One-year condo investments are a dangerous game

 

Investors who purchase a condo unit with the intention of selling for a profit within a year are playing a dangerous game, says one real estate expert.

"Timing the market is always high risk and a majority of investors jump in ill prepared,” said Freedom Malhotra, a sales representative at Condo Planet. “They are playing a dangerous game, but they are not alone.”

CMHC’s Condominium Owners Reportfound that, among respondents who have purchased a secondary condo unit as an investment, 12 per cent intend to sell it for a profit within a year of purchase.

That could be problematic if they have no contingency plan in the event that their condo can’t sell due to an oversupply of units at the same price point, argued Malhotra, also pointing to the possibility that a desperate seller may drop their price, which could make the sale unprofitable for other investors who want to sell.

But the 58.4 per cent of respondents to the CMHC survey who intend to keep their secondary unit for five years may have the right idea. “When you buy and hold, you don’t have to worry about timing the market,” explained Malhotra. 

“Historically, real estate in big cities such as Vancouver, Toronto and Montreal has always appreciated within five years, so as long as you don't buy above market value and crunch the numbers, you should be very happy with your investment.”

The report, which is part of CMHC’s 2014 Canadian Housing Observer, also found that more than 40% of respondents do not have a mortgage on their last purchase and, for those that do, most had a down payment greater than 20%.

Shaun Hildebrand, senior vice president at Urbanation, said this is good news. “So, if there ever was a correction, it appears that the vast majority of investors would be well insulated from going ‘under water’.”

However, Hildebrand also added that the survey misses the ‘flow’ of new condo units coming into the market, which is where less information is known about investors.

“The survey only included 7% of respondents who purchased a unit that is still in presale or under construction,” he said. “Since a large volume of condos will be coming to completion over the next few years, it would have been more meaningful to capture their intentions and equity positions.

“That would provide us with a sense of where supply growth will be directed in the coming years (i.e. for rent or for sale) and allow us to better assess risks in the market.”

                                                                                                        Artical by Jennifer Paterson

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