The most important and overlooked fact about Toronto real estate

If you live in Toronto, it seems you can’t pick up a newspaper or magazine
these days without reading about the dreaded Toronto condo bubble. The most
important thing that most of these articles fail to do is step back and look
at the big picture: bubble or no bubble, real estate is NOT a good short
term investment, It’s not even a good medium-term investment. In investment
terms, real-estate is a “buy-and-hold” investment.

 

Can you make money flipping houses? Sure, but most of that profit comes from
the investment you make in the renovations and your own sweat equity to
increase the value of the property. Alternatively, can you buy a brand new
condo this year and sell it in two years at a profit? Maybe – but let’s stop
for a minute and think about the details.  Every time you buy a condo, you
pay for land transfer tax and legal fees, which can add up to about 2%-3% of
the purchase price.

When you then turn around and sell it, you’re looking at legal fees(again)
and realtor fees (about 4%-5%). When all is said and done, it will cost you
anywhere from 6%-8% of the value of your condo to buy it and sell it,
hopefully for a profit. This means the price you sell it at has to be at
least 6%-8% higher than what you paid JUST TO BREAK EVEN! Over the short
run, that kind of price appreciation is a tall order.

 

The reality is that it is almost impossible to consistently predict real
estate prices over the short-run – anyone who can should be extremely
wealthy by now. On the other hand, statistically, real estate prices over
the long run are much more predictable. Over the long run (20 years or
more), real estate in Toronto is expected to increase in value at an average
rate of about 3% per year. If you have a long-term view (20-30 years), this
compounds to an estimated price increase of about 80% over 20 years and 140%
over 30 years, at which point the 6%-8% “transaction costs” become
irrelevant.

 

I rarely see any articles that focus on this very important fundamental
point. If you’re thinking of buying a condo as an investment property and
think there is a good chance that you may need to sell it within the next
2-5 years, the answer is simple – unless you’re willing to take a gamble,
invest your money in something else.

 

Alternatively, if you’re a long-term investor and you can find a reasonably
stable way to cover the carrying costs of the property that will allow you
to hold it for 20-30 years, real estate can be a very good investment.