Mississauga Condo Investment Talk

Debunking Some Myths Around Investing in Real Estate 

What’s better investment – New vs. Resale – 1 BR vs. 2 BR – Lower vs. Higher Value Properties

I have earlier talked about new vs resale condos and the pros and cons of buying a builder property. I have also discussed about what it means to stay diversified in stocks and real estate when investing for the future, and how leveraging makes real estate investing a great tool to multiply one’s returns.

GTA Home Prices Have Increased 2.5 Times The Median Income

When I started my real estate career in 2003, properties were very affordable if one compares the annual household income with the home prices. Based on the Teranet-National Bank House Price Index, house prices increased 69.1% between 2007 and 2017 (Teranet and National Bank of Canada, 2019), while the median income rose by 27.6% over the same time period (Statistics Canada, 2019).

This doesn’t mean that one should not invest in real estate now but an investor should adjust his or her investing strategies according to the time, place and growth potential. Well, real estate investing (like any other investing) is all about getting wealthy. Savvy investors achieve this by buying properties which provide good growth in nice neighbourhoods where they can be rented out to good tenants, and provide a positive cash flow.

These investors understand the market dynamics and understand that what was true in the past, may not be true in the future, due to socio economic impact, among others.

You can very well see how the GTA housing prices have increased in the last two decades, barring the small blip in prices in 2008 (recession caused by sub-prime mortgage crisis)  and then in 2017 (Canadian housing market bubble that was forced to shrink slowly by our Government with the introduction of foreign buyer tax etc.).

However, the GTA housing market has overall done very well since 2000. Canada is an immigrant country and many newcomers have been consistently flocking to the GTA, contributing to the real estate market here.

Just to give you an example, here are the median sold prices in Mississauga Square One Area:

Jan 1 to Apr 30 median prices as per TRREB data

MISSISSAUGA CITY CENTRE CONDOS PRICE GROWTH

Year1 BR2 BR
2010$220,500$265,000
2013$245,250$292,000
Price Increase11.2%10.2%
2016$255,000$315,000
2019$406,750$476,000
Price Increase59.5%51.1%
2019$406,750$476,000
2020$478,500$545,000
Price Increase17.6%14.5%

RENT TO VALUE RATIO

RENT TO VALUE RATIO (Annual Rent/Price)1 BR2 BR
2016 Median Price$255,000$315,000
2016  Rent/Month$1,500$1,825
Rent to Value in 20167.1%7.0%
2020 Median Price$478,500$545,000
2020 Rent/Month$2,050$2,450
Rent to Value in 20205.1%5.4%

FUTURE PRICE ASSUMPTION

FUTURE ASSUMPTION1 BR2 BR
2021 Median Price$550,000$615,000
2025 Median Price$687,500$750,500
Increase25.0%22.0%
2025 Rent/Month$2,300$2,500
Rent to Value in 20254.0%4.2%

PROJECTED MONTHLY CASH FLOW IN 2025

PROJECTED MONTHLY CASH FLOW1 BR2 BR
Average Builder’s Price in 2020. Unit to be ready in 2025$570,000$750,500
Mortgage (80% Loan to Value)$1,571$2,143
Property Tax$250$350
Condo fee$350$450
Condo Insurance$30$35
Total Expenses$2,201$2,978
Rental Income$2,300$2,500
Cash Flow$99-$478

DISCLAIMER: Price Growth, Taxes and Returns are based on Assumptions only. Not to be taken as Accounting, Legal or Tax Advice. E.&.O.E.

Understanding the Two Basic Fundamentals of Real Estate Investing

1. Property Growth & Positive Cash Flow:

Investors get rich by buying properties that are expected to appreciate in price in the long run, where they don’t have to inject cash and their rental income makes enough money to cover their expenses like mortgage, taxes, condo fees, small repairs etc.

2. Market is always changing. What was true in 2010 may not be so in 2023 or beyond

While we want to invest in properties that are expected to perform well in the long run, timing is very important. If you had bought something 10 years ago that gave you handsome returns, buying the same type of property and expecting it to stay on the same growth trajectory, is simply not wise.

