Month: May 2021

COVID-19 has put a damper on Canadian snowbirds’ travel habits but that doesn’t mean they won’t soon have the opportunity to travel to warmer locales, and an upcoming virtual expo will showcase some of those places.

On May 26, Buying Your Piece of Paradise Virtual Expo will bring together real estate professionals from the United States and the Caribbean who will showcase investment properties for Canadian investors and share cross-border financing tips, including home insurance and taxes.

“There will be people from different real estate brokerages in the Caribbean, including the Bahamas, and from the U.S. we’ll have representatives from the Sun Belt states,” said Alain Forget, director of business development at RBC Bank, which organized the event. “We have lined up a panel of market experts mainly to represent where Canadians are buying the most.”

Canadians are particularly bullish on Florida, Nevada, Arizona and Southern California, the latter two locations favourites of British Columbia and Alberta investors. RBC’s guests will include reps from key markets, including Orlando, West Palm Beach and Fort Myers, Florida.

“If you look at the area between Arizona and the coast, like San Diego, there are hot destinations for Canadians who are coming from B.C. and Alberta, but it’s higher priced and more expensive real estate there,” said Forget, who added that there are already over 3,000 registrants for Buying Your Piece of Paradise Virtual Expo. “What we’re going to include are some of the resources RBC Bank in the U.S. has built, like cross-border legal tax experts and homeowner insurance. We want to showcase to Canadians the resources they can get through RBC’s network of external trusted partners.”

The expo, which takes place May 26 from 12:30-4:30 (ET), will also feature segments on retirement planning, individual housing markets and purchasing, insurance, taxes, and legal and immigration issues.

A majority of Canadian seniors polled by IPSOS on behalf of HomeEqutiy Bank are reluctant to downsize, believing their homes are the most reliable way to retire comfortably and age in place.

“People taking out reverse mortgages with us are using that money for home care, which allows them to stay in their homes a little longer,” said HomeEquity Bank CEO Steven Ranson. “We’ve also done surveys in the past where people have reported feeling pressure to downsize, but to give up a place you have lived in for 30, 40 years to move into an unknown place doesn’t make sense to a lot of people.”

The most recent survey showed that 76% of respondents, all of whom are at least 55 years old, felt pressured to downsize even though they didn’t want to. Forty-five percent of respondents believe accessing home equity should be part of their retirement planning, but only 28% would go through with it.

As COVID-19 has ravaged elderly care facilities, Canadian seniors are understandably circumspect about selling their homes only to downgrade into potentially perilous living conditions. Moreover, they would sacrifice autonomy—not exactly a welcome prospect.

Ranson says the latter factor rang true before the pandemic.

“COVID or no COVID, we do these surveys all the time and 80% or more want to stay in their homes for as long as they can,” he said. “Not forever, but longer than they might otherwise be able to. Longer than society thinks is the norm.”

In a booming housing market, finding a new home isn’t as easy as it used to be. Even if seniors were to downsize from a single-family home into a condominium, being pulled into a bidding war would still be a distinct possibility in Canada’s larger housing markets.

“If you have to list your house, do you want people tracing through your house during a pandemic when you’re in an age group that’s most at risk?” The process of finding a house is hard and you could potentially get into a bidding war. If you have a young family, you might have to, but if you don’t, who wants to take that on?” said Ranson. “It used to be that you could downsize and move into a condo because it’s cheaper, but it’s not true anymore. Condo prices have taken off in the last little while, and the odds are a condo is the price you currently have on a square footage basis.”

Canadians’ appetite for recreational properties has grown during the COVID-19 pandemic as many have taken advantage of remote working capabilities to flee for greener pastures.

In fact, a new survey from RE/MAX conducted in partnership with Leger determined that 57% of markets offered recreational properties for below $500,000, but the average price, it is believed, will rise by 30% in certain markets. Moreover, 44% of recreational property purchasers have set aside $200,000-500,000 they plan to use in the next year.

