A growing class of condo owners have chosen to become landlords. It seems so easy. Purchase a property for $650,000. Pay 20 percent – from personal savings, family loan or an RRSP – and have a bank finance the remaining 80 percent or $500,000+.
So long as rent covers the mortgage payment many investor-owners are happy.
These amateur landlords have no idea what they are doing. The math for determining profitability ignores condo fees, property taxes and costs to maintain their property.
CIBC and Urbanation find that 44 percent of investor-owners are in negative cash flow when mortgage payments and condo fees are considered. The number is likely higher than 60 percent once insurance, property tax, maintenance, repairs and opportunity cost are considered. In response to a survey by Veritas, half the respondents admit to losing money every month. Only 18 percent of landlords make money according to this survey.
Government statistics report that 40 percent of Toronto condos are not owner-occupied.
Investor-owners believe they can make money renting their condo. If more than 40 percent of all condos are rented and over half are unprofitable, it is only a matter of time before these investor-landlords decide to stop the bleeding and sell their properties.
Using the example above, which approximates a real situation, the investor-owner has more than $500,000 in debt and is losing nearly $15,000 per year on their property. Had they simply invested their $150,000 instead of purchasing the property, income could have exceeded $10,000 per year.
How is this an investment?