Just so we’re clear, the question came from an investor wanting an income property.
I get this question all the time, from both experienced investors, and rookies alike.
I get comments like “You can’t cashflow with the maintenance fees!” or “The prices just don’t make sense!”
On the outside, the numbers usually point to buying freehold. And although the returns seem higher, there are several things to consider, including the PITA factor ( Pain in the ***), and difference between the fixed maintenance you pay with a condo, versus what I call the “hidden” maintenance fee you pay when you a house.
Condominiums are mandated under the provincial Condominium Act to have mandatory Reserve Fund Study performed by an engineer and a plan in place to save toward the required capital over the life of the building systems. In other words, an investor will not have to pay for large capital repairs if the building is managed well. On top of that, all the condominium owners have an elected Board of Directors that manage the daily affairs with a qualified property manager who manages the whole building. How is that for a Power Team behind your investment? Obviously these qualified professionals are not cheap and the costs of repair are extensive for a larger building, but it is a cost shared among all of the condominium owners in the building.
Lets do a freehold vs. condo example.
A legal triplex priced at $400,000 with 3 kitchens, 3 washrooms, washer, dryer and 3 sets of tenants with property management costing 10% of gross rents. 3 one bedroom apartments rented at $800 plus utilities each. $100 per unit should be set aside for repairs and maintenance. I use an investment ratio called the “rent to price ratio” which is gross rent less property management less maintenance reserve divided by price. In this case it is $2400-$240= 2160/ $400k which equals .54%. Now lets look at a $400k condo which is a 2 bedroom plus den in the GTA with parking where the tenant pays $2200 per month plus utilities. The property management is about 6% because of the ease of management. The Rent to Price ratio is $2200 – $132 = $2068/ $400k which equals .52%.
Comparing apples to apples lets introduce the cost of maintenance fee for the condo at $500 and a repair allowance of $100 per door for the triplex. I am also going to introduce the “hassle factor”. I quantify as a measure of energy used to own/ manage a rental property. This hassle factor includes turnover repairs to the property, advertising upon turnover, paying for repairs for plumbing, electrical and clean up, and all fun things that come along costs associated with managing properties with property management in place. The hassle factor is low for condos and higher for freehold, additionally more for multi-tenanted properties. In this example, the condo has none and the triplex has a hassle factor of $100 per door or $300. Let’s take a look at the Investment Ratios now:
Triplex $2400 – $240- $300 – $300 = 1560/ $400k which equals .39%
Condo $2200 – $132- $500= 1568/ $400k which equals .39%
Factors like liquidity and easy of selling, legal retrofit status of the property, age of the property, quality of the tenant and demand for rental play important factors aswell. So this should illustrate that condominiums are at least equivalent in investment quality to freehold.
What you choose to do for yourself . …depends on your tolerance for the PITA factor, and your overall plan. . . .