A lot of Toronto condo investors are subsidizing their tenants rent as of 2017. CIBC Economics crunched some numbers on Greater Toronto condo investors. They found a number of condo investors that took possession in 2017, are paying more on the mortgage than the rent collected. Despite the risky sounding approach, the speculative play is paying off so far.

Negative Carry

If you know what negative carry is, feel free to skip this section. For those that don’t, negative carry is when it costs more to hold an asset than you receive in return payments. If, for example, someone has a mortgage payment of $1,000/month, and only collects $900/month in rent, they have negative carry. They lose $100/month, to maintain the asset. No, people don’t do this because they’re terrible investors, they do it when they’re speculating.

People buy assets with negative carry, because they’re speculating on capital appreciation. In the above example, if the condo was bought for $300,000, and is sold 2 years later for $350,000, the owner would have paid $2,400 to subsidize the tenant. However, they would have made $50,000 in capital appreciation for a profit of $47,600, less expenses. Someone with negative carry is typically betting on a quick climb in the near term, so they can sell back to market.

Source: CIBC Economics. Better Dwelling.

Almost 56% of Condo Investors Have A Positive

Over half of condo investors that took possession of their condos in 2017, are cash flow positive. According to CIBC economics, 55.7% of GTA condo investors take home more money every month. The average cash flow positive investor takes home $380 per month. Pretty sweet considering they likely bought two years ago at pre-construction prices. This means they lost a little rent, but benefitted from the two years of capital appreciation.

Source: CIBC Economics. Better Dwelling.

Over 44% of Greater Toronto Condo Investors Are Negative Carry

The rest of those investors are negative carry, which is a pretty big number. 44.3% of investors that took possession of a condo in 2017, have negative cash flow. In fact, a whopping 34.5% of investors with negative carry, subsidize their tenants by over $1,000 per month. These investors haven’t lost money, since the capital appreciation is most likely larger than the loss on carry. This assumes the property will be able to be liquidated with gains in tact. Continuing to carry at a loss implies the owner is speculating on future price gains.

Source: CIBC Economics. Better Dwelling.

Cash flow positive or negative, most investors made a substantial gain on condos. The report notes the only headwinds that could impact that are record levels of supply, that will hit until 2021. The bank also notes that a rate rise of 200 to 300 bps, or a severe recession would also cause investors to abandon ship. A rate rise would imply the economy is doing really well. A severe recession would imply the economy is doing really bad. Basically, anything but middle of the road performance can cause investors to move on.

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