The Coattail Ride Is Over

There are two kinds of Real Estate Investors - the ones who flip properties, and the ones who buy properties to rent.  The simple laws of economics gave birth to an enormous amount of flip investors within the past 5-8 years in Toronto.   In a serendipitous moment, some ingenious investors decided to ride the waves of the economic rise and fall.  They caught the market at the perfect moments where the market inflation resulted in lower dollar pricing, and the popularity of condominiums was in reach, but not yet entirely present.  In hindsight, this introduced our metropolis to a love of condominiums, giving style to life, and sensationalizing the grandeur of high rise homes.  In buying at the right moment, and selling at an even better moment, the pre-construction industry became a gold mine.  The flip investors had a whirlwind romance with our market, and word started to spread of the lucrativeness of this investment - 'I can put down 30k, let it sit for a few years, sell during occupancy, and make about 300% return on investment!'.  It became a fad venture, coming up as dinner party ice breakers, hot new gossip, and water cooler talk.  It was the safest investment one could make, and everyone wanted to do it.

This is where our simple supply and demand got a little out of hand.  The last of the flip investors to really make a pretty penny were the ones who bought 7-8 years ago, but everyone saw their pretty penny and tried to ride the coattail themselves.  This is what drove the demand up.  The suppliers went crazy, and ended up over supplying.  If you think back to your high school economics class, you'll remember that if supply goes up, and demand goes down, prices drop to drive up demand.  This didn't happen here.  This is where an unspoken word seemed to have spread, giving us the gas station affect.  An psuedo-oligopoly was formed, and pre-construction prices did not drop, instead they raised to unthinkable prices like $750/square foot. Meanwhile, the resale market was smoothly sailing at around $6-650/square foot.  What does this mean?  The last string of flip investors are having a hard time selling their investments, they are holding their unit past occupancy, and are incurring other costs to their investment.  Buyers have taken a stand and refuse to pay 450k for a 650 square foot condo with no parking.  Developments are suffering, and units are left unabsorbed, and flip investors are left with their tails between their legs.

The resale market is the strongest indication of the strength of a pre-construction investment.  If a pre-construction unit is selling for $700/square foot, and a resale unit in the area is selling for $550/square foot, there is an obvious ambiguity here.  If you intend to flip your property, look at the facts - a smart investment would be one were the resale and new construction are closer in range.

Does this mean investing is over?  No, absolutely not.  This means that the flip investing days are over....for now.  Landlord investing is becoming the smarter and safer real estate investment.  Purchasing a downtown condominium with the intention of renting it is always a smart move, because there will always be renters in the downtown core.  Allowing for your investment to sit and grow, to endure times like this, and live through them, is the smartest investment to make.