We’ve talked about this a few times over the last eight years, but perhaps not quite enough?

There are a lot of uninformed buyers out there that don’t quite understand how hotel-condo units work.  And I don’t mean “uninformed” as an insult, but rather why should they be expected to know?

You’re browsing on MLS and you see a 1-bed, 1-bath unit in an A+ location at King & Yonge for $249K – why wouldn’t you get excited?

Let’s take a closer look at the numbers, and compare a hotel-condo unit to that of existing resale…

Trust me when I say I’m not knocking “One King West.”

After all, I got married there…

Yes, June 30th, 2013, Jenna made the most questionable decision of her life and said “I do” for some odd reason, which will be examined for years to come.

So while I don’t think this is the best place to “invest” your money in Toronto real estate, it will always hold a special place in my heart.

If you’ve never been in the building – you’re missing out.  If you like original Toronto architecture, that is.  And if you’re thinking of having a wedding in the downtown core, or even a banquet of some sort, you simply MUST check out their grand ballroom.

And since you asked, here’s a couple pics:

Gorgeous.

Absolutely, gorgeous!

Historical, original Toronto at its finest!

But back to the task at hand – let’s discuss 1 King West as a hotel-condominium, for a buyer looking to own a residence in the downtown core.

Now there are two sets of buyers who consider 1 King West: investors and users.

Today I want to look at the latter, and see if somebody could actually purchase a unit at OKW to reside in, once the numbers are examined.

Let’s look at the following:

So here we have a 525-530 square foot, 1-bed, 1-bath unit with no parking.  The listing says there’ a “den” but it’s really just a nook for a desk.  My wife’s wedding party got ready in this model unit on the day of the wedding…

So at $249,000, this is highly attractive.

I’ve had a lot of buyers email me listings here over the years, eager to go take a look and see if they can get in for $50-$100K lower than a comparable property down the street.

But once we examine the numbers, it becomes less attractive.

1) DOWN PAYMENT

You need a down payment of at least 30% to purchase a hotel-condominium, whereas you only need 5% when you’re buying a traditional resale condo.

30% of $249,000 is $74,700.

Many buyers just don’t have that kind of money up front, so the property would be thrown out the window before they ever head out for a look (assuming their Realtor goes through this with them, of course!)

2) MORTGAGE

Let’s say that the buyer did make the 30% down payment.

The balance of $174,300 would carry for $788.64 per month.

3) MAINTENANCE FEES

Yowzas!

$668.00 per month, albeit all-inclusive.

But that’s a LOT for a 525 square foot condo!  $1.27 per square foot!

4) PROPERTY TAXES

Double-Yowzas!

The property taxes here are $5,080, and that’s the 2014 taxes, which for some reason the listing agent decided to use, more than halfway through 2015.

Now let’s look at another 1-bed, 1-bath condo in the area.

This one is just down the street at 39 Jarvis Street, another A+ location, right across from the St. Lawrence Market:

1) DOWN PAYMENT

You only need 5% down to buy this unit, or $16,750.  Sure, it comes with a CMHC fee of over $11K, but there’s a big difference between being “forced” to put down $74,700, and being able to put down as little as $16,750.

Right there, you may have a large majority of the buyer pool.

2) MORTGAGE

But let’s say you did put 30% down here, just to keep it consistent with the unit at One King West.

$100,500 down, and the balance of $234,500 carries for $1,061.02.

Or wait – how about this, we’ll put down $74,700, which is the same down payment as the OKW unit, and now we can really compare apples to apples.

With $74,700, the balance of $260,300 carries for $1,177.75 per month.

3) MAINTENANCE FEES

The maintenance fees here are $411.00 per month, not including hydro.

Let’s say hydro is $50 per month, and we’re at $461.

4) PROPERTY TAXES

$1,870.00 for 2014.

What is with all the agents using 2014?  Seriously?  And there’s now way the property taxes and maintenance fees both end in “.00”  That’s an agent that’s just estimating.  Anyways…

–

So let’s review the monthly carrying cost for each property:

1 King West
Mortgage: $788.64
Maintenance Fees: $668
Taxes: $423.33
=$1,879.97

39 Jarvis Street:
Mortgage: $1,177.75
Maintenance Fees: $411.00, plus $50 for hydro
Taxes: $155.83
=$1,794.78

Okay, so it’s not that big a difference.

It costs you about $85 less per month to live at 39 Jarvis Street.

But keep the following in mind:

1) The unit at 39 Jarvis Street is 580 square feet, and the unit at 1 King Street West is only about 525-530 square feet, give or take.  We’re trying to compare apples to apples here, but I could get it exact.

2) The unit at 39 Jarvis Street will out-appreciate the unit at 1 King Street West, hands-down.

3) The unit at 1 King Street West might prove difficult to sell down the line.

That’s the real kicker here.

Say all you want about the maintenance fees and the property taxes, and you could argue that if you withdrew your condo from the hotel-pool, you could apply to the city for residential tax rates, and thus cut them down substantially.

But one of my biggest concerns is the resale potential, or lack thereof.

Take a look at this listing, which is not currently available, and never did sell:

The listing came out at $279,000, and went all the down to $249,900 before it was taken off the market.

That’s six listings, and 347 days on the market, for those of you playing along at home.

I think it’s fair to say that we never, ever, ever see this in the residential resale condominium market.

And I didn’t pick this listing because it was the most days on market or anything.  It was just in the middle of the pack of the 147 listings that have been on MLS in the last two years.

I often tell my condo buyers, “Don’t think about the resale value before you’ve even purchased.”  It makes sense, in theory.  It encourages the over-analytical buyers to just live in the moment, figure out where they want to live and in what type of property, and maybe not over-concern themselves with whether they make a 15% return in five years, or a 12% return, which they probably can’t predict  it with any sort of certainty regardless.

But in the case of One King West, you can’t ignore the days on market for most of the historical listings, and the fact that most of them didn’t sell.

Most Toronto condos sell.  Period.

That’s not meant to be simplistic, or an exaggeration, but if a downtown Toronto condo is priced correctly, easily accessible, and in at least B+ condition, it should sell in a relatively reasonable time period.

So when you see a property on the market for 347 days, in Toronto’s downtown core, there simply MUST be a reason.

It could be over-priced.  Sure, that’s fair, especially given the fact that the above example was reduced in price from $279,000 to $249,000 over the better part of a year.

But price isn’t the only reason why these units don’t sell.

The cost, the fees, the ownership structure – they all play a role.

And in the end, if’s a bit of a “chicken and egg” scenario.  The buyers don’t want to buy because they see that the units don’t sell, but the sellers can’t seem to sell because the buyers don’t want to buy.

Unless you’re a long-term investor looking for a property that’s rented out by a management company several hundred nights per year, I wouldn’t consider hotel-condominiums for purchase.

There’s simply no reason why a “user” in the city of Toronto should look at an ownership structure like this, when residential resale condos are readily available.

If the ownership structure doesn’t get you, then the mandatory 30-35% down payment will.  And if that doesn’t get you, then the fees and taxes simply must.

I have one client that owns a unit at OKW, but he’s owned it for 17 years, and bought it well before I ever got into real estate.  He’s been churning out cash flow for the better part of two decades, but it came with a massive down payment, and he knows he hasn’t seen half the appreciation that residential condos have.

It takes a special buyer for OKW.

But if you’re looking to get married there, email me, and I’ll fill you in….