In case you missed the article from this Saturday's Ottawa Citizen paper, read below to see why It's Better with Bennett!Golden Payoffs
Smart investors are smiling as they head to the bank with profits from buying, then flipping condos. Not so fast, warn experts. There's always a downside when the market's saturated or interest rates start to creep up.By Patrick Langston, Ottawa Citizen January 15, 2011Ottawa investors, those seemingly far-sighted folks who buy condos and then rent or flip them for a neat profit, must be rubbing their hands in glee.
The latest numbers from the Ottawa Real Estate Board show that all classes of existing condos sold for an average of $249,359 last month. That's a jump of 10.4 per cent over 2009, and almost 37 per cent more than the increase in single home prices in the same period.
Holy investment you say. Yup.
It is after all sweet news for smart investors who buy a condo at the pre-construction phase and sell it when the building is completed two or three years later, scooping up a chunky profit, thanks to Ottawa's robust real estate market.
At the same time, Canada Mortgage and Housing Corp. is forecasting that Ottawa's apartment vacancy rate -- at 1.6 per cent already the second-lowest in the province, right after Kingston -- will get even tighter this year because of increased immigration, a healthier job market and slower rental construction.
That's a dandy scenario for real estate investors, especially condo buyers, whose properties typically command a higher monthly rent than mainstream apartments because they're newer, boast more amenities and often sport a more hip, urban look.
With reports of people racking up investment returns of 20, 30, even 50 per cent, it's no wonder Marnie Bennett, the self-proclaimed condo queen and owner of Bennett Real Estate Professionals calls our condo investment market very strong. Canada Mortgage and Housing Corporation backs her up, saying at least 20 per cent of condos are rented out, putting us close to Toronto and Vancouver, where roughly 25 per cent of condos become part of the rental market.
Others, however, sound a note of caution.
Real estate investing can be a risky business they say, and for every boom, there's eventually a bust or at least a steep slide. You better have deep pockets and nerves of steel if the market does an about-turn, according to the doubting Thomases.
Our current unbridled enthusiasm for condo investments, says Bennett, springs from a large population of well-heeled baby boomers looking for a smart place to park their cash; a high number of cagey Generation Yers with the income to support their investment ambitions; and plenty of folks who, still bruised from 2008's market meltdown, want to diversify their holdings.
Since 2006, reports CMHC, the number of investor-held condo apartments in Ottawa has grown by more than over 30 per cent from about 3,400 to roughly 4,500.
Deborah de Grasse and her family are among those who have benefitted from this precocious real estate infancy. In 2007, they put a small deposit on a penthouse in Urban Capital's Mondrian project at the corner of Bank Street and Laurier Avenue. When construction was completed in late 2009, they wrote a final, large cheque, bringing their total payment to $65,000. About six months later, they sold, earning a profit of roughly 50 per cent on their $65,000 deposit.
The family also owns two condos in Urban Capital's other condo offering, Central, now being built on Bank Street, and a condo in Claridge Plaza on Rideau Street.
"It's a really good way of investing. It's tangible, unlike the stock market," says de Grasse, a civil servant. "You need the stomach for it because you never know what the market's going to do."
She admits to feeling nervous that all the condo projects in Ottawa mean we're reaching a saturation point. Her investment philosophy, however, has always been, "If you can't afford to lose, don't risk it."
It's understandable that some investors might ignore such a basic principle.
"Construction is averaging $450 a square foot now," says Brian Card, president of Ottawa's CRG Consulting. "If you bought when it was $350 and sell now, you can make a huge profit." However, as mutual fund advertisements caution, past performance is no guarantee of future performance.
While condos might look attractive to major investment groups, including boomers in their 50s and 60s -- Card asks a tough question. "What happens when interest rates creep upward, as they inevitably will? If you're renting out a condo with a large mortgage and making a profit of just $150 a month, a one or two per cent jump in the interest rate could bite deeply into that profit."
Developers will also eventually start building apartments again, giving condo landlords a run for their money, predicts Card.
Last year, according to CMHC, rent for an average two-bedroom apartment in Ottawa was $1,082.
In October 2010, the average two-bedroom condo in Ottawa rented for $1,212. That put us among the most expensive major centres in Canada, although modest compared to Vancouver at $1,610 and Toronto at $1,590.
"I've seen the busts," says Card. "And there will be one here. It's just a matter of when."
In the meantime, he says that 700 to 900-square-foot units are the most popular choices for investors. A lot of owners are also offering their rental condos partially or fully furnished, appealing to Ottawa's large temporary and "fly-in" workforce who are often looking for a three-to six-month lease.
