Rights & Money

Should You Buy a Condo as an Investment?

A condo that you rent out can provide a good return on your investment—as long as the rent covers your costs

By Katrina Caruso

Sometimes it seems that everywhere you look, another condo is going up. About 60,000 condo units are currently being built in the Greater Toronto Area alone, with another 20,000 due to be constructed between now and 2021. Who’s buying them all? About half the time, it’s someone investing in real estate—at least in the GTA: in 2017, 48% of the recently completed condo units there were bought as investment properties to be rented.

Unfortunately, about 50% of all investment properties aren’t providing great returns. According to a recent study by CIBC and Urbanation, a market analysis company, Toronto area condo investors aren’t making enough in rent from tenants to cover their costs—45% of respondents were in the red for $500 or less a month on their investment, 20% were losing between $500 and $1000 every month, and almost 35% were short by more than $1,000 a month.

On the other hand, the study says, a lot of people made money. By 2017, re-sale prices had gone up 51% over an average of five years. Investors who made a down payment of 20% saw a return on their investment of 155%.

The problem ahead for those considering such an investment is that interest rates are rising. Unless you’re in a position to pay cash to buy a property, you’ll have to take out a mortage, and the interest rates on investment properties can be high. According to the study, most investors paid high rates on their mortgages—30% paid 6% and 16% paid more than 9% interest. Investors who make a down payment of 20% will need to raise their rents by at least 17% over four years to cover their costs—and that’s only if rates don’t change.

In addition to interest rates, you have to remember that your costs will include condo fees and real estate taxes. And you’ll be a landlord, responsible for maintenance and any repairs.

Before you buy a condo as an investment, make sure you do a careful cost/benefit analysis and enough research to validate your assumptions.

Photo: iStock/FangXiaNuo.