Boardwalk Talks [S2-Ep1]: Should I buy a condo or freehold property?

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Transcription:

[INTRO]

I have this itch that I can't scratch. It's basically buying more properties. And If you already have a few condo or freehold investments and you're wondering what to buy next between the two, either condo or freehold, you want to grow your portfolio or maybe you're just starting out and you want to look in getting into the market. Either way, This podcast is about condo or freehold investing. Which one's better? Join me my most recent conversation with my good friend Charles Messina. Charlie and I have been working together for quite some time now, as our team has helped him grow and maintain his investment portfolio. So In this first episode of season two, we talked about what's better to hold condo or freehold investments.

Welcome to season two of boardwalk talks, your real estate investment show with your host, Kenneth Yim. Excuse the audio quality this conversation or future episodes will be high quality, just like this intro. Anyway, let's get right into it.

[KEN]

Should I buy a freehold or condos and investment?

[CHARLES]:

Yeah, this is a topic we've talked about before can and people ask us all the time. And I think it's a good idea for us to talk about the pros and cons of each. What do you think?

Yeah, sounds great. I mean, we both hold both properties as investments. I mean, we've gone through that. So I guess we can talk on either side, right?

[CHARLES]:

Yeah, that's right.

[KEN]

Why don’t we do rock, paper, scissors? So winner takes freehold?

[CHARLES]:

Yes!

[KEN]:

123. Tie. 123. Okay, so I took winner, so I'm freehold.

[CHARLES]:

Yes.

[KEN]:

All right, here we go. So I get the freehold side, you get the condo side pros, right. So I'm pro freehold and you’re pro condo. So let's go ahead. What's, what are some pros and cons of buying freehold?

[CHARLES]:

Well, the cons of freeholed, as someone who's lived in a condominium for a long time, it’s great lifestyle, because certainly, everything's taken care of, for you. And as an investment, we both have condos as investment properties, and you're buying management of those condos. You don't get too many phone calls from your tenants simply because a lot of is taken care of through those maintenance fees.

[KEN]:

Right. Right. So I guess the biggest pro for buying a freehold investment is that you get the land, right. So the thing with that, you're right, you do have to maintain it as long as… or maintenance. I would say the upside of that is that? Well, I mean, I guess if you have multi units, multi residents per freehold investment, then you could get economies of scale that way, right? I mean, the maintenance, It's kind of optional, you don't have to do it. If you don't want to, right? You could be a true slumlord not and do nothing really, you know, certainly you do want to maintain your property. And I'm not saying that I'm not advising any of the listeners to to not maintain your properties for your tenants. But you could choose when you want to do your investment, really, you can be a little more hands on with it.

[CHARLES]:

Right. And just On that point can let's talk a little bit about the price per square foot, if you will, that you're getting as an investment on a condo versus a freehold.

[KEN]:

That's a really good point. So let's look at some numbers here. So the average price of a detached home in the entire Toronto Real Estate board is just over a million bucks. So it's 1.018 million. And for condos, it's $590,274. In Toronto, and just 416, south of Steeles, it's a little over 1.3 million for freehold and for condo is $636,000. Specifically, if you look at the downtown core, which is between Dufferin and DVP, we're looking at $706,000 Just south of the Bloor.

[CHARLES]:

Right And that's, that's an interesting point there about the spread can more so lucky and Toronto almost double. So let's talk a little bit about the fees that are associated with condos, and that spread between a condo and freehold. So typically, would you agree that a condo around that $600,000 range would be around for $450-500 a month for condo fees?

[KEN]:

Condo fees and taxes? Yeah, let's call it $500. Let's say you get about $2,400 on an average $600,000 condo, one bedroom.

[CHARLES]:

Right. And for homes, obviously you're paying taxes as well. But as you mentioned earlier, maintenance fees, those are optional things, certainly you're going to have to spend money on all. I would say, of course you have control over when and the timing of when you spend that money. Versus with the condo, you have the peace of mind that you know major things that are going wrong in the building are covered with your condo fees. But something that's come to mind for me lately as owning both a freehold investment and condo investment is, over time, as we're talking about pros and cons, we can argue both sides of it is, that you're paying a lot of money and maintenance fees over a span of 5 to 10 to 15 years. And you know, how would you respond to that?

