Investors are the buyers for many new condos
Buyers know there is more than one way to turn a profit in the real estate market
What we tend to see, the smaller the unit the higher the chances of it being an investment.
It’s not enough to just read the headlines, folks. Those who didn’t scan past the first paragraph or so of the recent spate of news stories this week about a new report analyzing condo investment trends in Montreal could easily have come away with the impression that most investors in the city are losing money. It’s an unfortunate misreading of the text that overlooks some really interesting findings. That latest Montreal Housing Market Insight Report from Canada Mortgage and Housing Corp. (CMHC), released on Tuesday, explored the effect of very large highrise condo towers on the rental market in Montreal. Economist Francis Cortellino, who authored the report, said over the last few years, the scope of condo projects in downtown Montreal has become more ambitious, with a growing number of towers now under construction, including approximately 300 units or more. “This report is really specific to those very large new buildings. I wouldn’t generalize to the rest of the market,” he said. It’s not just size that sets these buildings apart from other condos downtown. By digging through the data on unit sales and rentals in the first buildings of this type to be completed in Montreal, Cortellino discovered that, unlike most downtown condos, the majority of units, 57 per cent, were owned by investors, versus 30 per cent of other condos downtown. While most owners held on to their investments for at least a year, the proportion of units flipped within a year of possession was greater than other condos in the same sector, with seven per cent selling within 12 months, compared to less than two per cent in other buildings downtown. But the finding that dominated headlines was that, if purchased with the typical 20 per cent down payment, three-quarters of the rental units analyzed would be cash-flow negative once mortgage payments, condo fees, school taxes and property taxes were factored in. Skeptical Cassandras seized, with glorious schadenfreude, on the idea that 75 per cent of condo investors were losing money. Except, that’s not actually what the study says. First: the cash flow calculation is a theoretical exercise. As Cortellino clearly states in his report, the actual down payment and mortgage terms of the rental units studied is unknown. At 20 per cent down, it’s true the rents of these units would not be sufficient to cover expenses. But it’s likely many investors paid cash or paid more than the minimum down payment to make the math work. For others, cash flow was not the point. According to Jennifer Walker, a real estate broker with Sutton Group Centre Ouest and founder of the Montreal Real Estate Investor’s Group, it’s not news that it’s hard to find a new rental condo with positive cash flow at today’s prices if buying with just 20 per cent down. But she noted that cash flow is only one of a number of investment goals. “A lot of people buy on the potential, meaning appreciation, that the value will be going up,” Walker said. According to Sacha Brosseau, chief brokerage officer at Sotheby’s International Realty Canada, the smaller units in downtown towers like these are appealing to both domestic and international investors, who often plan to resell the unit at a profit within five years or less. “What we tend to see, the smaller the unit the higher the chances of it being an investment,” Brosseau said. “When we sell smaller sized units, more often than not, our agents that represent them see questions asked like, ‘How much do you think we can rent this for?’ ” It’s common knowledge among local realtors that these types of units are extremely popular among foreign buyers. This is notable because previous CMHC research has also found that foreign investors are much more likely than local buyers to pay cash. One study based on data from 2015 found that 40 per cent of foreign buyers who bought condos in downtown Montreal did so without obtaining a mortgage in Canada, compared to only 15 per cent of local buyers. While CMHC’s best estimate puts the number of foreign buyers in Greater Montreal at about two per cent, when it comes to downtown condos, the proportion is more like 12 per cent. Whether local or foreign, investors aren’t stupid. You can bet they’ve got a plan to make money somehow. They know there’s more than one way to make a buck in real estate.