Fifty-nine percent of survey respondents who intend to buy a cottage property in the next year are first-time buyers, while 21% are looking to buy recreational properties because they’ve been priced out of an urban centre. Twenty-two percent of respondents stated that they are taking advantage of low interest rates to facilitate their planned purchase, while 11% were seeking a recreational property before the pandemic began, and 15% weren’t searching prior to March 2020 but are now.

“There’s intense competition among buyers in Canada’s recreational property markets and inventory is stretched thin,” said Christopher Alexander, chief strategy officer and executive vice president of RE/MAX Ontario-Atlantic Canada. “But Canadians recognize that recreational properties remain an affordable option in such a turbulent market. There are still many recreational markets across Canada that are deemed affordable, despite the growing demand and rising prices.”

The most affordable regions in Canada for waterfront properties include Thunder Bay ($425,805), Charlottetown ($334,447), and the Interlake Region of Manitoba ($363,833), while the most expensive are the Okanagan ($2,430,434), Barrie-Innisfil ($1,841,217), and the Niagara region ($1,546,561).

Commenting on the Okanagan’s exorbitant price points, Jon Friesen, CEO of Kelowna-based developer Mission Group, estimates that 60-70% of recent buyers in the area are from the Lower Mainland of Vancouver, many of whom are already planning for their retirement. However, the more obvious reason, added Friesen, is the dearth of waterfront properties.

“Waterfront properties are becoming more scarce and people are thinking, ‘We better get in while we can,’” he said. “We’re seeing a huge number of newcomers. Most of Kelowna is close to the water and it’s not proximity they’re interested in, they want to be on the water.”

The price of an Okanagan waterfront property averages over $2 million and Friesen says it’s not uncommon for properties to trade for $3-5 million. Nevertheless, the region is following a nationwide trend.

“It’s a trend we’ve seen all across Canada, with people trying to move out of densified urban cores to somewhere more relaxed. Kelowna checks those boxes and it’s still half the price of Vancouver, so why wouldn’t you?”

Rental demand, as a consequence of Canadians priced out of the ownership market, has put immense pressure on supply, but the wrong policies are being touted as solutions.

“Supply is not keeping up with demand and there is considerable demand for rental as it becomes more and more difficult for young Canadians to get into the market,” Benjamin Tal, deputy chief economist at CIBC Capital Markets, said during a webinar last week.

“We are trying to fight a supply issue with demand tools. Rental must be part of the solution to introduce affordability into the system and I think purpose-built is the only solution.”

The issue remains that building practices have not changed much in at least the last four decades, however, Tal is dismayed that there’s scant innovation in the market, a problem that’s on the precipice of becoming especially acute, he warns.

In 2020, Canada’s population declined to 200,000 from 500,000 a year earlier, but, in fact, there were 70,000 Canadians who’d returned from chaos-addled Hong Kong, with yet more likely on their way, and chose to settle in Toronto and Vancouver where rental demand is highest, and there were an additional 70,000 foreign students whose visas expired but who were stranded in the country and permitted to stay by the federal government.

“The other thing we’re seeing is we raised the (immigration) target to 410,000 from 350,000 and the population rate will accelerate,” said Tal. “Already, Canada is the fastest growing country, in terms of population, in the OECD [Organisation for Economic Co-operation and Development], almost double what the U.S. is growing at.”

Ontario’s net population growth averaged 145,000 between 1990 and 2017, Ben Myer, president and owner of Bullpen Research & Consulting, said during the webinar, but that number is on the verge of exploding.

“To see it go all the way up to 250,000, we saw huge pressure on the rental market,” he said. “We had double-digit increases in the GTA in both 2018 and 2019, and some areas of the GTA went up 17%, 18%, in terms of their rents. The government also made changes to the mortgage stress test, which made it difficult for some Canadians to find a home and others couldn’t purchase what they wanted to buy, so they just stayed in the rental market.”

Myers added that a lot of people have been approved to come to Canada and they have already started working for Canadian companies remotely, but their goal remains to come to Canada as soon as the pandemic is over.

Moreover, nearly a third of international students choose to stay in Canada once their residencies are over.