[KEN]:

Well, that's actually a good point. Because you know, if you if you actually look at your tax bills, depending if you are in the city of Toronto or not, but if you are in the city of Toronto, let's say location is relatively similar. You're looking at a higher tax bill, which would make up the difference really, and what you're paying for the maintenance in condos. Except you also have to maintain the property, depending on the age of it. There's so many variables, it's kind of hard to say, right? So I would say all in all, I think I understand your point, that maintenance is required, whether you have a condo or freehold. It's something that depreciate some value, it's not gonna last forever, It's just a matter of whether you want it professionally property manager, or if you want to take that control on yourself.

[CHARLES]:

Right. And we've always talked about getting in the market and how we encourage our clients to get into the market. And certainly with the prices as they are typically somebody is first purchase is probably going to be a condo these days, especially a young couple. And so when we look at building up equity, then certainly further down the road, They can consider moving up to a freehold as a result of investing in that condo.

[KEN]:

For sure. And I was actually gonna say that for the summary. But you're right, I mean, at the absolute dollar amount of buying a freehold, is almost double, if not more than double, of what a condo would be. And I always find that people that are looking for condos, certainly the rents are going to be higher per door for a condo. They're nicer places, they have amenities that concierge and things like that, right? As generally nice views, right and good locations, better locations than houses generally. So of course people tenants are they're willing to pay more rent for it, The property is going to command more rent per door, But then you don't get the efficiencies that you do in a freehold in a multi unit. Right?

[CHARLES]:

Correct. Because you could have the option of potentially renting out the basement making a two units. Certainly we've heard about what the City of Toronto discussions around allowing people to build in lane ways to expand the number of housing options. That whole also comes into play if you're buying a freehold as an investment.

[KEN]:

Right, Right. You know, actually, there's a lot of other ways to improve value of the rents improve the rents, right? I mean, you could do things like coin laundry or or storage, you can add storage to the property just pop up, You know, like a container bin or some kind of locker system out there and charge a little bit more. Or you can include Wi Fi, you know, for throughout the entire all the units that you have in there. So you have three units can throw in free Wi Fi, and just jack the rents a little bit, which will improve your numbers, there's so many ways you can improve the rent. Right. With a condo, I don't think you can do that typically.

[CHARLES]:

Well, you're limited to one revenue source, of course, right?

[KEN]

Of course. Wait, you’re supposed to be acting for the pro of condo, not acting for the pros of freehold.

[CHARLES]:

Well, I guess what we're saying Ken is I guess I've come to the conclusion that you can argue both sides of the pros and cons because we own both. And I think what we're trying to do here is we're trying to give… We're not trying to be fence sitters. But it occurs to me, it's about timing and where people's people are in the whole investment profile versus It's one thing to buy your own home to live in. And then as you've done so well, with your clients over the years counselling them is when they're ready to move up to a house to live in maintaining that condo as a rental. So we're certainly not saying it's the beyond all end all one versus the other.

[KEN]:

Of course, but that's the point of our topic. We're trying to get some controversy here. But at the end of the day, to all the listeners out there, I think, really, it's just to get started. That's The moral of the story. And I think that's what you're trying to say, Charlie, If you don't get started, you won't have the opportunity to build the equity, like you do in when you're in the market.

[CHARLES]:

Correct. And we're not just talking about this, we've actually seen our clients do this. Yeah, absolutely. So we're not basically talking about anything that we haven't done ourselves or our clients.

[KEN[:

Right, let's say, say you have the means to buy a free hold investment. And say you're actually you already have one or two condos now. And now you're thinking, should I pick up my third condo? Or should I trade them all and get a house?

[CHARLES]:

Yes, that's a great point, something that I've thought about as well. And I think it goes back to having the versatility in a home. Of course, you'd have to buy the right property where you've got the option where you need a separate entrance, for example, that would be ideal if you're going to rent up the basement or an upper level as an example. And then further down the road, assessing a property is, could I build up on this property as well and increase the value of the property? Because as we know, we have many clients and we know contractors that can give us an idea of what it costs to build, in addition, or build out a basement. And then of course you do the god cost benefit analysis of is it worth it for me to spend $50,000 on a basement reno, And what are typically the rents. Very good friend of mine, he bought a bungalow in Etobicoke. And he added the second story, He's renting out his basement. And, for example, he's getting $2,000 a month now for It's a really nice basement apartment. He's done it really, really nicely. It's a two bedroom. And so here's the way he explained it to me, Ken, is because he's getting that income. Now, when we talk about maintenance, so we hire somebody to cut the grass or hire somebody to shovel the snow. Sure. And he hires a cleaning lady. So basically, he's really created his own mini condo Corporation, if you will, through a multiplex at home. So that's another way of doing it,

[KEN]:

For sure. And the downside of doing that is that you have to manage it, though. That's that's the only thing I mean, the upside is that… Well, not even the upside. It's almost a non starter to me if the numbers don't make sense, if you don't incorporate professional property management in there, Right? If your model doesn't, if your model doesn't work, and it forces you to create a job for yourself, then why you invest in the first place, you're doing an active work instead of passive investment. Right. So we should have factored in the price of vacancies and the price of maintenance as well, too.