Let me further explain and debunk some commonly held misconceptions:

Rent is Proportionate to Property Size – False!

An important factor for investors to keep in mind is that most renters will not pay you a proportionately higher amount in rent based on higher property price. So if a property price is more, it will not translate into an increase in rental amount.

So lets say if a $480,000 condo fetches a rental income of $2,200, it does not mean that a $960,000 condo will rent for $4,400. Most people rent because they are saving to buy or they are new to the country, or they are unable to qualify to buy, or they have downsized – that is they have sold their property and are enjoying their equity returns, by using some of that money to pay for their rent.

On the rental front, higher valued properties will simply not give the same percentage return compared to properties of smaller value.

Average Growth Appreciation is Same for all Property Types – False!

Bear in mind that average property growth percentage reported by the Toronto Regional Real Estate Board (TRREB) takes into account all types of small, medium and large properties. But if you look at the median price of a 1 BR condo apartment from Jan 2020 to May 2020, it has appreciated by 17.6% vs. 14.5% for a 2 BR condo apartment during the same time.

You can see that smaller valued properties appreciated more than the larger valued properties!

This is because most people can afford smaller properties or smaller mortgage amounts since mortgage is based on income qualification. So if one’s household income is $100,000, they can get qualified for $450,000 (lender’s basic thumb rule based on annual household income before any debts).

That’s the reason why we have more buyers for smaller value properties than larger value properties as there are more people in the income group of $100,000 than there are in the income group of $200,000. 

One Bedroom vs. Two Bedroom Condos

I bought a 2 BR condo in the past and had great returns. It should give me same returns again. False!

It is possible that a 2 BR bought some years ago at a lower price point has appreciated by a lot. But what was true in the past, may not be true at the present time, or the future. When you bought a 2 BR unit in 2010, the price was $265,000, in 2020 it is $545,000, and today Mississauga builders are selling the same for $750,000 (approx. 800 sq. ft.) with a delivery date of 2024-2025.

Now if you are buying a 2 BR condo for $750,000+, in the future, it is not likely to appreciate at the same rate as it did between 2010-2020.

What it means is that investors who are buying a 2 BR or a bigger unit in today’s market and paying prices like $700,000 – $800,000, will have to find buyers with a household income of $180,000 or more, at the time of sale.

In other words, hardly any first time buyers or investors would be interested in buying these expensive condos. This could in turn make the marketability of their properties limited to only to move-up buyers (people selling 1BRs and moving into 2BRs) or a handful of downsizers moving from their million dollar homes. Most downsizers are choosing to retire in their existing homes as per the latest data.

Monthly Mortgage Payments of 1 BR and 2 BR Condos

1 bedroom condo math


2 BR condo math

Real Estate Calculator

Smaller valued properties can continue to appreciate more than the larger valued properties because of the above reasons.

All properties (not just condo apartments) in and around the GTA which are in the range of $450,000- $550,000 will be in demand and appreciate more. We can expect exponential growth in this price range in the next one year.

New Trends In Our GTA Real Estate Market

The other more recent trend as a result of the COVID pandemic is the work from home culture, which is encouraging people to spend this amount of money or even a little more to get a bigger home in areas outside of core GTA cities.

In Conclusion

New and seasoned real estate investors should keep the following in mind:

  • Prices cannot keep increasing indefinitely if the household income does not increase at the same time
  • Market is always changing and seasoned investors need to adjust their strategies accordingly
  • Positive cash flow is the key to successful real estate investing
  • If there is a huge price difference between a resale vs a new builder condo (to be built in 3-4 years), then investing in a lower priced resale condo makes better sense
  • Lower value properties appreciate faster and by more as compared to higher value properties
  • Rent is not proportionate to the property price

My Team and I are here to help our investors make informed decisions around real estate investing and have been doing this successfully since 2003. Even with the COVID 19 impacts on real estate, the Mississauga condo market is still exciting and holds good potential for real estate investors.

Consult with Team Kalia to Buy Investment Properties

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