As both a full time Realtor as well as an investor in certain types of real estate I am constantly attending seminars, courses and presentations relating to the investment side of my business. 

I recently attended a presentation that discussed in detail investing in newly built Condos specifically in the Toronto area as well as where the hot spot areas for investing currently are.   You might be surprised to hear that over the past 5 years inflation has pushed the cost of new condos 7%-9% per year, year over year.

Now consider this fact. In many downtown Toronto new condo developments the sales to investors are as high as 80%-90% of all pre-sales! This number is astronomically high especially when compared to historical norms in the much advertised 30%-40% range.

In 2007 average rental rates were $2.26 per square foot. This much pretty much stayed the same through 2010. In 2011 the average has been $2.16 per sq.ft. So rental rates are staying the same with a slight decrease in the average this year.

What’s it going to look like at the end of this year when there are 16,000 new condos being registered in 2011 (built and ready to transfer title to the buyer) when the previous high was 12,000. I remember 5 years ago when 10,000 was making industry people ask…how long can this last?

Here’s another fact. Prices today are 30%-40% higher than 2007 prices and as we read above rental rates are roughly the same. So it costs alot more to purchase but the rental rates haven’t increased or kept pace with the increase.

 Example: a 700 square foot unit rented out at $2.26 per sq ft would amount to $1582 in rental income. If you purchased this unit today it would cost you approximately $385,000 (700 sq ft x $550 sq ft). With 20% down payment your mortgage would be $308,000. At 3% interest the mortgage payment would be $1457.

Currently there are 38,000 brand new condo units under construction which is in about 300 projects. Sales alone this year for units not even built is most likely going to set a record with at least 22,000 new units being sold in 2011. Some of these purchasers will be end users (count myself as one of them). Currently end users are mainly buying resale with investors buying brand new. Many of these investors will offload their purchases once the unit is built (in my eyes the real term for this would be speculators). Some will be absorbed by end users and some will be rented out.

The real question is going to be. What will investors think they will be getting in rent in 2 to 3 years time when these new buildings are built? I would seriously think not once, not twice, but at least three times before making this purchase. Best advice as always is to seek out an experienced real estate agent who has handled investment properties in the past. Ask around and find someone you can trust. I know many people are not and they are being seduced by the slick and catchy marketing done by builders, or of the constant pressure by real estate agents looking to make a quick buck.

I should also note that personally I get higher than the average rental rates mentioned and have many clients who are benefiting from buying brand new for investment purposes. In some cases it can and does make sense. But when everyone and their mother is talking about the new condo investment they just purchased I wonder how much thought was given to making the numbers work? Or maybe having positive cash flow isn’t important to everybody? I know it is to at least two people though…me and my banker.