[CHARLES]:

Correct. So math is really important.

[KEN]:

And it's absolutely so it's really hard for us to I know we're trying to discuss this to try to create some, like a topic to talk about whether we're going to go free all the condo, but at the end of the day, every single opportunity is unique. And it takes warrants further analysis for sure. For sure. And the whole story, again, is to just get started no matter where you are in your in your journey, I guess. Right? So let's switch gears a little bit and do it on the same related note. I guess what kind of quality of tenants do you think you're going to get between the two is going to be the same quality tenants? Or do you think it's gonna be different?

[CHARLES]:

Another great point there, Ken. And certainly, whether it's a condo or freehold, it depends the location, You know, for talking, you know, but a home in Lawrence Park, you know, I'm looking for clients, you know, the rents there for home and Lawrence Park, or 6-7-8 thousand dollars per month. So I think we know who can afford to pay that kind of money is probably a real occasions, From like presidents, to vice presidents of companies. If you look downtown and the financial core, we know there's younger professionals, As a result of all the jobs moving into downtown gentleman from the tech companies, financial legal accounting. And certainly you've got a great pool of tenants to choose from. From there. So the location, I think, would be critical on the type of attendance, whether it's a condo or freehold. What are your

[KEN]:

So I mean, with that example, I think that it's kind of hard to compare them side by side like that, right? I mean, how many families willing to pay $8,000 in Lawrence Park are there? Versus the new grad that's just starting to work or actually gainfully employed and looking for that one bedroom, or one plus den, or two bedroom downtown, right. So there's certainly a wider audience of people downtown looking for that. So if you're looking at apples to apples in terms, call it $2,400. And, you know, that's the purchase price of the condo, and it started the rent of the condo, and then the purchase price a certain amount, Let's say if it's double, for the purchase price of a house, that kind of caliber, and you may or may not get double the rent of that, I certainly think you're going to get lower rents in freehold versus a condo downtown.

[CHARLES]:

So kind of the rule of thumb is a lower price per square foot as a rental and a home versus a condo?

[KEN]

For sure, because of the lower budget of the tenants, I guess generally, it might translate to low quality. I mean, that's not always true. Obviously, we know that. Just because you don't make the income Right now, it doesn't mean you're not worth a lot of assets, or your family's not worth a lot of states to some of the students from overseas or whatever. There are friends with a ton of assets, a lot more than what you and I have combined, times 10. So, but I guess the general rule of thumb is if they're making less money for the average, then you're looking at lower quality of tenant. Really, I guess?

[CHARLES]:

Well, you know, I guess it's based on income. And certainly, as we've been talking about, people want to live near where they work. And you know, not everybody works on Bay Street For Big Five accounting firm. So there's different options for different people. And where some of those options could be filled just outside the downtown core. In, for example, in East York, or in Leslieville, for example, or Etobicoke. And even actually, the downtown course a Parkdale there's multiplexes, there were people say in the hospitality industry that are not making the same money, as you know, somebody in legal or in the financial core.

[KEN]:

Or even even the ones that are and choose to rent. Like the big families out in more residential areas North York, and so forth, right? Lawrence Park and all that. That is a luxury rental, and they're paying 6-7-8-10,000 or more, Right? It's a smaller market for sure. But it's up there.

[CHARLES]:

Right. So ultimately, the demand for housing and Toronto, it continues, and there's different different options for different people. And you take that into account. And we get back to the math equation, which is, what am I paying for this investment? What's the type of tenant I'm going to get? What's my return? And versus what I get maybe higher price appreciation with a property that has land. But of course, then you have to look after the place, There's a lot of property management issues, less so than in a condo, where it's just peace of mind. It's being run by the condo Corporation. And there's less fuss about managing that.

[KEN]:

Yeah, exactly. So I don't know, you know, because our recording actually got cut off for the audience out there, we had to do this again, halfway through the thing. So we're not sure where we left off. But I know that we talked about having a one bedroom or sorry, condo is a lot less maintenance versus a house. I mean, although you could budget in, you shouldn't be budgeting the price of property management into it. So that you're factoring that cost into the model doesn't work without property management, it shouldn't work for you at all. Otherwise, you're just creating yourself a job, it’s not an investment.

