GTA condo investors are losing money on their rental real estate

It turns out that 2022 was the first year when more than half of investors in newly-completed GTA condos were losing money on their rental homes. According to the latest report by CIBC and Urbanation, this tendency can continue.

The report says 48% of leveraged condo investors who purchased pre-construction units to rent out were cash flow positive last year.

For most investors, rent generated by new units was lower than mortgage costs, condo fees, and property taxes.

“This points to a significant shift possibly signaling that a change in investor behaviour is coming,” – CIBC’s Benjamin Tal and Urbanation’s Shaun Hildebrand noted in their report.

According to them, we’ll see the shift toward negative cash flow in the nearest future as expensive new condos presold to investors previously reach completion.

In their opinion, a decline in interest rates and further growth in rents will ease the influence on investors, but it won’t be enough to stop their financial situations from worsening.

Nevertheless, they believe a lot depends on the prices change and the credit conditions.

“If investors have access to financing and prices are going up, they may be encouraged to stay in the rental market even with negative cash flow.”

The economists add that investors have held off selling because of the lack of supply and no hopes for significant changes in the nearest future.

The report shows that developers are able to deliver no more than about 20,000 units per year, which is small growth for a condo stock in the GTA that is reaching a half million units.

“Any investor who decides to sell will be welcomed by a tight resale market,” – Tal and Hildebrand noted.

At the same time, if investors become unwilling to purchase before the completion, new condo demand will go down with new construction and rental supply.

Tal and Hildebrand’s report follows the data from Rentals, showing that average rental prices in April rose by 20% from pandemic lows in April 2021.

The average national rent went up by 9.6% annually. The average rents for a one-bedroom home reached $2,787 in Vancouver and $1,091 in Regina. The national average number was $1,811.

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