Welcome to urbaneer.com’s Home Of The Month. This feature provides a snap shot of what urbaneer.com’s Buyers are purchasing in the City of Toronto.
From our point of view, one of the fastest growing markets in the downtown core is the Investor marketplace. The Investor is someone who is not occupying a property as their principal residence, but purchasing as a means of generating an income or profit through a short or long term hold. What Investors purchase depends on their own needs, financial position, and objectives. However, we believe the Investor marketplace purchasing in the downtown core can be broken down into three broad categories as follows:
1 – The Condominium Investor Market
The first category is those who have a modest amount of capital (often under 20% of the purchase price) and the ability to arrange a first mortgage through their lender. These Buyers often gravitate to New Development Condominium Projects which they purchase during the initial presale phase of the project (well in advance of construction and completion). They do this because they can place a smaller deposit at the time of purchase and, by the time it’s completed three or four years later when values have increased, mark gains in equity. When the unit is ready for occupancy (but in advance of registration when they are obliged to close on the purchase) the Investor may, with permission from the developer, assign their Agreement Of Purchase And Sale to a new Buyer, thereby enabling them to generate a modest profit with minimal effort. Alternatively, the Investor may place a tenant in the property when it is ready for occupancy and subsequently take ownership of the suite, using the income stream generated by the tenant to service the mortgage and property expenses. This strategy has worked well for well over a decade, though lately sales date indicates Investors are employing this strategy less often. This is partly because most everyone who would consider this strategy is now under contract with a developer and, for those who haven’t, the media alarm over a possible housing bubble has made them reticent. For over a year the press have been citing the explosion of the condo boom has begun to diminsh, as the Toronto market reaches a saturation point and potential over supply. The statistics certainly indicate this possibility. In 2012, 237 high-rise projects with units totaling 60,713 were under construction, of which 88 percent were sold as of December 31st. That means there are six times the number of units to be delivered in our near future than were completed last year.
2 – The Existing Freehold Income Property Investor
The second category of the Investor market is those seeking multi-unit properties (two to six units) which are already generating an income. This group usually have more capital to put down (20 to 50%+), but they still need the existing income stream to support the mortgage they require to purchase the dwelling. In other words, without the existing income the Investor may not be able to secure the loan. Because of the necessity for an existing income stream, these properties often sell for a premium. And, if the property is appropriately zoned, meets fire and retrofit criteria, and is legally classified as multi-unit (we estimate only five percent of the multi-unit housing stock in the downtown core fits this criteria), then it will garner an even larger premium. This market of Investors are often boomers and zoomers who are seeking a tangible investment (that which you can see and touch) to add to their existing portfolio of intangible investments (stocks, bonds and other forms of paper investments) or small investment groups or consortiums. Another large segment of this market are parents looking to purchase properties their children can occupy while they attend university, with the intention of also bequeathing the property as part of an inheritance one day. The return on investment these Investors typically seek is usually around 5% after the property expenses. Click HERE for one of our recent listings – a legal duplex generating a 5% return – which sold 5% over list last week. Note ,this group can find themselves competing with Buyers who want to occupy one of the units themselves, with the other suites serving as an income supplement to help offset the costs of buying a property in downtown Toronto.
3 – The Affluent Entrepreneurial Investor
The third category of the Investor market are those who are willing to purchase one of the many 100 year old + vintage downtown dwellings that are at the end of their life span, and undertake a significant amount of time, energy and capital to convert the dwelling into a legal multi-family property. Given their central locations and generous sizes, these properties are already in areas which have an existing zoning for multi-units, making them ripe for conversion. At the same time, Investors may find themselves competing against Buyers who want to restore or deconvert the dwelling into a single family home. To tackle one of these properties, deep pockets are usually requisite and are consequently prohibitively expensive for many Investors. Along with having to place a larger down payment given their poor condition, they require significant sums of capital to bring them up to the building code and legal retrofit requirements, plus capital to carry the property while it’s being retrofitted (which can take anywhere from six to twelve months). Despite the massive undertaking required here, the profit potential is the best. If you can purchase a vacant dwelling and convert it into new high-end luxury rentals (where you can set the rents), you will either enjoy the benefits of having limited maintenance and repair during your ownership, or you can resell the unit for a premium given it’s as turn-key as possible. We wrote about this in our Tales Of Upper Hillsborough blog which shares our journey of buying a dilapidated triplex in Charlottetown and turning it into a luxury furnished corporate and vacation rental. You can click HERE to read the story.
Which brings us to this month’s Home Of The Month.
The stately merchant-class Edwardian semi-detached ten-room manse with laneway parking in the photo above was most recently used as a rooming house. Located south of Bloor west of Bathurst in the South Annex, it is steps to the Bathurst subway station, the cafe cultures of Mirvish Village & College Street and a short bike ride to the University of Toronto. Situated on a coveted street of high-end real estate, the house offered ample proportions including a massive third floor and a large but low-ceiling basement.
To serve our Investors well, we always structure the contract so that the Seller provides vacant possession, to remove any potential challenges our Buyers might otherwise face trying to get the existing tenants out. You also want to ensure the property is free of all contents and debris, including the garage. In this instance, the closing date of the property had to be delayed as the tenants did not exit in a timely fashion, and they left so much garbage several dumpsters were required. The Seller had the legal responsibility and obligation of dealing with this before the deal would close.
Here are some pics showing the property before the renovation began:
Listed at $999,000, our Buyer competed against another Purchaser to secure this property for about 9% over list. The property is now under demolition under permit, and will soon see itself becoming two or three luxury two to four bedroom rentals. This will be a smart addition to our client’s expanding portfolio.
This property was a great buy! If you’re interested in purchasing an investment property in the City Of Toronto, or know someone who is, please know this is one of our fortes. With a multi-disciplinary education in housing, over twenty years of real estate sales, marketing and development including a sterling reputation as one of Bosley Real Estate’s Top Producers I, and my sales team, make it our mandate to guide buyers and sellers through all their real estate needs.
Curious to learn more about Investing in Real Estate? Click HERE to read our newsletter called ‘What Property Will You Invest In?’
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Buy Of The Month