Are You Thinking about Buying a Rental Property in Toronto?

Condo-Business-Intelligence-Are-you-thinking-about-buying-a-Rental-Property-in-Toronto

There is a wide choice of Condo buildings seems to be very attractive as a passive rental income and as a great future re-sale opportunity because of a steady Condo rental, purchase demand and prices growth year by year.

As buyers, it is our usual practice to make a decision based on:

  • A realtor’s advice based on current and a future re-sale prices, and on the opportunity to rent it out
  • Emotion, which is one of the strongest indicators

Some experienced buyers might analyze a Status certificate to find out if there is a healthy Reserve Fund and check to see if there is any litigation pending. 

Some experienced buyers might analyze a Status certificate to find out if there is a healthy Reserve Fund and check to see if there is any litigation pending. 

Seven years ago, I was a potential buyer of a condo, as a rental investment. I guessed that almost all Toronto downtowncondos have approximately the same rental income opportunities if they are the same age and have more or less the same set of amenities and conditions. However, as a financial professional, I wanted to find some specific financial information such as maintenance fees, property taxes and property insurance quotes. Armed with such information, I could make the right choice based on real numbers rather than gut feelings. I was able to collect some information from different sources and make some calculations on a napkin. And eventually, the final decision was made based on “Wow” emotions, a great location and view, and a good rental price forecast from a realtor we trust. We made a very good decision and never regretted it. But it was a time when it was possible to make any decision and get a decent annual rental income and capital gain in a few years. After all, this was when the market situation was favourable.  

Facing a shortage of financial information for rental-investment decision-making, I was inspired to collect such historical and analytical information in one place and have it analyzed. I suppose it should speed up the decision-making process of potential Condo buyers and help them to make a right choice, get a higher return and save time.   

A Condo benchmarking team created a handy tool for a potential Condo buyer, realtor or a Condo owner that might be very helpful in understanding how much rental income a potential buyer could expect from buying a Condo in a particular building, what is a reasonable growth in the price, and overall to make a more informed decision. The analytics made were based on publicly available information published on Realtor.cacondos.castrata.ca, web sites that are thought to be reliable and based on the reputation of those media resources and professional expertise. The analytics are updated quarterly.

And considering a rental income indicator such as Capitalization Rate or Cap Rate (Net operational Income/Current Market Price), we notice a big difference in the Cap Rate among different Condo buildings at the same location.

Condo benchmarking team created a handy tool for a potential Condo buyer, realtor or a Condo owner that might be very helpful to understand how much rental income a potential buyer could expect buying a Condo in a particular building, what is a property price growth might be expected and make more informed decision. The analytics made based on publicly available information published on Realtor.ca, condos.ca, strata.ca websites that supposed to be reliable based on the reputation of those media resources and professional expertise and updating once a quarter. 

And considering a rental income and especially Capitalization Rate or Cap Rate (Net operational Income/Current Market Price), we must notice a big difference in Cap Rate between different Condo buildings at the same location.

What might be a main factor that influences Rental Income?

1. Condo Rental Price?

  • Current Rental Rate?
  • Property Market Price?
  • Current operational expenses such as Maintenance Fee, Insurance, Property Taxes, Utilities?

A Condo-benchmarking team did some research to understand how those 3 factors influence the Cap Rate. They also researched what the critical factor is that makes a rental investment more or less profitable, or even loss inducing, and what the buyer should pay attention to.  

Renta Condo CapRate (Net Operational Rental Income/Current market price) & Rental Price relationship

A sample of 631 high-rise buildings (5 floors and higher) Toronto Condos and North York, data for the 2019 year has been analysed.

Then the sample was divided into 4 groups of buildings to check how Rental Price influences Rental Income for different buildings:

  1. with a pool, hydro and heat included in the Maintenance Fee
    2. no pool, and hydro and heat are not included in the Maintenance Fee
    3. with a pool, but no hydro and heat included in the Maintenance Fee 
    4. no pool, hydro and heat are included in the Maintenance Fee

The graphs for the whole sample of 631 buildings and for 4 groups of buildings are represented below, on 5 pages and the main statistics is in the table 1.

Please click arrow below to graphs by groups.
And click arrows above of graphs to see each group graph.

