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I wasn’t actually in the market for another investment condo.
I mean, I’m always looking for opportunities. I’m always keeping an open mind.
But this wasn’t something that I set out to do. I didn’t start the month of July with, “Purchase investment property” atop my to-do list.
As I wrote in the first part of this blog on Monday, all the indicators in my mind point to a condo market on a massive upswing in early-2025, or even late-2024.
Having said that, I still didn’t make a point of searching for opportunities.
Simply put: one was presented to me.
Any real estate agent will tell you that he or she has, many times over the years, clicked on a listing – after viewing the price to check if there was an “offer date.”
Think about how that works.
A house is listed for $899,900 and you think, “That sounds really low.” Then you click on the listing, scroll down to the brokerage remarks, and you read, “Offers Graciously Reviewed On August 30th, 2024 @ 6:00pm.”
In a red-hot market, you simply expect that any property listed at a seemingly-low price has an offer date.
But in the current market, there’s a lot less predictability.
Sometimes, I click on a listing and am absolutely shocked to see an “offer date.” For that property? In that area? And at that price? Good luck to the listing agent and the seller!
Then other times, it’s the complete opposite. I see a property listed for a very good price and expect to see an offer date, but there is none.
A few weeks ago, I was gathering information for a Pick5 video that I was filming on one-bedroom investment condos as well as the now-infamous podcast that has resulted in some nasty YouTube comments as well as some exceptionally unexpected and insane emails, and during this process, I found a condo that I kept coming back to.
It just seemed too good to be true.
We all have our favourite neighourhoods.
We all have our favourite buildings.
And some of have a favorite style, size, or layout.
I have always felt that the east-side of downtown holds great value and since my very first condo was 585 square feet, I continue to feel that a great size for a 1-bed, 1-bath unit in today’s market is 560 – 595 square feet.
After all, condos continue to shrink in size. Developers make them smaller and smaller and that proverbial “shoebox in the sky,” which was an exaggeration when 1-bedroom, condos were 600 square feet, is now becoming more literal as the downtown core features a slew of 300-something-square-foot units.
During my research for the video and podcast, one unit really jumped out at me.
It was listed for $499,900, which is a price that we often see associated with units that are under-listed with an offer date, and in red hot markets, I’ve had $499,900 listings sell for $650,000 or more.
But we’re not in that market.
We’re in this market.
And this $499,900 listing wasn’t for a property that’s under-listed with an offer date. In fact, this was for a property that had been sitting on the market for over a month.
This wasn’t a micro-condo either. This unit was 575 square feet.
That’s only $869 per square foot.
Now, think back to Monday’s blog post where I talked about the “replacement value” of downtown condos in 2024, aka the cost of construction.
It’s over $1,000 per square foot just to build the damn units in the first place, and that’s why pre-construction prices are averaging $1,400+ per square foot in the GTA over the last two years.
But also think back to Monday’s blog post where I showed you a pre-construction assignment that was purchased for $1,625 per square foot.
Why the difference?
What am I missing here?
Ah, right, I forgot – pre-construction condos are simply “worth more.” It’s not just that they sell for more to late-stage investors who don’t necessarily know what they’re doing, but rather they’re somehow….better.
Mark my words:
In ten years, price-per-square-foot will not reflect what was paid in pre-construction, but rather what the going rate is downtown.
With the replacement cost of new condos over $1,000/sqft and with all that pre-construction crap floating around at $1,400 – $1,700 per square foot, I think $869 per square foot is a steal.
However, this condo had been sitting on the market for over a month. So surely there was price flexibility, no?
I started to daydream a little bit.
At $485,000, this condo would be $843 per square foot.
At $475,000, this condo would be only $826 per square foot.
And by the way, I’ve always been a fan of this building.
Built in 2012, the building has clearly stood the test of time. It’s a 350-unit building with a full-time concierge, on-site property management, and above average amenities.
Despite all this, the maintenance fees are below average.
$0.77 per square foot.
And that’s for a 12-year-old building!
Not only that, this building includes heat, central air, and water in the fees.
I’ve had a lot of listings in this building over the years, both for sale and for lease. It’s certainly not a luxury building, but we’ve always had great success with rentals.
I clicked on the listing history of the unit and here’s where things got very interesting!
The owners of this condo paid $576,000 for the unit back in 2020.
And now it’s on the market for $499,900? Huh?
