Developers have long marketed to investors who are looking for a safe and easy return on their money. But now, with so many builds started during covid finally being finished up, we are seeing a glut of unsold inventory. The biggest reason is the fact that the numbers don’t really work anymore unless you are putting down a very significant downpayment.
For a $400,000 one bedroom in many of the newer towers you’re lucky to see $1800 a month rent. From the tenant’s viewpoint this is outrageously high but makes the investor cash flow negative every month with 25% down. At 50% down an investor is basically break even. Many investors cannot or will not be willing to put up such a substantial amount of cash.
In this environment high borrowing costs and high purchase prices have moved capitalization rates to essentially zero right now even at the 50% down real life example I described above. The only gains an investor will see are from property appreciation (if it occurs) and a gradual increase in net worth as the mortgage is paid down. There is little to no money in hand at the end of each month after financing costs, taxes and condo fees are paid.
The excess inventory will eventually sell, at the right price, to buyers simply looking for a place to live. There will be sales to the ill-informed investor as well , but they will be in the minority. It seems that the investment boom in condos may be on the way out here in Waterloo Region, just like it is in the GTA.
