January 10, 2022 | Investment

Condo living room - Condos vs Houses Investment

As Toronto matures and grows in population, many real estate investors have become exceptionally wealthy through the wise condo and house investments. As you can imagine, there are several differences, similarities, pros and cons when assessing a condo vs house investment. This post will help you understand which Toronto real estate investment best suits your investment needs and wants.

Differences and Similarities

The most obvious difference is that there is a different legal description; the condo has maintenance fees, condo corporation rules, and more often than not, it comes in the form of taller buildings. Not all condos are in buildings – you can purchase condo townhouses that appear similar to freehold houses. Most condos are found on major streets with easy and quick access to TTC transit and/or highways. Condo investments are typically newer than houses and have less maintenance to oversee as a landlord.

Houses are generally what you would picture, detached, semi-detached and row or townhouses in quieter neighbourhoods. Very few homes are found in major streets as most of these have already been converted into commercial buildings and condo developments. Typically, homes are larger than condos, allowing for more family and multiple student renters. Also, due to the size, it is possible to find houses that have two, three and four units that can be entered out.

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Pros and Cons

Condos can be an excellent option for those just beginning to invest in real estate. The reason is that the cost to acquire a condo is less than a house – you need fewer savings for the downpayment. Think of the game Monopoly; a player begins with a small house, adds more houses, then can trade them in for a hotel(s), generating more income from those who land on the property. The same goes for the real-life version in Toronto – with time and focused attention, the first condo can be re-financed into condos and/or houses. Condos are newer than houses, so the cost of upkeep is lower. There is no need to remove snow, leaves and check the roof for leaks. Most condos are one bedroom which can generate an excellent rental rate. A major pro for condo investments is that most condos are not rent-controlled – read: you can up the rent more than an older house.

Houses can generate far more income because of the larger size and, in many cases, more than one rental unit. Our clients love investment houses with three or more units for rent as the ability to leverage the downpayment is far greater. The cost of running a house is higher as yard maintenance, snow removal, and house maintenance – this can be managed by the landlord, which is very time-intensive, or you can oversee the tradespeople or have a property manager handle the trades.

Critical Investment Tips

The critical investment tips for any condo or house are time and hold. The landlord will accrue capital appreciation as the years go by, and the mortgage will gradually be paid down. The second aspect is to hold the property. The wisest of investors do not sell. If a landlord does sell it because they have a better investment vehicle to leverage, the Monopoly board game analogy is a great example. Do not rush to pay off the mortgage down.

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Capital Appreciation Examples (The Power Of Compounding Interest)

Condo Investment

Let’s use a condo investment example to start. An investor purchases a one-bedroom condo for $650,000. Assume the rents cover the mortgage, maintenance fees, taxes and insurance. In recent years, Toronto has seen incredible real estate value appreciation – more than 20% in some years! In this example, we will use 10% for a more realistic percentage increase.

Year 1: $650,000 + 10% = $715,000

Year 2: $715,000 + 10% = $786,500

Year 3: $786,500 + 10% = $865,150

Year 4: $865,150 + 10% = $951,665

As you can see, the cash on cash return of the original downpayment has been repaid in full, plus the investor has a bonus amount of capital invested. Note that the mortgage is also getting paid down. As you can see, the gains can be incredible for those investors. Keep adding 10%/year for another decade, and you will have a massive smile on your face, guaranteed!

House Investment

As for the house investment example, let’s use a $1,500,000 home to calculate the power of time value appreciation.

Year 1: $1,500,000 + 10% = $1,650,000

Year 2: $1,650,000 + 10% = $1,815,000

Year 3: $1,996,500 + 10% = $2,196,150

Year 4: $2,196,150 + 10% = $2,415,765

As you can see, within four years, the property has increased by nearly 1 million dollars! Factor in mortgage repayment, and you have reached a million dollars in most cases. Note that Toronto has seen 24% increases in some years. It’s hard to argue with the power of appreciation over time.

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When up weighing up a condo vs house investment there are many pros and cons. We have converted some but certainly not all! We lead our clients through to the best investments that meet their needs. We take the time to discuss the most critical aspects of each unique property investment. Contact us here to get started!

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