Buying A Toronto Condominium For Investment

We talk a lot on TRB about “investment properties” in Toronto, and we throw around investment terminology and metrics, but often we don’t go into detail.

We also agree and disagree about the merit of these investment properties, or just what constitutes and “investment” in this city.

So today, let’s delve into a real-life example of an investment property – one that I just sold to a client on the weekend.

Then feel free to give your opinion on the merit of the investment, or input on the process, evaluation criteria, and everything in between…


What is an investment?

Silly question to ask at the start of a blog post with the savvy audience that I have, perhaps.  But it’s not a rhetorical question; I mean it, what is an investment, to you?

I have a friend that buys older cars, drives them for a while, then turns them over.  He says he makes money doing this.

I know absolutely nothing about cars, and I consider them to be one of the biggest depreciating assets in existence.  But if my friend can buy for under fair market value, restore or rehabilitate some portion of the asset, and then sell for above fair market value, and/or with lower than average transaction costs, then to him, this is an investment.

What about this set of hockey cards?

Click the link – you have to see this.

This is the finest set of 1923-24 Paulin’s Candy V128 on the planet.

This is all seventy cards in this set; it’s complete.  They’re also all PSA-graded.

It’s one of a kind.

And it’s $10,000 US, plus a 19.5% “bidder’s premium,” plus taxes.

So it’s over $18,000.

But is that an investment to you?  Or is it simply something that people with too much money buy for no good reason?

Personally, I think in fifty years, that set of cards could sell for a million dollars.

But I also think that it would fetch more today if it were being sold via Christie’s Auctions than the website it’s currently being featured on.

So what I’m trying to get at is that anything can be considered an investment, so long as you have the opportunity to obtain a return on that investment, and/or find an opportunity for market arbitrage.

The return, of course, is subjective.

I’m fine with obtaining 7% in my RRSP.  Are you?

Would you invest in a second mortgage for 13.75%, or is that too risky?

We all have different investment objectives, so the one thing I will say before showing you this investment condo example, is you can’t simply say “that’s not an investment,” or even “that’s not a good investment,” without adding the words “in my opinion.”

Alright, shall we?

When it comes to buying condominiums for investment, there are two different “types” of returns an investor looks at:

1) Appreciation.  How much will this condo go up over time?

2) Yield.  What am I getting back on my investment?

In any hot market, buyers look for the former: appreciation.

When I was a kid, I wanted to buy stocks for $10 and sell them for $50.  The idea of getting a 6% dividend didn’t appeal to me.

There are still a lot of folks out there today, young and old, who are simply looking for the asset to increase in value, but I don’t think that’s how we should look at real estate.  People do, but for the purpose of this example, and from how I advise my clients, I would put that second to the actual yield.

In addition to appreciation and yield, I also look at acquisition cost.

You can pay more than a property is worth, and you can pay less.  In this market, you often pay more, even for an investment property.  I had a client bid on a property in King West and go $10,000 past what we had set out to bid, because the appreciation potential was so much greater than anything we’d seen (based on location).  We lost on that bid, but it goes to show you – sometimes you’re willing to pay more.

Then again, sometimes you pay less, which we’ll talk about in a minute.

I also look at the ease of investment, since some properties require more work (ie. a duplex, triplex, fourplex compared to one condo), and sometimes you get a really great tenant, and sometimes a really bad one.

You also might buy a property that’s rented, or vacant.

These are all things to consider along with the numbers; the appreciation and the yield.

A client of mine has been looking for an investment condo for the last two months, we’ve made two bids and lost, and this weekend, we purchased a unit that is the best we’ve seen.

Isn’t that always the way?

The property is in King East, and it’s in a boutique, low-rise building, with few amenities, no concierge, and very low fees.

The specs:

List Price: $319,900
Monthly Maintenance Fees: $354.55
Yearly Taxes: $1,884.85

The property is currently rented by a young, late-20’s accountant, with great credit, a very high income, and having met him in person (during the showing), my client and I both felt he was an A+ tenant all the way.  We also stalked him online through every social media application there is, and thus we’re doubly convinced.

The rent is $1,650 per month, and the tenant pays hydro.

So let’s work through the numbers, using the following assumptions:

Purchase Price: $310,000

Down payment: 20%, or $62,000

Amortization Period: 30-Years

Interest Rate: 2.30% (5-year-fixed)

Monthly Mortgage Payment: $952.92

A quick note here, perhaps…

I know that a lot of market bears, or anonymous internet commenters with an axe to grind, are cracking their knuckles getting ready to tear this example apart.

So I’m going to make the following assumptions, that you may disagree with if you may, but I will still sleep well at night…

1) Vacancy.  I’m forecasting a 0.00% vacancy rate, and if you disagree, then you’re simply trolling, and you don’t understand the market.  Put the “business” textbook down, and take a look at reality.  In downtown Toronto, a condo is only vacant if the landlord allows it to be.  There’s absolutely, positively, no reason for a downtown condo to have even one day of vacancy in this market, if the landlord knows what he or she is doing.  End of story.

2) Tenant Acquisition Cost.  I’m also using $0.00 for this, because at the risk of costing myself business, and putting all the rookie agents who live on leases, out of work, dare I say that you don’t need an agent to find a tenant in this market.  I think an investor should use an agent, if they’ve never done it before.  But I have clients that own 5-6 condos who have done this again and again, and through Craigslist, Kijiji, ViewIt, and Padmapper – they’ve found tenants, done credit checks, got employment letters, checked references, stalked them on social media, met them in person, and paid nothing to an agent.