“Another 30% of students who study in Canada stay in Canada,” said Susan Tjarksen, managing director of Cushman & Wakefield. “The younger they are, the more their propensity to rent versus own.”

The Bank of Canada’s quantitative easing (QE) policy is exacerbating wealth inequality in the country, as witnessed in the housing market.

“QE can boost wealth by increasing the value of assets, such as the investments Canadians have in their registered retirement savings plans or company pension plans,” Tiff Macklem, governor of the Bank of Canada said in a speech last week. “But, of course, these assets aren’t distributed evenly across society. As a result, QE can widen wealth inequality. We will look closely at the outcomes of QE here and elsewhere and will work to more fully understand its impact on both income and wealth inequality.”

However, the problem does not appear to be QE itself but rather its deployment, which has helped the haves accelerate the pace of their wealth accumulation while the have-nots have been precluded from sharing the riches.

“I think quantitative easing needs to continue but they need to find a way to target it better,” Paul Shelestowsky, a senior wealth advisor with Meridian Credit Union, told CREW. “Quantitative easing is for getting cheap money out there, but all it’s doing is making it easier for wealthy people to access it and making it difficult for people who need to get it, like first-time homebuyers and people trying to refinance.”

The solution, according to Shelestowsky, is to keep certain barriers in place for the wealthy, namely investors, while removing them and even creating incentives for first-time homebuyers. However, the question remains: how can chartered banks be convinced to lend money to riskier borrowers and erect barriers for non-risky ones?

“Tightening credit for investors—a minimum 40% down payment is one way of moving credit from the wealthy to people who need loans. Investors who get loans for 20% and deploy them to buy another property will have trouble if they have to put 40% down. Now maybe those banks instead provide those loans to non-investors and people looking to buy homes to live in, but how do you incent chartered banks to lend to risky people instead of the non-risky people? Is it through extra incentives? Is it through new programs to make sure that people like first-time homebuyers have an equal crack at getting a home?” said Shelestowsky.

“Instead of putting $200,000 down on a $1 million home, now investors have to put down $400,000. This will help first-time buyers instead of investor buyers, but it’s a huge knife’s edge.”

Part of the knife’s edge is raising interest rates, however, that would adversely impact people with existing mortgages from servicing their debts. The Bank of Canada nevertheless expects to raise rates by 2022 instead of 2023, as surmised earlier in the pandemic.

The B-20 mortgage stress test is slated for another increase June 1 after previous changes on January 1, 2018, but perhaps lowering it for first-time homebuyers will help more of them attain homeownership. Another solution might be increasing the first-time homebuyers’ tax credit. Ultimately, the crux of the issue is that housing prices aren’t commensurate to incomes, and ensuring prices remain static is as impossible as suddenly raising everyone’s wages.

“Certainly reducing the stress test, which sounds counterintuitive, for first-time homebuyers would make it easier for them to get in, but not reduce it for everyone else,” said Shelestowsky. “Increasing the stress test for refinances or second homes is another solution, but keeping the focus on first-time homebuyers is the only way to be able to get more people into homes.”

Have you thought about moving from the United States to Canada? Buying a house in Canada may seem like a stressful task for anyone, but it can be a great investment in your future while living abroad. We will answer your questions about getting a U.S. mortgage in Canada so you can determine what is best for your cross-border investment.

Buying a home as a non-resident from the U.S.

First, it’s important to determine your residency status by the standards of the Canadian government. Anyone who normally, customarily, and routinely lives in another country besides Canada is deemed a non-resident. Even if you choose to visit quite frequently, you are not granted residency as long as you stay in Canada for less than 183 days in the tax year. This is important information to keep in mind for buying a vacation property cross-border; you do not want to overstay and have to pay income tax in both countries.

While this is said, any person can buy property in Canada as long as you have the necessary funds. Many U.S. citizens choose to buy real estate in Canada, whether it is a vacation home in Muskoka or an investment property in Vancouver. You can buy a home without needing to be a Canadian citizen.

