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.”