3) Insurance.  Part of your monthly maintenance fee covers building insurance, and the tenant is responsible for obtaining a $2,000,000 insurance policy, so it’s up to the landlord whether he or she wants to obtain additional coverage, but most of my investors do not.

4) Land transfer tax.  This is a big number, no doubt about it.  And since it’s an initial cash outlay, you can choose to include it in the first year’s ROI, or spread it over a 20-year horizon.  Whatever you want – and we’ll come back to this.

5) Legal fees.  Same as above.

6) Realtor fees.  You don’t pay any fees to buy real estate, only to sell.  And since the answer to the old adage, “When is the best time to buy real estate?” happens to be “never,” I think we’ll run our examples without including any disposition fees.

7) Maintenance.  This is a condo, not an 80-year old brick building.  The only maintenance you’ll need is a new appliance every 5-6 years.  That’s a nominal cost.

Now the three metrics we want to look at are the following:

1) Cash Flow

2) Return on Investment

3) Cap Rate

Cash Flow.

The cash flow, quite simply, is the amount of money you’re left with after each month.

It’s the income minus the expenses, and in the 1-bedroom condo market in downtown Toronto, you’re usually cash-flow neutral.

In this case, our income is $1,650, and our expenses are as follows:

Mortgage – $952.92
Maintenance – $354.55
Taxes – $157.07
Hydro – $0 (tenant pays)

The condo is $185.46 cash flow positive each month.

You’ll be hard-pressed to find condos in the city that are cash flow positive, and that’s what makes this investment property such a great buy.

Of course, we’re using a 30-year amortization, but this unit would still be cash flow positive on a 25-year amortization, and using a 30-year amortization makes the ROI lower, so it doesn’t make the investment look any better than it actually is.

Return on Investment (ROI).

Here we’re looking at how much equity we get, as a percentage of our cash outlay.

Our cash outlay is the $62,000 down payment, and while the land transfer tax in this case is $5,950, I’m not going to throw this in, because there are so many ways investors choose to look at this.

Our condo is $185.46 per month cash flow positive, or $2,225.52 per year.

The $952.92 per month maintenance fees is made up of an average (in the first year) of $485 of principal and $468 of interest.

So that $485 of principal is $5,820 in the first year, plus the $2,225.52 is $8,045.52 in equity in the first year.

From a $62,000 investment of cash, that’s a 12.98% return on investment.

Even if we added in the $5,950 of land transfer tax, the ROI would still be 11.84%.

But as I said, some investors will spread that land transfer tax over twenty years, or five, or what have you.

Capitalization Rate, aka “Cap Rate.”

This is simply the net income as a percentage of the acquisition price, irrespective of financing.

In my opinion, this is a metric that works best when we’re considering cash purchases, but investors still use it no matter what.

Our income is $1,650 per month.

Our expenses are:
Maintenance – $354.55
Taxes – $157.07

The purchase price was $310,000.

That’s a 4.41% cap rate.

If you want to add the $5,950 of land transfer tax into the mix, then our cap rate drops to 4.32%.

So there you have the investment my client has made, and the three metrics that are most commonly used in real estate to evaluate the investment.

Now three more items to note:

1) Acquisition Cost.  Call me biased if you want to, but I believe this is a $325,000 property.  The property was listed at $319,900, but we couldn’t get in for a week.  The showings were severely restricted, as either the agent had to be there, or the tenant had to be home.  In my professional opinion, if this unit was vacant, cleaned, staged, and painted, it would list for $329,900, and it could sell overnight.  But a conservative estimate of value is $325,000, and thus my client did very well at $310,000.

2) Ease of Investment.  There’s already a tenant in place, on a lease until next year, with first and last month’s rent secured as a deposit.  Having met the tenant, and done our due diligence, we feel he’s an exceptional candidate.

3) Overall impression.  Simply put, $310,000 condos don’t rent for $1,650.  Or another way of saying this is – $1,650/month units are worth a lot more than $310,000.  We made an offer a while back for a unit at $350,000 with $1,625/month in rent, because it was in an A+ location.  But on the whole, you just don’t see $1,650/month coming from $310,000.

That’s it, folks!

I welcome your thoughts.




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  1. crazyegg says:

    Hi All,

    Great discussions here as usual guys!

    But why do Cap Rates even matter in today’s reality? With such low interest rates, I would imagine that all rational investors would be financing their purchases and putting down the minimal down payment.

    The ROI should thus be calculated as: [(FY Revenue) – (FY Expenses)] / Down Payment

    The purchase price is irrelevant in this case, unless you are foolish and buying swampland. Am I missing something here?


    1. Kramer says:

      I like where you’re going with that. Net return on capital that you have actually invested (ROI) seems like the most important thing. It factors in all costs, maintenance fees, property taxes, financing. Let’s you truly know what your investment is returning to you each year.

      That being said, I think that in the searching stage, Cap Rate can be your first blush metric used to quickly compare and narrow down a list of potential properties or even neighbourhoods. Can be item #1 in a list of criteria (including location, square footage, etc) to also assess the probability of increase in value. You shorten the list, and then dive deeper into ROI to figure out which property my capital is most efficiently allocated.

