So we recently had an agent pitch a “good” investment to us to see if we could help them sell more units. These are pre-construction condos, purpose built for students in Brantford. The development is One Wellington, you might have heard of it recently.
Brantford as a city is growing, yes, and a lot of stuff going for it, I’m not going to deny that.
However, just how they incentivize potential Buyers I feel is a bit sleezy. It’s similar to what was happening in Waterloo a few years back.
I’m just going to break down the numbers of a 1+den and you’ll see my reasoning.
A 1+den roughly 619 square feet on the 2nd floor is selling at $324,900 with parking. This is one of the cheapest one so you’ll see what numbers I’m working with.
First off, the info sheet they provide the following numbers:
35% down = $113,715Mortgage = $868 (based on their annual mortgage # which equates to 30 year amortization at ~2.8%)
Property tax = $176 / month
Condo fee = $183 / month
Guaranteed rent = $1,500 / month ($1,400 unit + $100 parking)
5 year rental guarantee2 year free property managementFully furnished (double bed, sofa, dining table, chairs)
So they calculate you roughly get $273 / month in POSITIVE cash flow.
Ok, so it looks great based on what they did.
Let’s just take it at face value. For TWO years, this could be decent investment property assuming no major issues with maintenance, repairs etc.
After 2 years, the property management isn’t free anymore, so you’re going to pay let’s say 5% of monthly rental income (on the low end) or $75…so year 3-5 you’ll be down to just under $200 a month in cash flow.
After year 5, will you be able to get $1,500 in rent still? Hopefully? Remember, this is Brantford and this is for students. Will there be students willing to pay? Probably…what happens when 100+ of these units become vacant and the ‘guarantees’ are gone. Supply > demand.
Students don’t want to spend money, in a 1+Den, they’ll split between 2 people = twice the wear and tear you were originally thinking.
Remember, the “rental guarantee” means they’ll still pay you that amount of rent, no matter what they’re renting for. You don’t think that the builder has baked these guarantees into your purchase price? They’re not stupid.
Let’s realistically take into consideration that you’re not putting 35% down, because why would you when you can do 20%. And a real life interest rate example of 3.19% (something I just got on my new condo purchase)…your monthly mortgage payment goes from $868 as mentioned above to $1,120…which brings your cash flow down to -$30 a month.
Oh, pretty sure it’s a good idea to also get insurance for the place incase shit hits the fan. Factor in another $50 a month, which they haven’t done in their calculations.
I don’t think they include internet either, but you’re most likely going to include that for students, so add in another $75 a month.
So from my realistic calculations, you’re negative about $100 a month for the first TWO years, and then add in another $75 a month if you want them to continue to property manage for year 3-5.
They also don’t even factor in the condo fees going up…500+ students in a building, even if it doesn’t have a lot of amenities, what’s the wear and tear on the common areas, elevators, garbage chutes etc.
I think you get the idea.
Personally, I don’t mind being slightly negative cash flow or breakeven. Our newest condo investment will be breakeven and I’m OK with that. I know exactly the rent I will be getting now and it’s not fluff.
The thing I don’t like is that they use the guarantees to attract investors, when long term, they masks all the potential costs that will come up.
I understand that each investor has their own criteria and some people might like these, that’s totally fine, however, please make the decision on the REAL numbers, not the marketing fluff they provide.
I always say that if a builder has to incentivize you to buy a unit, how good of an investment is that really?
I also wrote about this back in 2016 I believe with the Waterloo condos. Same stuff, different city. http://www.timhong.ca/waterloo-students-condo/