By Robert Van Rhijn

Historically, investors seeking income properties have sought out houses. Over the past decade, that trend has turned and more investors are opting for condos. However, condo investments can seem daunting and there’s a plethora of data to consider. So, let’s cut through the jargon and get straight to the facts.

The best investment: studio

Our data team at Strata.ca went back 10 years and looked at every sale recorded on the Toronto Real Estate Board between 2009 and 2019. In assessing each sale, we calculated the selling price against the square footage, giving us the exact cost per square foot for each sale.

After aggregating the results, the studio – traditionally the smallest condo unit and without a bedroom – showed the greatest growth overall. Studios have the highest price per square foot (PSF) and have appreciated more than any other unit type.

The average studio purchased in 2009 had a cost PSF of $465. By 2019, that number grew to $1,080, an increase of $614 PSF. One-bedroom units showed the second largest growth, starting with an average price PSF of $457 in 2009 and growing to $1,001 by 2019; an increase of $544 PSF. By comparison, three-bedroom condos grew from $405 to $916 PSF – gaining a still impressive $510 PSF from 2009 to 2019.

When it comes to rent, three-bedroom units showed the highest growth – increasing by $1.85 PSF over a 10-year span to $3.92 PSF: From my experience, much of this growth is likely attributed to empty nesters who are downsizing from detached single-family homes and find modern one- and two-bedroom units to be too cramped. There’s certainly an argument to be made for catering to this crowd, though it’s not the best investment from a dollar’s perspective.

Studios had the second-largest rental growth, increasing from $2.75 to $4.59 PSF by 2019, an increase of $1.78 PSF; just seven cents lower than three bedrooms. Given the disparity in purchase price between studios and three-bedrooms and in growth as well, studios come out on top.

Potential drawbacks of a studio

When working with investor/landlord clients, we usually start by discussing the type of tenant you’ll attract within each neighbourhood and unit type. With a studio unit, you’ll likely be renting to a student or young professional on a smaller budget, as those with higher income will usually opt to spend a little more to get a bedroom. Tenants who rent studios are often short-term tenants, and the moment they can afford a one-bedroom, they’ll probably move. This results in a higher than average vacancy period, which can quickly offset the benefit of renting a studio at the highest cost PSF. A one-bedroom, however, where a tenant has a more adequate living space, will undoubtedly result in a lower vacancy period.

Another potential drawback with studio units is financing. Large banks in Canada have a history of being hesitant to approve mortgages for units below 500 square feet (many studios are around 450). However, banks look at these units on a case-by-case basis – units in popular, newer buildings or highly desirable areas are more likely to be approved than those in less desirable neighbourhoods or older buildings.

Bigger isn’t necessarily better

Of all the data we examined, the most intriguing conclusion wasn’t that studios were the best unit for investment from a dollars and cents perspective – it was that the smallest unit among its respective unit type (for example, a 500-square-foot one-bedroom versus a 650-square-foot one-bedroom) are better investments.

Units generally rent based on unit type, not square footage. If you compared the cost of rent for one-bedroom units in the same neighbourhood, you’d find that the prices are mostly on par with one another. That’s because rent is based on the unit type as opposed to the actual square footage.

But when units are sold, square footage carries a lot of weight. This is where things get interesting, because if your goal is to rent a unit out over a number of years, you could save money by purchasing a smaller unit, secure in the knowledge that it will rent for roughly the same price as a unit of the same type that might have a larger (and more expensive) floorplan.

A common principle of real estate investing is to invest in a property that you’d personally enjoy living in. Maybe it’s time to make an exception? There are plenty of people who would never live in a studio, but there are just as many who would – why not rent it to them?

SIMILAR ARTICLES

5 COMMENTS

  1. Recommend this young realtor reaches out to Barry Lebow and Al Sinclair, two of the countries most experienced sales reps and condo investors.

    I still remember Barry’s picture in the Toronto Star as the market had begun to crash in the early 90s.

    Actually a revisionist review of that period is needed for any Realtor who started selling homes after 1990.

  2. Robert Ede is correct.

    Real estate speculators looking backward to forecast the future is no different than mutual funds salespeople displaying empirical data of historical movements of the stock market/mutual funds’ returns to lead potential investors to make positive investment assumptions and thus gamble on future returns by buying in to the game with a large purchase. it’s a crap shoot. Go ahead and gamble, but only if you can afford to lose. Buy a condo, or any other domicile, because you want a place of your own to live in, but not to hopefully capitalize on dreams of often potentially false expectations based upon old stats. Nothing goes up forever…except for naive, false expectations of endless growth without interruptions.

    People fail to realize that home prices rise because of demand, which in turn causes inflation. Thus the value of the dollar diminishes and buying power of the dollar declines. One needs more dollars to purchase the same items as were purchased more cheaply before. Net values therefore remain relatively stable. It’s a shell game.

    Buy because you want your own place. Ignore relatively short-term price trends upward or downward. Pay your place off as quickly as possible and enjoy life therein. Stop trying to time the market; it’s a fools paradise (aka: a fool’s pair a’ dice). We are all equally unqualified to be ongoing successful speculators. We are all victims of delusions of grandeur, gathering about the roulette wheel of fortune. Adopt the gambler’s persona if you want, but only if it will be a game of chance that you can afford to play…and lose at…in which case you are simply a fool throwing money away…because you will surely lose in opposition to your wishful-thinking-based expectations. It’s all about attitude and understanding the reality of false hope leading to guarantees of net profit based upon adjusted-for-inflation real dollars. Too many of us forget the adjusted-for-inflation part…if we are even aware of it. Many just put that out of their minds and simply focus on the raw numbers only…because that makes them feel good. it’s called self delusion.

  3. Simplistic analysis. Concluding that appreciation trumps other inputs to long term ROI has no mathematical basis.

    “When it comes to rent, three-bedroom units showed the highest growth – increasing by $1.85 PSF over a 10-year span to $3.92 PSF: From my experience, much of this growth is likely attributed to empty nesters who are downsizing from detached single-family homes and find modern one- and two-bedroom units to be too cramped. There’s certainly an argument to be made for catering to this crowd, though it’s not the best investment from a dollar’s perspective.”

    The above paragraph says, paraphrasing: “three-bedroom units are better from a dollars and cents perspective from a rental income perspective, but appreciation is more important”.

    Too many realtors espouse speculation and do not help their clients project long term total ROI.

  4. Your start date (perfectly reasonable to want 10yr of data) is the reason your conclusion is going to be proved incorrect in ten years from now (but probably much sooner)

    Here’s why.

    Your conclusion WILL ONlY BE Correct if 1) the massive Low-interest boom in GTA realty in 2009-2017 is duplicated AND ALSO if 2) the massive migration of speculative Pre-construction “Investment” in 2017-2019/20, that moved FROM ex-urban and suburban homes TO 416 Preconsttuction and assignment Condos is similarly duplicated.

    In summary, your numbers record MLS sales, but the market itself is based on the inputs to the inventory.
    What price land, what locations available for development, what price materials and labour, how long to build, how many owner-occupier buyers, how many “spec/investor” buyers, how many tenants and students and immigrants are Incoming, what financing wrinkles are the ‘flavour of the month’etc and finally what is the City/ Prov and Fed Govt planning yo do just before their next election?

    Therefore only IF you believe that the next ten years will be the same as the last 10 will your Looking-back sales data and Book- assumptions and Book- calculations become true and worthy recommendations for the Buying public

Leave a Reply