      Furthermore, once you are in the property and say, for example, the property has gone up in value, then I would update the property price (for Cap Rate) and my Total Equity in the property factoring in value increase (for ROI) to reflect current market value. Change in Cap Rate might tell you that the property is now returning a low Cap Rate compared to other properties, whereas the change in your ROI is highly dependent on your financing situation (maybe you have even pulled some equity out and lowered ROI) and hence is not as useful in comparing properties.

      On that note, I think that Cap Rate is useful for investors who are managing a portfolio of investment properties because it does take into account property price and many investors are looking at their portfolio from a perspective of total property value and how they can pull equity from one to buy another etc. Still, it should be only one of several ratios to consider.

      Perhaps the answer also lies in the realm of financial statements. Cap Rate would seem to me like a balance sheet ratio (sales to assets – are assets being used efficiently), whereas ROI is more of an income statement/shareholder’s equity driven ratio (return on equity). Both are important. Neither good on its own, and must combine with Debt to Equity Ratio to make sure you’re not leveraged to the gills.

      In summary, any business cannot rely only on ROI for a full analysis… though I agree that at the end of the day it is most important.

      1. Kramer says:

        * that should have said “pulled some equity out and INCREASED your ROI”…

  2. Coming Soon to TRB... says:

    (Hope that worked)
    Sure would be nice to be informed when transacting in real estate.

    Don’t you just love how everyone on this blog has a crystal ball? Where can I get mine?

    Can’t we all just get past the fact that investments involve risk? Sometimes you win, other times the government steps in and adds layers of rules upon rules…which no one saw coming…

    If i win it’s because I’m smart, if I lose blame [enter here] (although ‘the government’ seems to be a common choice…)

  3. Libertarian says:

    Some good debate on this one. One thing that I would like to add is that David’s story shows a good return because they got the unit at a discount. Any investment will have a great return if it’s purchased at a discount. That’s half of the cliche….buy low, sell high. If everything were that simple, we’d all be gazillionaires. But David admits, as do some of the other commenters, that it’s very difficult to get units at a discount so that they are cash flow positive. So it’s not as easy as David makes it sound in his story, which is why people are questioning his numbers. But I get it, David is marketing himself to would-be investors, trying to get more clients. Good luck David!

  4. Kyle says:

    There are three main sources of return to real estate investors: 1. principal paydown 2. cashflow 3. price appreciation. Assuming the investor meets his mortgage payment, the principal paydown component is basically locked in regardless of what property he invests in. So the analysis comes down to cashflow vs appreciation. Sure people can nit pick about the assumptions in an attempt to sound like they have a clue, but is this a good investment?

    I own real estate investments outside of the city and looked at investing in condos in the city to diversify, but most properties i saw don’t generate enough cash flow, so i would have to either put down a much larger down payment or have a negative cash flow and count on price appreciation.

    This property generates a positive cash flow with 20% down (not based on assumptions, but real world numbers), which means this property is profitable based on 1 and 2 alone (this is an anomaly in this city). Factor in the likely price appreciation over the holding period, and rising rents makes it a solid long term investment in my book.

    1. Kramer says:

      Kyle, a lot of what you said resonates with me after my 6 years holding a great downtown Toronto property, specifically:

      My mortgage, with only 10% down initially, meant that for the first 2-3 years I was just cash flow negative. In the next 2 years I still had to contribute some of my own money to pay for some of the equity portion of the mortgage payments (although all expenses and interest were covered). Finally in the last year and a bit, the rental income paid for all costs, the full mortgage payment, and SOME pure extra cash flow (nothing to write home about) because more equity was paid off and interest rates went down, overweighting the increases in maintenance fees. If you want a quality property in downtown-ish, I think this is what you have to go through in the first few years, unless you put down a huge downpayment, but then opportunity costs and overallocation could kick in.

      Luckily, with all this, it was forced savings and significant price appreciation occurred which made it a great 6-year savings plan and investment and a huge learning experience. BUT without that price appreciation though, WHAT A WASTE OF TIME AND CAPITAL IT WOULD HAVE BEEN. Net: you need that price appreciation to make it worth all the time, and if your time horizon is short then you are speculating in an inflexible high entry and exit cost investment.

      If I were mid-20’s again today, I would:
      – carefully decide how much of my capital I would invest in real estate – it would be like 30%.
      – do a crap ton of research into markets outside downtown like you are talking about that have positive cash flow immediately after carrying themselves completely. I would even make sure I have that precious reserve fund growing for when I need to replace a dishwasher, washer and dryer, and AC unit. Yes, got hit with all of those. In other words, I would PROPERLY invest in rental real estate like I read in Campbell’s book before diving in.
      – I would not buy a property that sucks in additional capital from you to cover the equity portion of your mortgage payments even in the short term, however I view this in hindsight as the cost of holding a quality strategic differentiated Toronto property that only attracted A+++ tenants.

      1. Kyle says:

        I have to confess, though i admire him immensely and consider him one of the preeminent real estate pros in this Country, i actually haven’t followed Campbell’s system either. The substance is bang on, i just don’t have the diligence or discipline to follow it to a tee. I do however consider most of his concepts and like him i prefer predictable cash flows over appreciation, because 1. as you alluded to in your own experience, returns from cash flow tends to grow exponentially (i.e. can take you from a negative CF situation to a positive CF situation), while returns from appreciation tend to grow linearly and 2. because i find cash flows far easier and cheaper to harvest and reinvest.

