A Low Point for Condo Landlords

Buying condos to rent isn’t always the road to riches. In fact, it can lead to near ruin. Ever wonder about those long lines at new condo development sales offices, or curious as to how condo developments can be sold out within hours? Most of us have. One clue is that more than half the buyers are wearing suits and seem to spend all their time chatting furiously into their smartphones.

By Tony Wanless / November 6, 2012

Buying condos to rent isn’t always the road to riches. In fact, it can lead to near ruin.

Ever wonder about those long lines at new condo development sales offices, or curious as to how condo developments can be sold out within hours? Most of us have. One clue is that more than half the buyers are wearing suits and seem to spend all their time chatting furiously into their smartphones.

This leads us to conclude that many of those buyers are investors hoping to rent out those usually tiny condos and make a long-term killing in real estate. After all, when you hear two young 20-somethings on the SkyTrain loudly discussing buying condos for rental, you start to think that get-rich fever has infected just about everybody.

Turns out we were right. A large chunk of the condo-purchasing market is apparently the buy-to-rent market.

Not always the right strategy

A recent study shows that the benefits of that buy-to-rent investment strategy may be over, if they existed at all. Instead, condo buyers who rent out are in danger of actually losing money on their investments. This is because of several reasons, says Ohad Lederer, a Veritas Investment Research analyst in Toronto.

First of all, he indicates, the current crop of buy-to-rent purchasers in Toronto and Vancouver tend to be amateurs who “exude hope over experience.” And, he adds, despite claims of a buoyant rental market, investors are ending up with “an astonishingly low return on invested capital.”

Lederer studied 84 units in Toronto and Vancouver, comparing them with similar rental units. His conclusion: these buyers are facing annual returns on their investment of below 4 per cent. You can get almost that much with a long-term GIC (and there will be no ongoing costs). Good dividend-paying shares would be even better.

If that isn’t bad enough, think about the coming cooling of the market, which Lederer predicts will be about a 15 per cent decline. These kind of studies point out something that, as a financial planner, I’ve always worried about when real-estate fever breaks out in Vancouver. If you are a professional, your timing is usually good and you’ll buy for the long term, during which prices (and rents) will rise. You’ll do quite well.

But if you’re an amateur, as most of these buyers on the tail end of a fever are, you’re in for a lot of financial risk with little in the way of return. It may be years before you recover your investment, let alone make any money from it.