Here’s where things are getting really tricky in the downtown condo market. And here’s where and why I get frustrated with newspaper headlines that group different market segments into one, or with YouTube commenters that leave a spiteful comment but watch 0:00 of a 45-minute video.
The average 416 condo price in June of 2020 was $672,465.
The average 416 condo price in June of 2024 was $763,148.
That’s an increase of 13.5%.
Of course, if that data could be applied directly to this particular condo, based on the $575,000 that they paid for the unit in June of 2020, it would now be worth $652,625.
It’s not.
In fact, nobody knows what any condo in the downtown core is “worth” because nothing is selling. As has been written about in the media – one of the fairest and most accurate details in this market, most sellers are simply sticking to their asking prices.
But not every seller.
Look hard enough and you’ll find a seller who simply must sell.
That was, rather, unfortunately, the seller of this particular unit.
The listing history tells the story.
This unit was purchased for $575,000 in June of 2020 but that was smack-dab in the middle of the pandemic. This was also when tenants began moving out of rental properties in the middle of the night and when Doug Ford told people, “If you have to choose between feeding your family and paying your rent, then feed your family.”
Unfortunately for these investors, the $2,200/month they probably counted on for this $575,000 condo purchase simply wasn’t going to happen.
And the unit sat on the market. For weeks. Eventually months.
They finally put a tenant in the unit…
….for $1,550/month.
Make no mistake, this is a $2,200 unit in today’s market and it was a $2,200 unit four years ago. But the pandemic did crazy things to rents, renters, and landlords alike. Those who didn’t know how to navigate the system got steamrolled, and here’s a case of an investor/landlord who panicked and put a tenant in place for a pittance.
Of course, once a tenant is in place, you can’t get rid of them.
As has been demonstrated over the last few years, all of these handshake, sweetheart deals between landlords and tenants for rental relief were impossible to undo once put into place.
This condo burned a hole in these people’s pockets for four years.
It’s no wonder they wanted to exit the investor space. What an awful experience.
The condo was vacated and the unit was put up for sale but now there’s a condo being built one block over and I have to think that end-users looking at this unit are saying, “I don’t want to look at that for the next two years!”
So the property sat on the market for months. The price drop to $499,900 reeked of desperation.
With absolutely nothing to lose, I thought, “What the heck?” and I went down with my colleague, Tara, to have a look.
The unit was in mint condition. You would never believe that this was a 12-year-old condo. The floors looked new. The appliances were sparkling. And the owners had spent money on custom built-ins, wainscotting, crown moulding, and really tried to improve the value and look and feel of the space.
I told Tara, “If the listing agent calls me today or tomorrow for ‘feedback’ then I’ll know I have leverage.”
Tara said, “Dave, this has been on the market for 32 days. You have leverage.”
Sure enough, the listing agent called me the next day for feedback on my showing, and I was very transparent with her.
“I’m looking for myself,” I told her. “And I’m looking for a deal.”
She said, “You don’t think $499,900 is a deal? The same model sold for $530,000 last month! We’re giving this away!”
She wasn’t wrong.
“Look, I sympathize with what your clients are going through,” I told her, “But I’m looking at several units out there right now and don’t need to pull the trigger. I will only do so if it’s a deal.”
She said, “What price are you thinking?”
So with nothing to lose, I said, “Probably four-sixty. Four-seventy.”
She said, “Put it on paper.”
I told her, “I get it; I would say the same thing. But I don’t want to put that on paper only for them to sign back at $495,000.”
She replied, “Whatever you put on paper for me, I will do my best with. We both have nothing to lose.”
Good for her! She wasn’t wrong.
The next day, I decided to submit an offer for $460,000 with a 30-day closing.
I sent it over to the listing agent and she confirmed receipt.
I was out on appointments that afternoon and when I checked my phone, I found three missed calls from her. Was there a fire? Nope. But it sure felt like it…
When I reached her, she was very courteous and told me that the sellers had “crunched some numbers” and their absolute, no-questions-asked, bottom line was $485,000.
I said, “Understood, no problem.”
Then there was silence.
She replied, “No problem…..like….that’s something you would consider?”
I told her, “Sorry, no, I mean that I’m at $460,000.”
She sighed. She already sounded defeated. She said, “Isn’t there anything you can do?”
I was honest and said, “Can do versus will do; that’s two different things. I’m sorry, I get it, I know you’re in a tough spot. I know the sellers are too. I will buy this condo for $460,000 if they are interested.”