        1. Kramer says:

          I think you’re a much better real estate investor than I and over the long run you will reap the rewards form the dedication.

          Your approach and those of other diligent cash flow focused investors make me feel like I was more crash and bang, even though I did make sure I would never be in a position where I had to sell and would have been OK if 20 years later my kids had a great place to live in Toronto with subsidized rent from their old man. But because of my approach, I put myself in the position where if the price didn’t go up nicely I would have been crying out “WHAT A WASTE OF TIME AND CAPITAL!” – not where you want to be!

          Keep’er up, you’re going to retire like a king. Stacks and stacks of square footage so high you can’t see over. LEARN FROM THIS GUY EVERYONE!

          1. Kramer says:

            Oh, and may I just say… F###ing maintenance fees! A whole animal unto itself. That should be the topic of an entire blog post in the future.

            The risk of maintenance fees increasing forever has me scared off from future Toronto condo real estate investment. Yes you can model for increases in it, as you should, but in practice… well, maintenance fees just SUCK.

          2. Kyle says:

            Thanks for the kind words!

  5. Kramer says:

    Reality check: There is too much flat out comparison of real estate returns to the returns of other assets in these comments. Real Estate is but one class of alternative investments with unique characteristics. The expected return being bigger or smaller for one asset class does not mean you go all in to that asset class. Bottom line: real estate should be considered for its diversification benefits to your overall portfolio.

    I just sold an investment property, it closes next week. Here is my very fresh input from the last 6 years of holding it:
    1. It was some work. It wasn’t terrible, but it was more work than buying and holding a share of Apple.
    2. Like any real investment (non-speculative) you should be ready for a long time horizon, in this case mainly because of entry and exit fees.
    3. You are leveraged: it amplifies gains and losses. Without leverage, the returns are not worth the effort or allocation of capital. With too much leverage, you may need to be shovelling in your own equity on top of the rental income, which could be going into other asset classes, so you find yourself un-diversified.
    4. The one thing that I liked most about holding an investment property was that it was forced savings. With every mortgage payment that you are not allowed to miss, you are adding to the equity, whether it comes from the tenant or from top-up from you depending on the financials. This forced savings over a long time horizon was incredibly helpful to me.

    There is no right or wrong answer here (except in hindsight). It’s all about whether or not it fits your lifestyle and your risk/return objectives.

    I will say this, one would have been better off over the last 6 years putting a downpayment into Apple and adding equity bi-weekly without requiring leverage hence not requiring rental income to pay the interest on that debt, or property taxes or maintenance fees, and the commission to purchase is tiny, and without having to find and service tenants and pay for new dishwashers and such. I wouldn’t have had this discipline without a bank on my arse making sure i do it biweekly!

    Of course, if Apple was the only stock and investment you were investing in, that would be irresponsible, even though it has done well in the past six years. It should also be considered irresponsible to only invest in real estate over any period, even if it has done well in the past.


    1. Kyle says:

      “Reality check: There is too much flat out comparison of real estate returns to the returns of other assets in these comments. Real Estate is but one class of alternative investments with unique characteristics. The expected return being bigger or smaller for one asset class does not mean you go all in to that asset class. Bottom line: real estate should be considered for its diversification benefits to your overall portfolio.”

      TRUTH! Real estate vs financial investments are completely different (which is actually a really good thing for diversification purposes). Pissing matches comparing the two and how they’re measured is a just waste of piss.

  6. Condodweller says:

    Shall we bring up the elephant in the room? Real estate agents are NOT licensed nor are they qualified investment advisors. They are licensed to buy and sell properties. Sure they can advise on location, potential appreciation, possible rent you can get, however, they cannot advise whether or not it is a suitable investment for you. This is evident from the holes that have already been pointed out. I had to chuckle a bit as I read let’s exclude disposition costs, maintenance costs, and let’s assume best case scenario of 0 months of no income.

    Sure in this hot market it’s fair to assume 0 months of vacancy….or is it? What happens when a tenant trashes your place and it takes a month to repair everything before it can be rented out again? What happens if your tenant decides he/she is not going to pay rent? What if both happen at the same time? I know someone whose tenant stopped paying rent and lost about 5 moths of rent until the tenant was evicted, and lost another month’s worth of income while the place was repaired to the condition where it could be rented again. All this in downtown Toronto in a hot market where we can assume 0 vacancy.

    I am also going to challenge the fact that renting condos is an investment. In my mind purchasing real estate with the intention of collecting rent to make a return is a business, not an investment. When renting out a condo, the only one cost which is constant and predictable is the acquisition cost. Well almost, while the purchase price and the land transfer cost are fixed I have yet to meet a lawyer who would give a guaranteed legal cost. Everything else is variable and unpredictable. Your mortgage payment is going change, your property tax is going to change, your fixed maintenance cost (condo fees) is going to change, your long term maintenance cost is totally unpredictable, your income tax is unpredictable (assuming none of your other sources of incomes change), and here is the big one: your sale price is totally unpredictable.

    The only real way to assess the value of the “investment” is to do a business plan where you run a best/worst case scenario and you are comfortable with the worst case should it occur and weighed it against other investments.

