condo with minimal prospects for appreciation

[torontowest]

I'm looking at a condo unit in a building which generally sells for prices that are way below the market norms for the area and the city. The condo building itself is older, built in the 60s but well maintained, and the maintenance fees are average and in line with what you would expect to find in a newer building built in the last 20 years.


PROs


- low rise, only 6 storey building


- quiet building, mainly mature owner-occupants and seniors citizen owners


- very few sales per year, out of a total of 75 units, less that 4 units come on the market per year on average over the past 5 years


- spacious 1BR unit with a balcony


- in a convenient location and can be rented easily, decent curb appeal


- cap rate 7.11%





CONs


- very little upward movement in price over the last decade, only gone up about 11-12% since the early 2000s - present


- because of the age, guessing that there might be major repairs coming up in the next few years which may cause the condo maintenance fees to go up (will have to confirm this by looking at the stat cert)


- the condo building is in an area that is "up and coming" but this in only 1 of 2 condo buildings on the street, there are similar building adjacent and across the street but they are all apartment buildings, this one may have been a conversion at some point in the 80s. There are visible signs of major work being done to beautify the other adjacent building and usually that is a good sign.


- Days on the market is quite high 2x - 3x the average for the city but similar to other units of this age, structure and area





Question:


Is this a good investment, I have calculated a positive cash flow of approx $2647/year in addition to the mortgage paydown of approx $2355 in the first year alone (25 yr amm, 3.49% fixed). My main concern is will I be losing out if the building does not appreciate? Is it a good strategy to just buy, hold and reap the benefits of the cash flow and principal pay down with an exit strategy for getting out when the monthly maintenance fees hit a threshold of say $500/month.


Any input would be greatly appreciated.

 

[bizaro86]

That sounds to me like it might be a good prospect for future appreciation, if this area is undervalued compared to the surrounding areas. Is this type of unit in this area priced at less than a similar unit in another neighbourhood? Because if the area is improving, you would expect the real estate prices to also improve to be comparable to the newly-comparable neighbourhoods.


I would be very careful in assuming that whatever has happened in the past with regards to appreciation will happen again in the future. You can't just extrapolate forever. (Well, you can, but you'll be wrong).


Real estate should eventually sell for its intrinsic value, and if this property is below its intrinsic value for the city, then it sounds like a good buy to me, although admitedly there aren't enough numbers there to make a firm determination of value.


Good luck!


Michael

 

[housingrental]

Hmm I'm suprised you can find something with that high of a cap rate in an apartment condo


Please post your numbers on how you came to that calculation

 

[MrHamilton]

Hello Chen Kumar,

I agree with Adam, you'll need to post all the numbers for us to gage the financials and your assumptions. Have you been inside the building yet? Have any of the units been renovated? How do the rents compare to market value? Ask the listing agent why its the building is priced below market norms and why its sat on the market for so long. The vendor might not be motivated and is "fishing" as I like to call it. Where is the property? If it were in Hamilton I would be able to provide your feedback on the building as I've probably seen it.

Best Regards,
Erwin

 

[Thomas Beyer]

more details please on:


a) price


b) condo fees


c) taxes


d) rents





Generally, a 1BR is hard to sell. But, if you can make a 12-18% ROI in a flat market on 20-25% down .. WHY NOT ?





Very important to look at reserve fund and state of major items like roof, parking lot, boiler, hallway carpets, windows as those cost a lot to repair and will eat your cash-flow quickly.

 

[EdRenkema]

More specific numbers needed, as Thomas indicated look at reserve fund and have s/one else experienced in condos look at the condo docs. If the reserve is sufficient it will account for upgrades which will be upcoming. Also research whether the condo fees include limited common property such as windows and exterior doors etc and calculate those as they factor into purchase price & general condition of building & unit itself.


A true investment makes money whether its value appreciates or not. So think about that when calculating your cash flow.


Another thing to consider is desirability and how difficult it will be to attract tenants as this is often a function of more than just price.