When it comes to condo investing, few concepts lead to as much debate as cash flow. Every financial expert has an opinion, and they’re often at odds with one another. The truth is, while it’s important to know if the property you’re thinking of buying will provide positive cash flow or not, the answer to this question won’t necessarily determine whether purchasing it is a wise decision. Real estate investing isn’t cut and dry, which is why it’s so important to understand the basics and tailor them to your situation.
In this post, I’ll look at if (and when) buying a cash-flow negative property is a good idea…
What is a cash-flow negative property?
Let’s start with the basics, for all of you first-time investors. Cash flow is a fancy word for a simple concept. It refers to the income you generate from your rental property, minus the costs of maintaining it. Sometimes these expenses—such as mortgage payments, property taxes, and ongoing repairs—are higher than the money that comes in through rent, parking, and laundry. When this happens, the condo is said to be cash-flow negative.
Risks and rewards
The rewards associated with cash-flow positive condos are clear. They put extra money in your pocket each month. The benefits of buying a unit with negative cash flow are less obvious—and it comes with some risks. If market conditions don’t go your way, you may never see the kind of returns you’re hoping for. And if you lose a separate source of income (due to a job layoff or because another investment takes a nosedive), the costs of maintaining the property could lead to financial strain.
That said, there are a couple of big reasons why some investors are willing to take on the risks of a cash-flow negative property. Namely: impressive sale profits or a fantastic rental income down the line.
While it’s true that nobody knows exactly what’s going to happen in the Toronto market, educated guesses can sometimes pay off. Using factors like historical appreciation rates and projected neighbourhood price growth, investors can estimate how much their cash-flow negative condo will be worth in a few years. Of course, it’s important to note that this is speculating—and it can be risky. That said, if you see a strong possibility for future capital growth (and interest rates aren’t slated to rise), you could be looking at a great investment.
If your end goal is to make money by renting out your unit, there are other factors you’ll want to look at. What’s the local rental market like? How much are landlords charging for condos in nearby buildings like yours? Is there strong job growth in the area? Is the community becoming a popular “it” destination? If you can accurately assess the situation, you’ll make a wiser (and more potentially profitable) investment.
Should you consider it?
Let’s say you find a unit for sale in an in-demand (or up-and-coming) neighbourhood. Not only is the location great, but it boasts fantastic features and amenities. There’s only one issue: it’s cash-flow negative. When you’re trying to decide whether or not to buy it, consider this. Every real estate investment comes with some risk.
Right now, you’ll find a lot of cash-flow negative properties in prime locations. I’m talking near the downtown core, on the subway line. Is purchasing a unit in an area like that really a bigger risk than buying one with positive cash flow in the middle of nowhere? Many investors don’t think so. They’re snapping up centrally-located condos now, with the expectation that rents will rise (perhaps slowly) while mortgage rates stay the same.
Purchasing an investment property—whether it’s cash-flow negative or not—isn’t a step to be taken lightly. If you’re wondering whether to take the plunge, the first thing you’ll want to do is seek out advice from trustworthy financial and real estate professionals. Whatever investment route you decide to take, remember that being informed is the key to a making a smart purchase!
Thinking of buying an investment condo in the GTA? I can answer all of your questions. Call or text me at 416-500-5360, or send me an email at rashid.notash@rogers.com and ask away!