    I wouldn’t expect anything else from a real estate agent, but David presents the best case goldie locks scenario here. Below market value purchase price, high rent that will not go down, A+ tenant who will never leave and will never cause any damage, 0 vacancy rate, no maintenance costs, no insurance because there will never be any fire, water damage etc..

    This analysis is a good starting point for someone who is contemplating investing in real estate to get an idea of what’s involved, but they must realize this is a best case scenario and should crash test the plan to make sure they can handle it if and when some of the variables go south.

    One final thought: what other investment class would be a good idea to buy at the top of the market? I’m not saying it’s a bad idea, just consider the implications of some sort of market correction should it happen and what is your exit strategy.

    1. Jason says:

      Some fair points, but very difficult to predict the top of any market. Despite government intervention and with some pauses along the way, Toronto’s real estate market has continued to climb. Many people were calling the top of the market for several years. The higher prices climb, the more cautious one should be, but calling a top is impossible. You can find good investments in any market.

      1. Condodweller says:

        @ Jason, Agreed, however, your returns are defined by the price you paid for the asset. If you buy today, your return will be much less than if you had bought 20 years ago. Each day that goes by with the market rising makes it a worse investment.

    2. Kramer says:

      Condodweller, your points are interesting but I am sure that you would consider buying shares of Procter and Gamble to be “an investment”. P&G is a business that has many costs and variables as you were discussing.

      If you purchase an condo to rent it out, yes it is a business, but you are “investing” in that “business”. It is an investment.

      1. Kramer says:

        And as for the top of the market thing… if your time horizon is long enough then it shouldn’t matter. Someone bought Berkshire Hathaway at the top of the market 20 years ago, look at how they did.

        If you are going all in on one real estate investment at one moment in time and it represents your entire portfolio of investments, then THAT is one’s mistake, not the timing. If someone looks at it as part of their portfolio and the time horizon is long (as it should be especially in real estate), then maybe it is still a good investment to make.

        Loose numbers, let’s say you had $200,000 to invest in total, all of your savings… ask yourself, what % of this would you want to put into a leveraged real estate purchase today, taking into account all of the other characteristics like the work required, etc. Personally I would be happy putting 30% into real estate, so $60,000… but the entry costs knock that down to $55, and you want to make sure it is 20% so you avoid CMHC insurance… so $55K is 20% of $275K. You can’t get much for that in this market for $275K. Me, right now in my point of life, I wouldn’t invest. Too much work. Too much leverage that I don’t want on my balance sheet right now.

        Point is that it comes down to what you have in your total portfolio to invest, and how much you want to allocate to real estate which has unique risk and return and other characteristics like work involved vs sitting back and letting Mr. Iger run Disney for you or letting Warren run Berkshire for you, or characteristic like leverage and amplified returns or losses vs having a more conservative balance sheet at this point in your life.

        Everyone on this post is caught up in if it is right or wrong IN GENERAL FOR EVERYONE. As long as that is the perspective, it will be a never ending circular argument because it is not right for everyone or wrong for everyone.

      2. Condodweller says:

        There is a difference between investing in a business and running a business. I consider buying real estate to rent out, a business I have to run unless I hire a management company in which case it becomes an investment although I’m still involved in the buying/selling. I consider buying a REIT an investment.

        1. Kramer says:

          Fair, but if you were just running a business, someone would be paying you a salary and you would have no skin in the game. Because you have invested capital in the hopes of a return via appreciation in value of your equity, you are also invested in the business.

          I get your perspective though, and I appreciate it, because after being involved in a rental property (both as the sole investor and its sole business manager), it is very VERY different than just buying a REIT, or the stock of a different business, and I believe that it is a HUGE thing to consider. I am happy I did it while I was young and had the capacity and energy… now that I have kids and more on my plate, not getting involved again except via REITs and investments in companies that manage Real Assets (like Brookfield Property Partners… ps: BUY IT!!!!!)

          1. Kramer says:

            And just to put this to bed:
            1. the management company you could hire to run your property – for THEM it is ONLY running a business, they have no exposure to whether your property goes up or down in value… only you do, as the owner who is invested in changes to the property value.
            2. there is a chapter in the CFA program called “Alternative Investments” and Real Estate is a class of alternative investment. There are three types of real estate investment: 1. Residential Properties (simply owning your home), 2. Commercial Properties (owning real estate to generate rental income from 1 tenant in a condo unit or to 100 tenants in an office building, with exposure to increases or decreases in value of the property), and 3. REITs.

  7. My Name Is Jonas says:

    Q: When it the best time to sell real estate?
    A: Never.

    I love that. Makes perfect sense.

    1. Condodweller says:

      Does it?

  8. Appraiser says:

    Don’t wait to buy real estate. Buy real estate and wait.

  9. Mike says:

    Its nice to see the work behind this.

    However, as some others have mentioned there are deficiencies in the calculations.

    1. the ROI is being calculated with the assumption that the property will be held for a term and when sold, it will be sold at cost or a profit only then can you count your principal as part of your return. You have to have term and exit price in your calculation in order for it to be accurate. If you’re not worried about your calculation being actuate then you’ve just wasted your time putting together the model.