Bruce Dwyer has found his niche in the condo market, buying, renovating and then renting nine older units. The full-time professor and program coordinator at Algonquin College was inspired after attending a real estate seminar led by Marnie Bennett.
He buys in the $150,000 to $160,000 range, updates the kitchens and bathrooms, and then re-mortgages them. The improvements mean their value has increased, so he uses the extra money from the bank to buy the next unit.
Dwyer, 46, plans to have $100,000 equity in each property within 20 years. He says he has positive rental cash flow on every property and, by being choosy, has never had a serious problem with a tenant.
"My advice," says Dwyer, "is find a real estate agent who specializes in investment properties and has been through the bumps and bruises. You can learn from their mistakes. My only regret is I didn't do this sooner."
Mark Roundell isn't so sure about leveraging strategies. The certified financial planner with Scotia Mc-Leod says that because real estate is a tangible investment, we're often lulled into thinking it's also an assured one.
"Most people wouldn't go out and borrow $100,000 to invest in the stock market, yet they do it for real estate investments. We forget that (real estate) is like the financial markets: it can go sideways for a long time. It will eventually go up, but so do other investments."
A real problem can occur, he points out, if you suddenly need to off-load a piece of real estate in a bad market. You might take a bath selling downward-plunging stocks, but at least you can get rid of them. Not necessarily so a chunk of real estate if everyone else is trying to do the same.
"Portfolio diversification is good," concludes Roundell, "but most of us already have a substantial investment in their own homes."
Canadian Business Magazine compared returns on real estate investments and the stock market over the past 25 years in a dozen Canadian cities in a March 2010 story and found real estate lagged behind the TSX substantially. Toronto provided the best return on real estate investment of 5,75 per cent, while the TSX was during the period was 13.85 per cent.
Don R. Campbell says condo investing isn't really investing at all.
"It's speculating, and you better have deep pockets," says the Abbotsford, B.C.-based real estate investor, author and president of Real Estate Investment Network (
http://www.realestateinvestingincanada.com/).
While Campbell says he's a fan of Ottawa's normally very stable economy, he has also seen what can happen in a volatile one like Vancouver's.
There, for example, at least two developers have launched suits against condo buyers who reportedly attempted to walk away from their pre-sale purchase agreements after the market tumbled and values declined. When they went to get mortgages, the banks weren't willing to cover the full amount of the original purchase price.
His advice is to buy resale condos: "you can analyse the property as it actually is; you know the maintenance record; and you can negotiate price."
Done properly, he says, condo investing can produce a good return. The trick is to regard any profit you might make by selling the unit as the "dessert" in a financial meal: sweet but more treat than anything. The appetizer, he says, is the bit of cash flow from rental, while the accumulation of an asset by having other people pay for it with their rent cheques is the meat and potatoes.
There are other models of condo investing.
As well as his units here,
Bruce Dwyer is part of condo investment consortiums in Toronto and London. The groups pool rental revenue from each building, pay a property manager and other expenses, and then distribute the profits. If a unit in the building sits vacant too long, the owner is paid "rent" out of the pooled revenues.
Toronto-based Urban Capital, meanwhile, will soon offer property management services to those renting out their units. The cost will equal about one month's rent, says company partner David Wex.
Ottawa's Phoenix Homes has its own co-op-based condo investment model, explains Rahul Kochar, vice-president of operations. Phoenix buys and sells the land to a company of shareholding condo owners, at this point mostly friends and family. That company handles construction. Because Phoenix makes its money on the land deal and doesn't have the usual soft costs of marketing, sales agents and so on, the condo buyers pay less for their units than they would in a normal deal.
Those savings can be up to $40,000 on an 800-square-foot unit, says Vincent Colizza, the architect who designed the 80-unit Phoenix condo project currently going up near the Children's Hospital of Eastern Ontario. That means, he adds, that owners should be able to rent their units at a reasonable price without having to worry that they could end up subsidizing their tenants if interest rates or other costs increase.
Ajay Jain, an investor in the project, adds: "With the hospital, there are a lot of nurses and doctors and even families of long-term patients who would want to rent. I don't think it's going to be a problem finding tenants."
Phoenix plans a second, similar project near Rideau and King Edward streets, says Kochar. But don't go looking for a share: It's already fully subscribed, mostly by the same people who bought into the first project.
© Copyright (c) The Ottawa Citizen
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