reason to only “buy low.” So, don’t buy low just because you think you will not get higher rents if you go higher.

Insight #2: Higher is betterThink of it like this: for a median floor premium of $8.33 per floor per month, that works out to $100 per year. An extra $100 per year on a $1,000 initial investment means you are getting a 10-per-cent cap rate, which is very good. Thus, the higher floor is better.

Insight #3: Three bedrooms get the highest floor premiumThe largest floor premiums were for the three-bedroom units, with average rents higher by $54 per month, or $648 per year, for every floor up they went. If buyers paid only $1,000 more per floor, than that works out to an astonishing 64.8-per-cent cap rate! Why are renters willing to pay such high floor premiums for these three-bedroom units? My theory is that if you are already shelling out $3,000 or more per month for rent, what’s another $200 to $300 per month for an outstanding view?

What the data does not tell you...

While these findings are interesting, they are only one data set from one building, and it’s only for rental rates. So, take this all with a grain of salt. I consider this strong anecdotal evidence to support buying on higher floors is better than on lower floors, but it's not an empirical study by any means.

Unfortunately the bigger question remains: what will buyers on the resale market pay for a higher floor versus a lower floor? For example, if you buy on the 50th floor, and you pay a $40,000 premium to do so, will you get at least $40,000 more when you resell than if you bought on the 10th floor?

Another thing these calculations do not take into account are increased property taxes for going up higher in a building (purchase price is higher) or increased mortgage payments for going up higher.