The only issue that comes to U.S. citizens buying property in Canada is that they are not allowed to use a U.S. bank for their mortgage. Because foreign banks are not allowed to register mortgages in Canada, so you will have to qualify for a mortgage in Canada.

What are the benefits to Canadian real estate?

The benefits of buying a Canadian property differ from person to person. While you may want to buy your dream vacation home, others may look for an investment property that they can earn money off of. What costs can you expect when buying a Canadian property?

Buying a second home can be a costly endeavour for many, especially if your Canadian dream home is located in an area where there are high living costs. U.S. citizens may have a more difficult time affording a home because of the higher property taxes and the requirement for a larger down payment from foreign buyers.

In fact, the GTA (Toronto and the surrounding areas) imposes an additional tax of 15% of the value of the property for some foreign buyers. This tax is called the NRST (non-resident speculation tax) and is designed to make it more difficult for non-residents to buy Canadian properties. While you may not be able to avoid this tax, any foreigners who pay the tax can later apply for a rebate if they live and work or study in the region – or become permanent citizens.

A mortgage loan also will be significantly smaller for U.S. buyers. Mortgage lenders will only provide 65% of the cost while a U.S. buyer needs to have a 35% down payment already accumulated. This could mean that many foreign buyers may choose to simply get a mortgage in the U.S. rather than Canada.

How can you get a Canadian mortgage?

This may seem like a daunting question for any person buying a home outside their place of residence. If you are only familiar with U.S. mortgages, we can help. We will provide a brief introduction and some advice for each step of the real estate purchase process.

Set up a Canadian bank account with RBC Bank

The first step to beginning the mortgage process is to create a Canadian account in your name. Some great banks to consider are RBC Bank and BMO, which specialize in cross-border mortgages for Canadians. While they cannot offer you U.S. mortgages, they may be more familiar with U.S. and Canadian laws that could impact your home purchase.

If you bank with a large U.S. bank that has international recognition, it may be possible that you can open a Canadian account with them. This would save you a visit to a bank in Canada.

Get your credit cards and score in order

If you are coming from the U.S. to buy a house, you may think that your line of credit score registered to your U.S. bank may be able to be transferred to Canada. This is false. When you move countries, your credit score does not follow you. Before you consider investing in real estate, take your time to get Canadian credit cards and build up your credit score. A good credit score is one of the many ways you can improve your chances of getting a better mortgage interest rate.

Qualifying for a mortgage

Be prepared to provide your credit history, income, and other financial documents when applying for a mortgage. A bank will want to access as much information as possible to ensure your trustworthiness, especially as a foreigner buying property. Expect to provide these documents to your bank or mortgage broker when qualifying for a mortgage:

• A reference letter from your U.S. bank
• Pay stubs with your income to the dollar amount
• Your credit history both in Canada and the U.S.
• Your bank’s mortgage application form

The information gleaned from your financial history will tell mortgage lenders about you and allow them to decide what rates you can qualify for. It is important to get your credit history in order because it could afford you some discounts on your mortgage rates.

Access great mortgage rates

Alan Forget, the vice-president of cross-border strategy at RBC Bank noted that “While mortgages may appear to be the same in the U.S. as in Canada, they aren’t.”

Canadian banks post competitive rates starting from the ceiling. If your credit trustworthiness is proven, your mortgage rate will fall and you will have less interest accumulating on your mortgage payments. The U.S. does this a different way, advertising low rates that will increase based on your credit history. This is good news for any U.S. buyer in Canada.

U.S. buyers are also eligible for the same mortgage rates that citizens receive as long as they meet their mortgage eligibility criteria. This is extremely beneficial because U.S. buyers can trust that their interest rates are not skewed to provide discounts to citizens.

Home insurance is mandatory

Unlike U.S. mortgages, home insurance is written into the mortgage purchase agreement with your Canadian lender. This differs greatly from the U.S. where your U.S. property is yours to care for. Lenders like RBC Bank have written into their purchase agreement that insurance must be bought as a way to protect both your and your lender’s investment in your property. This may seem like an extra dollar to spend, but these laws can protect your investment in the long run.