    2. You can’t skip expenses. This should be obvious. If you’re going to include your principal in the ROI you’ve made the assumption of an exit, as such you must include your selling expenses. Also, you can’t just say that you’re not going to include maintenance as part of your calculation just because you feel like it. Has there never been a new condo with a special assessment? Never been a tenant who’s trashed the place (good luck suing)? You say you might need to buy a new appliance every 5-6 years, where is that money going to come from? Then you have to paint the place every other year, the floors will need replacing, tub needs re-calked and the place will seem dated if you don’t want to spend money on a new kitchen and bathroom, every 10-15 years; all of which cost money and you’ll need to set aside. That’s part of your calculation.

    3. You can’t say that your cost of acquiring tenants is zero, there is a cost even if you do it yourself and post on Craigslist. Posting on Craigslist take time, then you have to screen the calls, show the unit, draft a contract and chase down references. All of that takes time and as they say, “time is money”. As such you need to put it in your calculation.

    3. Tenants also have higher rates of needing plumbers and/or electricians and/or exterminators than the general population. Another expense that you have to make contingencies for, including your time, on your model.

    4. Also as mentioned, you should show what the risk free rate of return is. You’re money should be earning money even if it’s not invest in this unit, as such there is a cost for using your own money, that would be considered the risk free rate. Then again, the assumption here is you’re only going to have good tenants, you will never have vacancies, rent will increase in-sync with interest rates, maintenance fees will remain constant and you don’t need to set aside money for any unforeseen repairs or upgrades, so maybe 13% is the risk free rate?

    1. Jason says:

      I think you’re nit picking a bit here. Principal repayment should absolutely be included in the calculation. Regardless of how long you hold it, rent payments are reducing your mortgage balance. It is definitely part of the return. On some of my properties, I have paid down over $20,000 over the past 5 years while renting the unit out. Obviously, exit price will come into play at some point and if you sell for a loss, the investment probably wasn’t worth it depending on the time frame, but this seems unlikely in this market. Always a risk though.

      I agree maintenance costs should be included and as such point 2 and your second point number 3 are the same.

      Tenant acquisitions costs are debateable. You could use realtors as I do and pay one month’s rent. Hard to predict the frequency as some tenants may stay for long periods of time. I wouldn’t use my time if using Craigslist as an expense. The CRA doesn’t let you do it. It is expected that being a real estate investor will require some time.

      Risk free rate is probably 1.5% so ROI is much greater than that. Illustrates that real estate is a viable alternative for some.

      It’s not meant to be a perfect example, but it shows how difficult it is to find a good investment properties at today’s prices and also the large discrepancy between real estate return and other forms of investments.

      1. Ken says:

        Some of this is beyond nitpicking, and borders on incorrect.

        But some of this is valid.


        1. The ROI should include principal repayment as it is equity, and all forms of equity should be included, whether it’s the cash flow, or the repayment. David hasn’t included appreciation in his calculation, which is incredibly conservative of him.

        2. “Skipping” expenses has nothing to do with ROI, you can’t tie them together to strengthen your point. I don’t see him as skipping them, but I see him as saying “if you want to do it yourself, which you can, then there are no expenses.” I agree about vacancy and finding tenants, and we can’t seriously be talking about the value of our time, can we? So if you’re buying stocks, do you put $100/hour into all the research you do? I agree there should be an overall cost for the potential of new appliance, special assessment, etc. Call it $1,000 per year, and it’s still “nominal” as David said.

        3. Agreed, to some extent. But find the right tenant, and you won’t have this problem. David has talked in the past about not wanting to rent to “young guys who will trash the place,” but surely you would agree that a 20-something young lady can’t fix the sink, and maybe a young man can? There’s a happy medium hnere.

        4. Completely disagree about RFRR. Your financial manager doesn’t tell you he averaged 15.5% last year, which was 17% minus 1.5%. Nobody in any industry talks about their returns MINUS the RFRR. I see this point as simply looking to pick David’s work apart.

        Overall, perhaps the numbers are slightly inflated but I think the post on the whole gets the point across: there are fantastic returns out there for people who want to take on the risk, have the money, and can manage the property. The 13% ROI didn’t include appreciation, and aren’t prices up 15% this year?

        1. Mike says:


          1. Not including an exit price isn’t conservative it’s negligent. You can’t calculate rate of return without an exit price, plain and simple.

          2. Of course skipping expenses effects your ROI. If this investor is making a thousand dollars a year but they next year they have two grand in maintenance cost or worse, spending 6-months fighting to evict a tenant at the LTB who hasn’t paid rent, then it is going to impact your bottom line. Also, if picking stocks is your job you’re going to figure what your time is worth into the equation. If you returned twenty grand on the markets but it required 100-hours of research and you’re a lawyer billing $500/hour, did you actually make money on the market? The point is, you can’t calculate return and then pick and choose what numbers you’re going to put into it.

          3. Yes agreed, find the right tenant and you’re laughing. Stop by the l Landlord Tenant Board anytime and ask a landlord what happened. You’ll get a story that beings like this, “they checked all the right boxes and then all of a sudden…”

          4. Ya, I thought this was too obvious so I wouldn’t have to spell it out. The difference in what you are describing, an investment manager talking about last year’s return and David’s projections is that if a Investment Manager tells you what they returned last year, it’s because that’s what they returned last year. Those numbers are audited by an outside audit firm and then contain a statement below “prior year return not indicative of future returns and do not include fees.”