Graph #1 shows:
The Average CapRate of the sample (631 buildings) is 3.2 % with a $3.24 Rental Price per Square Feet per month. 161 of 631 buildings have a CapRate 3.1%-3.4% The Minimum CAP Rate is 0.3% with $1.18/per SF month. Just one building has such a low CapRate. The units in that building are rarely on sale or for rent. Such a building stands out in the sample and might be included in the sample just for information.

The Highest CapRate is $10.7 % with $2.62/per SF per month that is not the highest Rental Price for such category of buildings. It is in fact 15 % below average rental price for Toronto and North York ($3.1/ per SF/month). Just one building has such high CapRate. The units in that building are on sale or for rent very often. The lowest property market is the main factor of such a high CapRate and the popularity of the property. Such a building stands out from the general sample and might be considered as an exception. And the next highest CapRate is 6.3%. Just 2 buildings have CapRate higher than 6% and 8 buildings have CapRate higher than 5%.

The trend line of graph #1 shows that the CapRate increases with Rental Price Increase. 
And the trend lines of graph #2 confirms that the CapRate increases with the Rental Price There is an increase for almost all categories of buildings except category 2. No pool, hydro and heat are not included in the Maintenance Fee.
For the category of buildings, CapRate decreasing with Rental Price growth, there is just a slight trend. But we might suppose that for such categories of buildings, costs are increasing with rental price growth. And it should be mentioned that for this category of buildings, CapRate will be decreased by a utility bill that is about $0.75-$0.9 per SF/per year or ~0.1 % of CapRate.

The table shows Max, Min, Average and Median values connected with CapRATE and the corresponding Rental Price, $ per SF per month for 4 groups of buildings:

  1. with a pool, hydro and heat that are included in the Maintenance Fee
    2. pool, hydro and heat that are not included in the Maintenance Fee
    3. with a pool, no hydro and no heat included in the Maintenance Fee 
    4. no pool, hydro and heat that are included in the Maintenance Fee

The main statistics for those 4 groups and for all buildings of a sample are in the table below.

Based on the table, we can conclude that:
The highest Average CapRate of those 4 categories of buildings – 3.3% per SF per month, belongs to the category “No pool, No hydro, No heat”.
And the Rental Price connected with that CapRate is $2.1 per SF/month that is lower than Average Rental Price – $3.10 per SF per month of a whole sample. In that sample, CapRate does not depend on Rental Price significantly. And the category of Condo buildings with “no pool, no hydro, no heat included in maintenance fee” has the highest average CapRate.

The lowest CapRate for those 4 categories of buildings belongs to the category of “No pool, Yes hydro, Yes heat”. It is 0.3 % annually, corresponding to $1.3 Per SF per month. This building is the only one and might be considered as an exception. 
And the Highest CapRate belongs to the same category “No pool, Yes hydro, Yes heat. Included “is $10.7 % related to $2.62/per SF per month (that is not the highest Rental Price for such category of buildings). That price is 15 % below the average rental price for Toronto and North York ($3.1/ per SF/month). And taking into account that those buildings Rental Income is not supposed to be decreased by Utility cost because it is already included, it looks like the most attractive category for Rental Investments. However, taking into account the building’s age – 47 years and basic amenities. It might be a very risky investment. And certainly, there are risks connected with the occupancy rate and a category of tenant. But taking into account a very high maintenance fee for such a category of buildings – $1.09 per SF/month, it must be well maintained. But there is no any guarantee that it is well maintained. A potential buyer has to check it. 

And the rule, “The highest profitability of any investment is usually connected with the highest risks!” works for Real Estate market as well. 

2. Property Market Value?

Rental Condo CapRate & Property Market Price relationship

A sample of 631 high-rise buildings (5 floors and higher) Toronto Condos and North York, data 2019 year has been analysed.

Please click arrow below to graphs by groups.
And click arrows above of graphs to see each group graph.

Graph #3 shows a very clear relationship between Property Market Price increase and CapRate decrease.
That means that more expensive properties have higher operating costs.

But Graphs #4 for 4 groups of buildings show us a different relationship. We can see CapRate growth with Property Market price growth for almost all categories of buildings except just one group 2, Condos “without a pool and hydro and heat not included.”.
That category of buildings shows the same tendency as Graph #3 (631 buildings):
Rental Income decreases significantly with Property Market Price increases.
This means, generally, that operating costs increase with Property Market Price increase.