[CHARLES]:

Right. And some people would say route, kind of a rule of thumb for freehold property is 1% of the value, annually. Would you subsidize it? Yeah. Would you subscribe to that?

[KEN]:

Yeah, I wouldn't subscribe to that because there's so many variables into it. I mean, a new home is not gonna have a lot less maintenance than a new one, right. Right. So It really depends on the components, the specific components as replace and repair and kind of do your due diligence as you're going to buy it, right?

Anyway, I think we also talked about what a one bedroom condo appreciate fashion and a two bedroom condo, and what should you buy? Right? We missed that comment. I think that got cut off. Right?

[CHARLES]:

It did get cut off. And we talked to both you an average of one bedroom downtown was about $2,400. And we talked about how a two bedroom will be about $3,500. But once again, we're back to the math on how if you're a couple, you need a bit more space, You want to go for the two bedroom, and then split down the middle that's $1,750 versus someone going solo and renting that place after $2,400 in a one bedroom?

[KEN]:

Yeah, for sure. So you could get more disposable income, so that the tenants would have more disposable income, which is great. Now there's situations where not everyone's a couple, right? You were talking about right? Joint and severably liable for the for the lease. So that is if you're going there with a roommate and one person decides to leave, Who's in charge of the household taken over?

[CHARLES]:

Right? Well, obviously to protect, you know, our clients, it's about writing the lease properly. So that those two people renting the place tenants understand that if one of them leaves, then the other one is still on the lease and has to pay the rent and full.

[KEN]:

Yeah, I totally agree. And, you know, Funny enough, the landlord tenant board doesn't say, they don't have any legislation against roommates. Right. And I mean, it's it's such a case by case basis, more of a civil basis, that they don't have any jurisdiction over roommates. Anyway, we were talking about how, in New York, it's kind of common to use the vocabulary of saying “roommates”, right, not even just “renting” or even “owning” for that matter. Forget to put that all together. But, you know, a lot of people say in their vocabulary, you know, “my rent is so and so”. But more so they added my roommate is so and so. Right, which is pretty unique, because I pretty interesting story. That's where I think Toronto is heading. And you were mentioning all the employment not suffering tough.

[CHARLES]:

Sure, sure. And we know that all the office space has been built and continues to be built in downtown Toronto. And with these technology, companies like Microsoft relocating from Mississauga to downtown, CNBC, housing 15,000 people in those towers by the Scotiabank Arena, because they know that the people that want to work for them, One of the attractions is to live in downtown Toronto. And certainly that's not only the amenities, but being close to all the great restaurants and events that are happening. And that's what makes it attractive. And what we're finding is, as these new buildings come online, there's a demand for these buildings to be up to be occupied, and the vacancy rates are still low, and the inventory gets sucked up, if you will, as soon as it comes on market.

[KEN]:

Yeah, I agree that. So We also talked about one of the things about the benefits of being in a condo is that you're closer to the action really closer to downtown, because you're not necessarily going to have all those amenities in the suburbs where an affordable houses and affordable rental is, right. Right, right. And we're also talking about the potential of building something as a strategy for investing, right. So you, if you're part of a development place, say that you buy a multi unit that eventually can be gobbled up, or even any kind of free world for that matter. And you can be gobbled up by the neighbouring parcels to kind of join them up together to create a roadmap. But realistically, you have to have that in mind. Because if you're going to buy something in the suburbs, and you're going to acquire two or three of your neighbours, and you try to build, you know, they're not gonna let you the city's not gonna let you build a big giant apartment building in the suburbs. But if you have a main street with you know, me likely commercial downstairs on a main artery, then you might get those approvals. So you kind of have that that with the goal in mind is an exit strategy.

[CHARLES]:

For sure. And, you know, obviously, the complications or the additional duties that are required to manage a property with one or two tenants in a condo versus a multiplex.

[KEN]:

Yeah, that's a, that's a big thing. I mean, I guess, one thing I should say is that, when you have a small multifamily property, you're a little bit more limited, and who you're going to sell it to, you're going to sell to sophisticated investor, or a family that wants a living there, Assuming the tenants in the basement or and you have to get all the tenants out, whether it's the purchaser doing it with the seller doing it, Somebody's going to get all the tenants out to you know, to stage it, to clean it up, to show it well to have access for showings and all that kind of stuff. So you can get on the market properly. Right. So that's also a consideration, you might be waiting a long time for the remaining tenants to leave and be vacant.

