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Jul212014

Condos v. Other Real Estate Investments

I was recently asked my thoughts on investing in condos v. other real estate investments and creating $1 Million in wealth.
 
Here are my thoughts on the subject:
 
Leveraged investing in real estate will invariably create real estate wealth.  The important factor is the amount of time it will take.  Getting to the $1 million mark through condo investing will take significantly more time than other real estate investment choices.
 
The 3 pillars of real estate investing are (1) cash flow (2) mortgage paydown and (3) appreciation.
 
I think that if you invest in condos right now, pillars 1 and 3 are inferior to other real estate investment opportunities.
 
Pillar #1:  The cap rate on condos is poor.  On average you would be looking at a cap rate of approx. 4% to 4.5%.  This type of cap rate will likely lead to negative cash flow on a monthly basis.
 
Pillar #2:  As stated above, leveraged investing will invariably lead to real estate wealth as the investor is forced to make payments on the principal amount every month, eventually paying off the mortgage.
 
Pillar #3: This one is up for debate.  We've seen an incredible run up in the price of condos in major urban centres such as Toronto and Vancouver.  The question is whether this type of growth is sustainable.  I personally think we've neared a plateau in terms of run up.  I think the condo market will stabilize, but I don't see much appreciation in the future thus making pillar #3 weak for condo investing.
 
In a nutshell, you can get to $1 million eventually investing in condos, however, it may lead to negative cash flow on a monthly basis and will take a lot longer to get there vs. other real estate investments.
 
While investing in condos may not be the best real estate investment vehicle, it is still better to invest in condos that have have your money sitting in GICs, Bonds or T-Bills as the return is far superior.
 
Paul Kondakos, BA, LL.B, MBA - Professional Real Estate Investor

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