Get help from a real estate lawyer

A real estate lawyer’s services will be one of the greatest investments you can make while buying a house in Canada. They are knowledgeable with laws and will help U.S. citizens navigate down payment, mortgage requirements, and any other questions. You may think you can handle it on your own, but a U.S. mortgage is a lot different than one in the Great White North! A lawyer’s advice will be crucial to the success of your real estate journey.

Budget your money for closing costs

Once you have found a home that you would like to buy, you will begin the process of buying it. The first step is to make sure that you have your down payment in your Canadian bank. Lenders will want to see that your payment has been in the account for some time.

There are significantly fewer closing costs for a U.S. mortgage than one in Canada. You can expect the closing costs to include 35% of your purchase price, third-party fees, real estate transaction fees (i.e., land title and land transfer tax), insurance, and more.

The costs of a house abroad can add up quickly. Many choose to use their home equity to help pay for their new house across the border. Choosing to use home equity is a great option for any person who may not have a large amount of savings. The only thing to consider is how your equity loan will change with the exchange rate from U.S. currency to Canadian dollars. We strongly recommend that you seek the advice of a financial advisor to ensure that you have substantial funds.

Buy a Canadian home as a U.S. citizen

If you already have a U.S. property and want to buy a house in Canada, it is impossible to have a U.S. mortgage on your new home abroad. U.S. citizens will need to speak with a Canadian mortgage lender like RBC Bank to buy a house on Canadian soil.

Although there may be many steps to buying a house across the border, it could be a worthy investment in your future. If you ask a group of Canadians, most of us will say that our country is the best place to live in the world. We will leave that up to you to decide.

Housing sales declined nationwide last month, according to the Canadian Real Estate Association (CREA), signalling that the national market is following a trend that emerged in its largest city.

Although actual sales surged by 256% compared to April 2020, which was the first full month of COVID-19 pandemic-related lockdown measures, thereby illustrating a flawed picture of what’s actually happening in the housing market, transactions declined last month by 12.5% from the all-time high recorded in March. Moreover, activity was down in 85% of Canada’s housing markets, including nearly all Ontario and British Columbia.

Nevertheless, the reduction in sales activity might start restoring some balance, although how much remains to be seen, in the Canadian real estate market.

“While housing markets across Canada remain very active, there is growing evidence that some of the extreme imbalances of the last year are beginning to unwind, which is what everyone wants to see happen,” said Cliff Stevenson, CREA’s chair. “That said, the slowdown in sales activity between March and April was at a time that COVID cases, including very concerning variants, hit their highest levels ever and many jurisdictions enacted fresh lockdowns, making it harder to get a clear read on the underlying levels of demand and supply. 2021 may be another year where some of the spring market gets pushed into the summer by COVID-19.”

But while sales might have been down on a monthly basis, sale prices were up 42% year-over-year, marking the largest ever increase, although April 2020 was when the worst numbers ever were published.

New listings declined by 5.4% month-over-month in April, despite March setting a listings record, indicating that there is still a healthy amount in the national housing market, and CREA suggested demand remains high. The sales-to-new-listings ratio fell to 75.2% in April from a peak of 90.6% in January, but it is still historically high and well above the long-term average of 54.5%.

In Toronto, COVID-19 measures enacted through all of April explain the drop in housing sales, says Davelle Morrison, a broker with Bosley Real Estate.

“I was selling a condo at Spadina and Bloor, which had over 50 showings, listed at $598,000, and on offer night we sold for $706,500,” Morrison told CREW at the end of April. “This week I have another condo listing in Yorkville that’s over 1,000 sq ft, and you’d think it’d be hopping, but with the new stay-at-home order, things are quieter. I only have nine showings so far and the offer night is coming up on Monday.”

One reason the cost of housing is increasing so rapidly is material costs have skyrocketed, and developers, desperate not to fall in the red on their projects, say they still need to seek out profits.

