Sell Your Investment Property If You Meet These Criteria
The number of condo sales in downtown Toronto peaked the week of March 9, 2020. Since then the number of condo sales fell over 70% within a 5 week period. Prices have strongly maintained their levels, only falling a few percentage points from the peaks in March. This is due mainly because new condo listings have falling over 50% when compared to 2019. This is because people do not want to sell their home during a pandemic unless they absolutely have to (there are always reasons to have to sell like you already sold your house, moving for a job, divorce; life happens!)
Rental Market Performance
The rental market is an indicator for what is going to happen to the resale market as we get into the fall and into 2021. The number of Toronto condos leased fell 68% from the peak in March to the low in April and was 40% lower than 2019. Over the last 6 weeks, the market has fully recovered and the number of leases is now matching 2019 levels.
Rental Market Supply
This recovery is incredible to see and seems to point to a “V” shaped recovery that many economists are talking about. However, a cloud is forming; the number of units currently available for rent has spiked over 150% (i.e. there are 2.5 units for rent today, whereas there was only 1 unit in 2019). This flood of supply is suppressing prices which we have seen drop over 10% downtown. This is the best time ever to be a renter in Toronto.
It is common that when a new condo building goes into its occupancy period and people are allowed to rent out their units for the first time, to have a surge of lease listings. This is because a lot of new supply has just hit the market, people are not yet familiar with the building, and it may take a few months for the market to absorb the new units and to rent out.
What we have never seen before is the surge in resale lease listings that have hit the market since Covid-19 started (and continues to get worse). Our brokerage has never had as many resale lease listings as we currently do and we are getting calls every day to help more people rent their units.
What Is Causing This Surge In Rental Listings?
This surge in listings has been caused by these factors:
The Airbnb market has been devastated
Unemployment has spiked (especially within the service industry)
Non-Essential Immigration to Canada has stopped
Post-Secondary Education schools are closed (i.e. no international students)
So What Happens Next?
Most landlords can absorb the loss in income from having a vacant unit for a month or two because this should be accounted for in their financial analysis (you can never expect 100% occupancy levels). We are now getting to that point where after 2 months, landlords who still have a vacant unit may not be able to afford these investment units or are not getting enough rent to cover their costs and will make the evaluation to list their properties for sale.
Effect On Sale Listings
Even if Covid-19 went away tomorrow, we expect the number of sale listings to slowly start to creep up driven by:
Spring market (always the hottest market of the year)
Slow opening of the economy
Pent-Up demand after Covid-19
We predict that there will be an even bigger jump because of these real estate investors who are converting their lease listings into sale listings; there will not be a flood, but you will start to see it. The market will be in equilibrium throughout the spring/summer but as we enter the fall, we expect this to get worse and for prices to remain flat and potentially fall a few percent.
What Does The Future Look Like?
Most of our real estate investors buy because they believe in the long-term potential of the Toronto real estate market (real estate is a long, boring game). The future for Toronto/GTA is still incredibly bright, sunny and there are rainbows! Toronto is still the economic engine of Canada, it still has a huge number of well paying, high-tech jobs, immigration will still be a priority for the government, students will flock back to our prestigious post-secondary institutes, everything is going to be okay – it is just going to take a bit of time.
Sell If Your Property Meets These 4 Criteria
For the first time we ever say this (and hopefully the only time), it may be a good time to sell your investment property if your property meets these exact criteria:
1) Unit Vacant or Tenant Has Given Notice
This is the most important consideration - if your unit is currently vacant or your tenant(s) have given their 60 day notice, you will want to consider selling if you meet the other criteria. If your unit is currently rented, just ignore the noise, stay the course and ride out the storm.
2) Rent Controlled
If you unit was built before November 2018, your unit is subject to rent control and you can only increase rent each year by the provincially prescribed amount (typically 1-2%). To rent your unit today, you will have to reduce the price and it may take you years to claw back to pre-Covid rental levels.
3) Older Building
If your condo is in a building that is 6+ years old, you are likely facing increased costs to replace aging appliances and to repair/maintain the aging property. Condo fees are higher for older properties because of the extra building maintenance required. Most units in older buildings are also larger in size, which means you end up paying even higher condo fees because they are calculated based on the square footage of your unit.
4) Your Portfolio Mix
If you own multiple properties, you have more flexibility to adapt and respond to market forces (e.g. if you bought a unit 10 years ago, you may have a small mortgage remaining, or if you have a long-term tenant, your rent may be below current rent so it doesn’t matter if you have to find a new tenant). The structure and make-up of your portfolio will help guide what you should do
Reallocate, Do Not Divest
Bright skies are expected for the Toronto real estate market long-term. Trying to time the market is a fool’s errand and like with stocks, the best advice is to just stay invested for the long-term. If you sell an investment property, you will want to reinvest that money into a better producing asset given the ongoing Covid-10 situation.
Pre-Construction Condos
Pre-construction condos are the perfect way to keep your real estate investments while reallocate into a better producing asset:
1) Time
Building a new building takes time and you will want to invest in a development with an occupancy date that is 4-5 years out. This will ensure that the resale and rental markets have had enough time to fully recover from Covid-19. While the building is being built, you have no expense other than your required deposits.
2) No Tenants
While the building is under construction, you get to participate in the appreciation of the real estate market without any of the hassle of managing tenants (finding a tenant, responding to service requests, cashing rent cheques, etc.).
3) Not Subject to Rent Control
Any unit built after Nov 2018 is not subject to rent control and landlords can adjust the rental rate to whatever the market forces allow each year.
4) Lower Costs
Condo fees for new buildings are typically in the $0.59-$0.65 per square foot range which means your maintenance fees will be lower. Hydro (electricity) usage is now almost always separately metered which means the tenant will be required to setup their own account and manage this separately, offloading another expense from landlords. New condos are covered under Tarion warrant for the first 7 years which means maintenance/repair costs should be very low for the first several years.
Note: If you decide to invest in a pre-construction condo, make sure you the development is “shovel ready” and has received all of the planning approvals.
If you meet these criteria, let’s book a chat to see if it makes sense to keep the unit in your portfolio or if it’s time to reallocate it into another property. Real estate is a long-term wealth and we want to help you maximize your wealth and minimize your stress.