Buying a Toronto Investment Property in Uncertain Times

The other day, a client asked me whether now was a good time to buy a condo in downtown as an investment property for the purpose of renting it as a furnished apartment in Toronto.

Specifically, this client was looking at a large loft around the King / Spadina area listed at $600,000. The unit itself was a great fit for short-term furnished rentals in Toronto, and the building had all the amenities that someone looking for a furnished apartment in Toronto would want (gym, pool, etc.).

My client’s main concern was that he had been told there by several people that there was a bubble looming in the downtown Toronto condo market. My advice to him was three-fold:

Will it matter in the long-run?

The most important consideration in this decision is your time horizon. If you’re looking at this as a long-term investment and want to rent the unit as a short-term serviced apartment for at least 10-20 years, at which time it will likely be worth over $1,000,000, it won’t matter much at that point whether you paid $600,000 in 2012 or say $540,000 in 2014 (10% less).

Have you considered both sides of the coin?

Say you wait two years and condo prices do drop by 10%, so at that time you will be able to buy a unit like this one for $60,000 less. However, during this two year period, you will have lost almost $50,000 of profit that you would have otherwise generated from renting the unit as a short-term furnished apartment (corporate housing in Toronto rents very well…). So in actuality, you will only have saved $10,000. On the other hand, if condo prices increase by 10% over this period, not only will you have missed out on lost rent, but you will also have missed out on $60,000 of investment growth.

Are you financing the purchase?

If you’re financing any significant part of this purchase, mortgage rates are at an all-time low right now. You could lock these rates in for up to 5 years. Furthermore, renting the condo as a Toronto short-term furnished apartment gives you a lot more flexibility if you do decide to sell it and take the equity out of it (that is, with short-term tenant, you wouldn’t have to wait for a 1 or 2 year lease to end before you can easily sell the property). This added liquidity protects you in case you’re not able to renew your financing for some reason later on.