January 4, 2012
“Hi Stevie, Happy New Year! Hope all is well with you. We are considering investing in an income property sometime this year. Given the price range discussed a while back, what are your thoughts on options to consider outside the typical downtown condo?”
Hi […], Happy 2012 to you both! Your plans couldn’t be more timely, here’s why. The United States Federal Reserve has just indicated that interest rates will remain unchanged until mid to late 2014, which suggests that Canada will most likely follow suit. This bodes well for investors as it means that variable interest rates will likely remain low.
While the condo side of the market still remains strong, it is anticipated that it may become more difficult for investors to reap positive cash flow on projects above the $650/sq foot mark.
After all costs are factored in, many owners may end up subsidizing their rental units to the tune of $300-400 per month as rent alone often falls short of covering all carrying costs. The hope is that in time, the value of the unit will appreciate enough upon selling, to offset the subsidized payments carried and provide a solid return, i.e. a decent capital gain.
While this was almost a guarantee between 2006 and 2010, it may become a little harder to achieve amidst competition from both new and resale units of similar sizes, features and location. These combined factors have the potential for a perfect storm, one that could work to drive prices down if the market does not absorb current inventory at a fast enough pace.
So where else to consider in the real estate landscape you ask? I would suggest… diversifying your portfolio to include property types such as bungalows–with finished basements situated close to urban centers (i.e. a 20 minute drive to the downtown core). My rational is based on 4 observations:
Observation 1: Amidst an investment climate focused largely on condo acquisitions and an increasingly dense-population expansion throughout the downtown core, it’s reasonable to expect that in years to come (barring any economic calamity), ownership of a detached property—with actual land—will become an exclusive club (visit a London, New York city or Hong Kong for a dose of this reality).
Observation 2: A demographic shift is occurring, many baby-boomers are downsizing from larger homes into smaller single-floor dwellings. While condominiums have been in large part the go-to option here, bungalows are becoming a very popular alternative as they provide similar comforts to a standard 2-storey home, but on a smaller scale for more maintainable and affordable upkeep. In addition, if the basement is finished, it allows for potential income from a tenant to help offset expenses while on a fixed income.
Observation 3: Bungalows are often priced thousands less than two storey detached homes—and in some cases still even lower than many recently built town houses. As an added benefit, lot size permitting, one can always extend the home or build vertically down the road to suit individual tastes.
Observation 4: When the late 20 to early to 30-somethings who represent a fair share of today’s condo buyers look to begin investing in families, the current 1 bedroom+den setup may be insufficient.
Unless condo developers go back to the drawing board and focus on designing operationally sustainable communities that include larger 2 and 3 bedrooms, minus the heinous maintenance fees that often accompany larger units, bungalows sitting at the cusp of the core might emerge as one of the best options. Condos certainly have their place and let’s face it; sky-living is here to stay, however a bungalow should be considered a worthy complement to your long term property investment plans. Hope this helps!
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