All is fair in love and war, right?
She called me back an hour later and said, “Great news, they will go to $475,000 but that’s it.”
I asked, “What about their bottom line? I though they had crunched some numbers? How are they able to make this work?”
She said that they just really needed to move this unit, and the more she talked, the more I knew they were going to accept what was in front of them.
She called me back two more times and tried to get me to move. She begged. Good for her; she was working for her client and she wasn’t above anything.
In the end, they accepted the $460,000 offer.
And since I am gainfully employed in the world of real estate and was acting as my own agent, the deal netted out to $444,406.
That’s $773 per square foot.
It’s also $130,594 less than they paid for the unit four years ago, and the average 416 condo price is up 13.5%, on paper.
But the greater fool theory can work in reverse, right?
If I paid $444,406 only because somebody else paid $575,000, then what’s to say I’m not forced to sell it for $288,000 in four years?
Well, I won’t be.
First of all, because investors who can’t afford to carry a condo through tough times shouldn’t be in the market in the first place, and unfortunately these folks were a prime example of it. But I can carry this. Otherwise, I wouldn’t be doing it.
Secondly, because this will be a $575,000 condo once again, whether it’s in two years or five years. I have zero doubt about it.
As for “the numbers,” this is where the YouTube peanut gallery is lost.
There’s a lot of talk about “negative carry.”
Who cares?
That’s cash flow. I’m good on that. Most investors are.
What I care about is the net ROI after principal repayment which is really all any investor should care about.
Oh, and appreciation. Of course.
The condo cost $444,406.
A 20% down payment is $88,881.
A mortgage with a 30-year amortization at the current 6.04% variable rate is $2,123.64 per month.
Ouch, right?
The rent is only $2,200.
The fees are $440/month.
The taxes are $190/month.
This “investment” is negative $553.64 per month!
But the principal repayment is around $360 per month.
So the net loss is only $193.64 per month.
“But David, the investment is still losing money,” you might shout.
Yes, it is. I’d have to cover $2,323.68 per year in negative cash flow.
Thankfully, the condo would only have to appreciate 0.53% per year to cover that.
Do you see where I’m going with this?
I would happily “lose” $2,300 per year to ride the appreciation of this condo over the next year, or two, or five, or ten.
Not only that, we are in a declining interest rate environment.
By the time I close on the condo, we’ll have seen another rate cut of at least 0.25%.
The variable will fall to 5.79%.
The mortgage is $2,068.28, the investment is negative $498.28 per month, but the net loss is only $125.28 per month, or $1,503.36 per year.
But when do we “lock-in” to a five-year, fixed rate mortgage?
By this time next year, projections are a five-year, fixed rate of 3.99%.
That would make the monthly payment $1,688.58.
Now the unit is cash flow negative $118.58 per month.
But now there’s $530/month in principal repayment, so the net return is $411.42 per month.
This condo will be making money every month for a five-year term.
Around a 5.6% ROI based on the math above.
But that’s not why I’m interested.
I’m interested in the appreciation.
The days of cash-flow positive real estate investments are over. They have been over for a long time; maybe a decade or more.
Market bears and real estate haters continue to use this as a reason why real estate is a poor investment but they completely ignore both principal repayment and leveraged appreciation.
Tell that to the folks who paid $575,000 for this condo and just sold it for $460,000, I know. But their case isn’t normal, and had they been able to ride this out for another year or two, they’d have been made whole.
Remember the onset of the pandemic when the DOW Jones dropped from 30,000 to 20,000 in four weeks?
How many people panicked and sold off? How many people ate that 33% loss because they were afraid that it would go lower?
The DOW hit 20,000 in March and was back to 30,000 by December.
I can think of all kinds of scenarios where the advice, “Don’t worry, just ride it out” has proven catastrophic. Some of the YouTubers mentioned Nortel or Bre-Ex.
But real estate isn’t that. Those are companies that go broke because of accounting scandals or falsified gold samples.
I’m a long-term investor. I’m not worried about “negative cash flow” that’s a couple hundred dollars per month for 12 months until rates are lower.
But having said that, and having talked about a 5-10 year horizon, I’m happy to come back to this in June of 2025.
Mark your calendars…
The post Putting My Money Where My Mouth Is……Again (Pt2) appeared first on Toronto Realty Blog.