How to buy an investment condo

Investment-condoAre you wondering how to buy an investment condo and aren’t sure where to begin? You may think Toronto, Vancouver and other large Canadian markets offer the only opportunities to buy an investment condo. But you’d be wrong.Smaller cities also make great target markets to buy an investment condo. The key things to look for are a solid local economy, stable employment conditions and minimal new apartment construction. These combine to produce a tight rental environment, which is what you want.As an investor-landlord, you’ll need to learn about vacancy rates. Canada Mortgage and Housing Corp. (CMHC) summarizes these, along with average rents, in twice-annual rental market reports. An increasing rate means rental supply is growing, and renters have more units from which to choose. For landlords, this means more competition. Therefore, you may have trouble renting a property or increasing the rent. Declining vacancy rates mean supply is tightening and your property may be in higher demand. This could lead to you being able to charge more rent.A vacancy rate between two and three per cent is considered a balanced market, meaning supply is appropriate for demand. Anything below that is ideal.Investment strategyAcquiring and operating an investment condo is very different than buying a primary residence. Your strategy should be to buy, hold and rent to generate income over and above your mortgage costs, while building equity over time.Rule number one for new investors, experts agree, is to take a long-term view – five to seven years – while generating positive cash flow.“There is nothing more challenging than buying an investment that does not cash-flow,” says Mike Cunning, an investor based in Vancouver.Achieving positive cash flow means renting out your investment condo for more than your monthly mortgage payment and other costs. Once you include condo fees, taxes, insurance, property management fees, maintenance and advertising, the financial picture can look much different.If you can generate positive cash flow, the benefits are three-fold:

  • You pocket the monthly surplus
  • You build equity over the long term while someone else pays down your mortgage
  • And eventually, when you sell, you gain from any value appreciation in the property

“Be in it for the long run,” says Rasna Arora, an Ottawa area investor. “Not to flip and speculate but to invest, for at least five years.”Buyers of investment condos are required to have a minimum 20-per-cent down payment. But a larger down payment also means you have to borrow less and your monthly payments will be lower.Vacancy ratesAs an investor, you’re looking to select areas where:• The vacancy rate is low and ideally tightening further• The economic fundamentals are strong• The area is desirable for renters and the building type is suitable for the local tenant profile• Tenants in the area will pay what you have to charge for rentChoosing an investment condoWhen choosing a neighbourhood and a property, it’s important to conduct your research and due diligence. Look for areas with strong economic fundamentals: job growth, population influx, average income growth and increasing (but still reasonable) property purchase prices.Other influences in value appreciation are proximity to mass transit, shopping, schools and other amenities. Ultimately, you want a property that appeals to potential owners, not just renters, because you want to be able to sell it one day, taking advantage of the increase in value.Setting the rentHow to set the “right” rent – high enough to generate positive cash flow, but not so high you price yourself out of the market for the area? First, find out what comparable units in the area rent for by checking sources where landlords advertise. You can also check provincial rent registry databases, along with CMHC’s rental market reports.The rent must be market-appropriate. Don’t be thinking you can rent your two-bedroom condo for $1,500 a month, when similar units in your building rent for $1,000.In larger cities, downtown properties might be your first choice as a location for an investment condo, since the location will appeal to renters. But it’s also where average prices are higher and therefore less affordable. That makes achieving positive cash flow more difficult, because you might not be able to rent out your unit for what you need to cover your mortgage and expenses.And one final, but important reminder: “Remember that your tenants are your partners – they are the ones taking care of your investment and paying for it while you reap the rewards of appreciation and positive cash flow over time,” says Arora.“Treat them well, but don’t let them walk over you.”


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