[CHARLES]:

Right? And I just want to point out, Ken, just the concept of buying a property and living in and renting out a basement or an apartment or what have you in the home. That's not a new concept. And It's not I know that my family when they immigrated to to Canada, Their first house who included an extra apartment, and they would live in one part of the house and rented out and we know that that's what people aren't doing as well. So it's not a new concept.

[KEN]:

No, you're right. Yeah, certainly isn't a new concept. But different though, is that the Toronto see they've changed it sorry, not trying to Ontario, for that matter, because of the need for affordable housing and second suites. They allowed zoning for all to have second suites as long as it needs building code and fire code. So the stock of housing supply has increased, potentially by double, but still not enough for the the pace of growth that we're growing in the city. That being said, Yes, I think having a basement suite for those deciding to supplement their income or have some tenant pay a portion of the mortgage off is great way to invest.

[CHARLES]:

Right. And I know of a person who's done that, and they couldn't be happier because they move out from a condo, They need extra space, they're having children. And of course, I think we know that, you know, larger condos, can get up there and price. And as well, the maintenance fees. So they look at the option of moving into a home with income potential to help them bridge that gap.

[KEN]:

For sure. And that's that makes the house definitely more valuable. So On that note, so the good thing about investing into a freedom is that the the potential of increasing the value of to create more income for the investment, I think is a good benefit.

[CHARLES]:

Yeah, it definitely provides more options. Now those options will could cost money, and more time to make those changes. But it definitely have more options than you would within a condo. But there's nothing wrong with owning an investment condo and having passive income. It's managed. You don't you don't have to look after it. And you move on.

[KEN]:

For sure. For sure. That's that's definitely a good attraction for condos. And why most people buy condos is because of the price point the the ease of it they the bigger market size, I guess it's a lower price point. So they're easier to be more commoditized, I guess you could say.

[CHARLES]:

Right. And thank God for condo investors in Toronto. Otherwise, all this stock would not have been built.

[KEN]:

Correct. And the city would have grown. Yeah, for sure. For Sure. That's that's actually a really good point. That being said, If you know we own several condos, ourselves, and I don't think there's anything wrong with condiment, I love controversy, it's a great way to build equity. Can I ask you, would you rather trade up? Two condos for three condos for a freehold?

[CHARLES]:

Well, that's that topic of today. I guess it kind of dovetails to what we've been talking about this afternoon can which is you'd have to, we have to do the math and figure out over time, price appreciation. We know for sure, It's going to take more time of your resources. So if you really value your time, I think getting into a multiplex means bigger, a bigger issue more problems and money required to manage those. Not that I would dissuade anybody from doing it. So I think it's always about being well informed about the pros and cons, this we've been talking about, for sure.

[KEN]:

And I know we've been interrupted number times, so I apologize for that. But I guess we also talked about building in the price of a property manager. So if you have a good property manager, they are able to take those headaches away from you for a fee, obviously. But of course, if you build it into your cost, then it's possible. So it can still be passive, and you still can get the other ways to exit the the investment or other kind of benefits of owning property, not just increased rents. It'll be through other avenues.

[CHARLES]:

Right. So and we're getting back to the whole location. You wants three condos in downtown Toronto, and a multiplex say in the suburbs? I think goes that's a different equation.

[KEN]:

Yeah. I don't know about the summers but multiplies downtown or closer to the city, maybe jumping up one tier of, I guess from A, B, C to D, I guess joined down one rank would be okay, but not going down to rank. So that makes sense. But from A to B to C, right. From A to B? Yeah, that's okay. I wouldn't mind. I'd probably do that. And I guess it's every every property is case by case every situation is different.

So I think the summary at the end of day is just get started.

[CHARLES]:

No question about it.

[KEN]:

The only way to do it. I think if you have a small condo, that's more commoditized, you can start If you don't own anything now, buy one of those things, buy two of them, buy three of them, let it grow and let it like plant that seed and let it grow like a little flower.

[CHARLES]:

Right. And then it provides you with options Above multiplexes as a result of taking that initial step.

[KEN]:

You can take those budding things of the flower and trade into turn into a tree and all that kind of stuff. That's it. I guess. Just get started.

[CHARLES]:

Get Started.

[KEN]:

All right, Charlie, good talking to you today. Thanks. Thanks for joining me on this podcast. And I guess we'll talk soon. Thank you.

[OUTRO]:

Well, I really hope you enjoyed that episode, and we've given you some food for thought. If you're interested in learning more, please visit www.BroadviewAvenue.ca and click for an appointment for a quick 15 minute phone call. We look forward to talking to you about your real estate investment journey. And thanks for listening.