“It’s tough in the low-rise segment because that’s all lumber, and prices in 2020 went up more than 100%,” said Mike Bowering, president of Mutual Developments. “Lumber would have cost $40,000 for a 2,200 sq ft home, and by the end of 2020 it was over $80,000. Recently, it’s gone up 60-70% on top of that. I can’t say there are a lot of builders making big profits this year.”

In the condominium sector, steel costs have escalated substantially, with rebar alone surging 60% during the pandemic. Bowering says sheet metal outlays are a problem, but he added that high demand for housing has stretched trades thin and now they’re demanding a larger slice of the pie.

“Materials are part of the problem, but the other part is the market is hot and a lot of projects in 2020 that were shelved hit the market this year and they’re selling, and that means trades are so busy that they’re backlogged for about a year. If you wanted to start today, you wouldn’t be able to get a concrete former to start for another year, and they’re the main trades who build condominiums,” he said.

“The market was hot because of demand last year and that pushed prices for houses and condominiums up, and the trades see that and they know they can charge more. This year it’s the opposite: the trades and materials are pushing prices and I see that continuing until at least the end of the year.”

A perfect storm has conspired to not only render housing financially prohibitive for many Canadians, including meagre supply, but it’s also cleaving developers’ profits. For example, Bowering says that concrete comprises 30% of the construction budget of condominiums.

“It’s a tough time for purchasers and developers because prices are going up for condominiums,” said Bowering. “Builders will either not make a profit or they will make a very small profit.”

Fortunately for some developers, they’re protected by contracts signed pre-pandemic, but that doesn’t mean problems don’t frequently arise. John Miolla, vice president of operations at Koler Builders, says that contractors often complain about price escalations and try to renegotiate existing price structures, and while Koler is protected by its pacts, pricing has become so unstable that Miolla has noticed it can change in as quickly as a week.

“We’re experiencing unstable pricing, especially for drywall, steel and, of course, lumber,” he said. “With pricing requests for proposals, you’re typically asked to hold your price for 60 days. At one time in stable markets you could do that, but now we’re getting price increases, in some cases, weekly and to try to hold a price for something more than seven days, some trades don’t want to do it.

“If you did a condo project, or really any project, by the time you get to the planning stage, do your pro forma and put shovels into the ground, it could be a year. How do you plan pricing a year from now?”

Miolla anticipates that erratic material pricing will continue into 2022 and he suspects that COVID-19 isn’t the only thing affecting supply chains.

“People are sitting at home with nothing to do and a lot of home equity, so they’re renovating their houses, and that’s one reason there’s a delay in material,” he said. “The material isn’t just sitting in lumber yards, for example. It affects us because if we can’t get material to get to the construction phase, which might have taken a year but has now been stretched out, that affects the whole timeline, and timelines are critical to the whole process.”

With the spring market in full swing, there are a lot of buyers across the country looking to land an accepted offer on a property. And while the majority of buyers with successful offers do close on properties without much concern, there are valid reasons why you should never go in condition-free.

Sure, a realtor might tell you that, in a heated market, conditions make your offer less desirable, but considering these conditions are put in the offer to protect you in the event that something unexpected happens, I like to compare it to insurance: you might not think twice about it until you need it.

And as a mortgage brokerage owner, I’ve come across enough offers this year that have had to rely on those conditions to walk away from an offer. Conditions placed on an offer to purchase can vary from the review of a status certificate, to a home inspection, to the acceptance of satisfactory financing approval on the purchase. And that’s what I want to focus on today, the financing condition on offers.

Many buyers believe that a preapproval or prequalification can take the place of an approval and falsely waive a financing condition on offers only to find out afterwards that there are issues with obtaining financing. This could be something related to the credit worthiness of a borrower (remember, preapprovals often do not involve credit investigation); perhaps something has fallen into collections unbeknownst to you (that old cable service bill never really did get settled did it?); or, more commonly, there are issues with the property. That’s right, you might be a solid A+ client to the bank or credit union, but they might have major issues with the property you just agreed to buy. The property is the final cornerstone when it comes to determining if you will be approved for financing. That property is the collateral that, if you cannot make payments, the bank will seize and sell to recover their money. So if that was your money, would you feel comfortable loaning hundreds of thousands of dollars on a glorified shack with a fresh coat of paint? Oftentimes with insured purchases, we can request an auto-appraisal be conducted. But, in the event the bank requires a physical inspection things can start to get sketchy, especially with anything labelled as “a handyman’s delight” or “has great potential.”