          You can call it nitpicking if you’d like, I just expect that if someone is going to advise others on how they should invest their money, they should know what they’re talking about.

      2. Mike says:


        I never said that principal payments shouldn’t be included, I said that if you’re going to included them you need to include costs associated with disposition . You mention that over five years you’ve had $20,000 of your principal repaid but if your condo had decreased in price by $20,000, are you further ahead? No. On any ROI you need to include your exit price and that needs to be factored into you overall rate of return.

        1. Jason says:

          Of course not! I as well as other readers probably assume that you have a shred of common sense. Return on investment is calculated using annual cash flow and principal repayment. Overall return on investment will include the eventual sale of the property and this can be factored in and most cash flows models will include it, but it’s a guesstimate until that time actually comes. Most models will calculate a 2-3% annual rate of appreciation, which is also not considered! You don’t have to read David’s blog! Time for you to move on Mike!

          1. Mike says:


            You’re only confirming what I’m saying. You need to have all your information in the model in order to calculate return. You say most have the exit in it but this one doesn’t. This is all assumptions but in order to compare apples to apples and oranges to oranges you need to include all the information. This model doesn’t and therefore it renders the model irrelevant.

            I’m not sure what the point would be to calculate partial return on investment. When you calculate return on investment it’s on total return on investment or overall return on investment as you put it.

            You’re right, I don’t have to read the blog, but just because I’m not reading it doesn’t mean that the information posted in the blog somehow becomes correct. If David wants to talk about ROI then he has to calculate it correctly. You can’t forecast a return without including all the data or dismissing that, which you don’t feel is relevant. It’s lazy and dangerous.

            You might think I’m a dick for posting this, that’s fine. But if David ever found himself in front of the OSC like the sales team over at Trump he’d appreciate a second sober thought. Those guys pitched real estate as an investment however they were smart enough not to put any of their talk about ROI on paper, never mind a public blog. I’m super surprised that Bosley’s legal team hasn’t been all over this.

  10. Jason says:

    I have a few comments on this post. First of all, let me state that I am a condo investor and I have several condos in downtown Toronto along the King St corridor. Overall, I think this is a good investment for your client. I generally try to target an ROI of 15%, but 13% is very good in this market. I also purchased some of my condos pre-construction and therefore I have benefited from the rise in prices and rents over the last few years. For a purchase in today’s market, I think an ROI of 13% is quite good. I agree that the rent is quite high for this type of unit and that maybe on renewal the rent may stagnate or even fall if the market softens a bit.

    A couple of points that I would make in the example itself is that I would definitely include some type of maintenance costs on an annual basis. I agree that condos are quite low maintenance, but having had many tenants over the years, they do not treat the property as their own and there will definitely be items that need to be taken care of on an annual basis. I generally used $500 a year as a base case. The second point that I would make is that the investor should always take out insurance on the unit. In addition to the tenant’s civil liability protection of $2 million dollars, the owner of the unit should have this as well and they should also have a rental guarantee whereby if there’s a flood or a fire and the tenant has to move out, the insurance company would pay for the lost rental income during this period. Even if this is unlikely to happen, it could put the investor in a very severe position if it did occur and the insurance on an investment property is about $150 a year so quite small for the protection it offers.

    1. Guy says:

      How have you benefited from the rise in prices if you still hold the properties?

      1. Kramer says:

        I know what you mean, but you have benefited because your net worth, or your “Shareholders Equity” section (Where Shareholders Equity = Assets – Liabilities) of your own personal balance sheet is bigger (which is better), and you have a better debt to equity ratio, i.e. you are in a less leveraged position which is better (in my opinion at least).

        You always want your own personal business (i.e your personal financials) to have a strong balance sheet. With this better and bigger balance sheet, you can then make decisions for the future of your own personal business depending on your goals, forecasts, and risk/return objectives. You have benefitted because you are in a better financial position to do whatever it is you want to do going forward (sell and reallocate capital, sell and blow it all in Vegas, hold, draw out some equity and buy another etc.). When your properties are underwater, you have less shareholders equity therefore less options, you are more leveraged (which is stinky).

        Easiest way to process this:
        1. you have more equity
        2. when you bought that property, you were leveraged to the ####s. Now, you are not so much.

        1. Kramer says:

          And all that balance sheet crap applies to whether it is in pre-construction or a mature property.

          1. Kramer says:

            and yes, that is the extent to the benefits you get if you are still holding. It’s all on paper, it’s only benefits to your overall “position”.

            I think what he meant specifically is that he has already benefitted because rents (in addition to property value) have gone up since he made the reconstruction purchase. So his income statement has benefitted since the income model when he bought because of the increases in rents (and also his equity section of his balance sheet has already gone up vs the debt required to buy it).

  11. Christian says:

    13% ROI – very respectable by today’s investment standards! This is without even considering the power of leverage and appreciation potential. The key here is that the investor used a $62,000 cash outlay to obtain a much hisger valued asset, which has appreciated at a 5% rate by historical standards. Now he’s effectively used the bank’s money to make a $310,000 asset grow with only $62,000 of his own skin in the game. Someone please tell me how else you can magically do this while using other’s people’s money (the bank’s and the tenants). How long would someone have to save to replicate an asset worth $310,000 so it could appreciate in the same manner? . I realize that the example used here considered no appreciation. Even if the asset stays flat, it will beat the 7-8% RRSP most people are happy with. I know the bears out there will say that this type of leverage can work in a reversely negative way. The key here is that the investor protected himself by buying in a solid downtown core location. Even if the worst long term case scenario materializes and the investor sells at the price he paid, he still generates 13% ROI. Keep renting to A+ tenants and you will do great! Great job guys and kudos to this good investment!