The table #2 below shows Max, Min, Average and Median values connected with Rental Income and corresponding Property Market Price, $ per SF per month for 4 groups of buildings:

  1. with a pool, hydro and heat included in the Maintenance Fee
    2. no pool, hydro and heat included in the Maintenance Fee
    3. with a pool, no hydro and no heat in the Maintenance Fee 
    4. no pool, hydro and heat included in the Maintenance Fee

The main statistics for those 4 groups and for all buildings of a sample are in the table below.

The highest Average CapRate of those 4 categories of buildings – 3.3% per SF per month, belongs to the category “No pool, No hydro, No heat included”.
It means the CapRate is higher in buildings with no pool and hydro and heat included in Maintenance Fee. And the Property Market Price with that Average Rental Income is $655 per SF that is 18 % lower than the Average Property Market Price of the whole sample – $797 per SF. It might mean that the buildings with a Market Price below average might generate a higher Rental Income. One of the possible reasons of such a tendency might be lower operating costs of the buildings – Maintenance Fee. 
The lowest Minimum CapRate for those 4 categories of buildings belongs to the category “No pool, Yes hydro, Yes heat included”. It is 0.3 % annually, corresponding with $357 Per SF and that Market Price is half of the average Market price $632 per SF. 
And the Highest CapRate belongs to the same category “No pool, Yes hydro, Yes heat included” is $10.7 % related to $159 per SF (It is the lowest Property Market Price for such a category of buildings and for a whole sample of 631 buildings that price increased up to $192/SF – by 20 % for a few months). 
But as we mentioned above, this building is an exception. The next highest CapRate is 6.3% and related $307 per SF that is twice as low as the average Market Price.
Graphs connected with those 4 categories of the buildings are on the page above.

3. Condo Maintenance Fees?

Rental  Condo CapRate & Maintenance Fee Relationship

A sample of 631 high-rise buildings (5 floors and higher) Toronto Condos and North York, data 2019 year have been analysed.

The graphs below show Rental Income and Property Market Price relationship for
4 groups of buildings:

  1. with a pool, hydro and heat included in the Maintenance Fee
    2. no pool, hydro and heat included in the Maintenance Fee
    3. with a pool, no hydro and no heat in the Maintenance Fee 
    4. no pool, but hydro and heat included in the Maintenance Fee

 

Please click arrow below to graphs by groups.
And click arrows above of graphs to see each group graph.

Graph #5 shows absolutely clear tendency: 
CapRate increases proportionally with Maintenance Fee decrease! Graphs #6 confirm the same and that CapRate has the strongest relationship with Maintenance Fee decrease/or increase for all categories of buildings without any exclusions!

So, we could make a conclusion that Maintenance Fee is the most influencing factor that every Rental Property buyer!
The main statistics for those 4 groups and for all buildings of a sample is in the table below.

The table shows Max, Min, Average and Median values connected with Rental Income and corresponding Maintenance Fees, $ per SF per month for
4 groups of buildings:

1. with a pool, hydro and heat are included in the Maintenance Fee
2. no pool, hydro and heat are not included in the Maintenance Fee
3. with a pool, no hydro and no heat included in the Maintenance Fee
4. no pool, hydro and heat are included in the Maintenance Fee

the main statistics by those 4 groups and for all buildings of a sample is in the table below.

The lowest CapRate for those 4 categories of buildings belongs to the category “No pool, Yes hydro, Yes heat included”. It is 0.3 % annually, corresponding with $0.94 Per SF per month and it is 42 % above of the average Maintenance Fee of a sample.
And the Highest CapRate belongs to the same category “No pool, Yes hydro, Yes heat included” is $10.7 % related with $1.09 per SF per month that is very high, 56% higher than average Maintenance Fee ($0.7)in a sample.

So, the building with the lowest Property Market Price for category of buildings without pool but heat and hydro included in the Maintenance Fee has high Maintenance Fee - 56 % above average and a Rental Price 15 % below the average in a sample and generate  the highest Rental Income because of the lowest Property Market Price and probably a high demand for affordable rental.

We hope our Mapped CapRates of Toronto and North York Condos might be handy for rental investment decision-making

www.condo-benchmarking.ca

Make a right decision!

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