I recently had what, by all accounts, looked like a wonderful house in a great neighbourhood in Toronto that a client put an offer on (conditional on financing of course). The appraisal that was ordered later came back identifying structural issues that made the property unsuitable for financing. That’s right. The deal was dead. The realtor and buyer were so confident in the property (heck, I was too) but the appraiser identified a major flaw that killed the offer. Luckily for the buyer, they were able to exercise their financing clause and back out of the offer, deposit safely returned.

So if you’re in the market for a property and are getting frustrated with offers being declined, I would recommend taking a deep breath, stepping back, and trying not to buy into the hype or fear of missing out. There are many horror stories of bad transactions that don’t close due to deficiencies in the property or poor management of reserve funds in condo corporations, to developer liens and structural issues that are identified. Having the ability to pull the emergency evacuation button when an offer starts going up in flames is never a bad idea. And just like a parachute, if you need to get out you’ll be glad you took the time to pack it. Remember, conditions are put on offers to protect you as a buyer, which is needed more now than ever in this sellers market.

Investing in a smaller unit like a studio condominium might seem counterintuitive, but, as it turns out, it’s the safest bet for investors in an expensive real estate market like Toronto’s.

According to a report from Benjamin Tal, CIBC Capital Markets’ deputy chief economist, and Urbanation president Shaun Hildebrand, there’s a negative correlation between the size of an investment condo and cash flow—larger units erode cash flow.

“In terms of unit type, there was a clear negative correlation between the size of the unit and the amount of cash flow, with studios performing best but still only representing 6% of the market,” said their report. “Only three-bedroom units had average negative cash flow, although these larger units comprised only 2% of rental investments.”

Studio units, according to Tal’s and Hildebrand’s analysis, produced $163 in cash flow, while one-bedroom units produced $86, two-bedrooms left $21, and three-bedroom units put investors $122 in the red.

Scott McLellan, senior vice president of Plaza Corp., agrees with the veracity of the study, noting that a decision was made to include a heavy contingent of studio condo units in Plaza’s 400 King St. W. project in downtown Toronto.

“There was a method behind the madness—we felt that the end price of the studio was probably the most affordable brand new housing product you can buy anywhere in the city, in terms of condos,” McLellan told CREW. “The end price is still somewhere in the low-$500,000s to low-$600,000s, with a one-bedroom coming in at around $75,000 more than that, but you’re basically getting the same rent. So the studios are the absolute best buy right now for an investor.”

The key, added McLellan, is that studio units have a lot of room for appreciation by virtue of their price points. In fact, end users have also figured out that their way up the property ladder is to start with studio units.

“There’s room for the studio to appreciate that much greater because you can get them for under $600,000, or at least around $600,000, and that alone makes them incredibly inviting for first-time buyers and investors alike,” he said. “We’re also seeing that people who aren’t full-time residents of Toronto—they might work full-time in Ottawa or Montreal and only come to Toronto for a few days a month—would rather live in our studio units than in a hotel. Studio units still come with a kitchen that have a fridge, microwave, stove and all regular appliances. Nothing changes from what they’d get in a 2,000 sq ft unit except for the size. We even include a Murphy bed, so the upside for studios right now, at this particular time in the market, is these unit types make the most sense for investors because of the appreciation potential and rents commanded.”

The delta between a one-bedroom unit, which in Toronto runs in the neighbourhood of $700,000, and a studio, which can still be had for below $600,000, buttresses the argument for appreciation, and given that Toronto’s condos barely carry anymore, and therein is a sound investor strategy, says McLellan.

“As the entry-level price point in Toronto continues to climb, price point is what’s going to drive studio condo units, and when price point drives something, historically speaking, it has the most opportunity for appreciation.”