    1. Jack says:

      Yes, 13% is much better than an average RRSP portfolio return. But that’s because the investor is willing to take on other risks — risk that the tenant may misbehave, that the condo fees will go up, that the interest rates will be higher in five years, not to mention uncertainty about the direction of real estate values. There are many opinions how serious those risks are. If the investor understands and accepts them, great; he then deserves the higher expected return, and I am happy for him. And in this case the investor has done due diligence to minimize the risks. But let’s compare apples to apples, not real estate investment to investments in highly liquid assets such as stocks and bonds. There is more to investing than looking at the expected rate of return.

      1. Libertarian says:

        You’re right in that he’s not making an apples-to-apples comparison. The biggest thing he missed is that an investor can’t use leverage in an RSP, so of course the returns are different! An investor can use leverage in a non-registered account, but most people are afraid to do that. I’m not a numbers guy, but I’m guessing that anyone who used leveraged to invest in Canadian bank stocks would have just done as well if not better over the last 10 or 20 years. The usual response to that is…”But you would have gotten a margin call during the market crash!” But if the investor had been making monthly payments, just as you do with a mortgage, there wouldn’t have been a margin call. Most people don’t deposit more money to a margin account, which is dumb. Add on top of that the growing dividends, the investor would have owned the stocks outright eventually.

        I understand the “different strokes for different folks” idea, so if people want to invest in condos, knock yourself out. I wish you the best of luck. But please stop talking about investing as an expert. One might be an expert in condos, but obviously not an expert in RSPs, TFSAs, stocks, bonds, leverage, etc.

  12. Jack says:

    To get 12.98%, you added two different types of ROI: The monthly cash flow and the $485 that pays off the principal. You (the investor) get the former every month, but the latter is only realized when the asset is sold. So you can add them to get a _very_ rough idea of ROI, but not if you want to compute ROI with a three decimal places accuracy.

  13. Marina says:

    I think condo investors fall into sub-categories and it matters which sub-category you are in.
    You have the multi-unit investors who do this over and over, have lots of experience and are good at being dispassionate about the numbers. They will likely only focus on their favorite metric or metrics.
    But I know a LOT of people who own one or two investment condos that are not really “condo investors”. A few bought a unit in case their parents would need a place to live. A couple kept a condo once they bought a house and they just flip every 5 years to a new unit. One or two bought a unit just for investment diversification purposes.
    My point is, I agree 100%. As long as it is a good investment to the buyer, then it’s a good investment period.

  14. Jeremy says:

    We have talked about buying a second condo down the road. Either as a straight up investment, or buy a larger condo for us to live in and rent out our current condo. How much equity would you want to have in your current mortgage before buying an investment? Or is that not even something you’d consider if the math makes sense on the new condo? Do you need a cash downpayment or can you re-finance using your existing equity?

    1. Joel says:

      You can refinance using your existing equity, but only up to 80% of the condo’s value.

    2. Condodweller says:

      What you are asking is totally subjective, but generally you might want to have enough equity to be sure you can afford the payments on both units in a worst case scenario and can sustain it for a while. You also should consider discussing with an accountant or a financial advisor how you should structure the mortgages considering one is deductible and the other isn’t. Especially if you are going to rent out your current unit and move into a new one. Good luck.

  15. Scott says:

    You’ve excluded income taxes in your analysis; they are going to impact all of your metrics which are overstated as a result. You need to know the investor’s marginal tax rate and you can deduct the interest expense paid on the mortgage each year, but your after-tax cash flows are certainly going to be lower than what you’ve presented here.

    1. Ed says:

      This is a whole other subject. All returns are taxable, yes to various extents. But taxation isn’t used in standard ROI calculations. It’s used afterwards. David is providing real estate analysis, not accounting and estate management.

    2. Jason says:

      A lot of investors will look at return pre-tax since each taxpayer’s situation is vastly different. In addition, real estate investor can claim CCA on their properties and reduce the income, without having an impact on cash flow since it is a non-cash charge.

    3. Ken says:

      Agreed. Why are people bringing taxation into this? The post is about the return, and it’s after the return is identified that people should start looking at taxation, not before, and not during.

      1. Kamryn says:

        Phanomenel breakdown of the topic, you should write for me too!

  16. Ralph Cramdown says:

    I hope it works out for your client.

  17. Denny says:

    Haters gonna hate. You just never know who’s hating from their mother’s basement.

  18. Close says:

    Don’t you have to factor opportunity cost of your down payment into a property? That 68,000 could have been invested elsewhere and yielded 4-5%
    At relatively low risk

    Also I think assuming $0 maintenance cost with
    A tenant is a bit optimistic, they will break shit. it’s not their stuff so they don’t care

    1. Ed says:

      If that were true, then every return calculated would be mins the risk-free rate of interest.

      This is not correct.

      1. Jason says:

        I know for certain that you can’t obtain a 4 to 5% return with low risk. You can obtain it in a blue chip stock, but equities are not considered low risk.