There’s no shortage of people lining up to invest in the city’s burgeoning condo market — many of them mom-and-pop investors who see rental units as a hedge for their children against the increasingly unaffordable property market. Others are self-employed individuals without a pension who view a condo as an appreciating asset to help fund their retirement.

But real estate experts are warning that the investment scene will shift in less than five years as the cost of condos continues to climb at the same time as Toronto tenants show signs of hitting a wall when it comes to paying for an apartment.

That will have significant cash flow implications for property investors because rent won’t cover the monthly carrying cost of those units, said Shaun Hildebrand, president of market research firm Urbanation.

“I’m not sure that condo investors that have been active recently in buying pre-construction units fully appreciate how much supply is underway in the condo sector and what that will do for their assumptions for returns,” he said.

Rents that rose about 10 per cent a year from 2016 to 2018 will likely increase at a more moderate five per cent annually for the foreseeable future, Hildebrand said.

“For a little while it’s going to feel like we’re building enough rentals because there’s going to be a lot of investor-held units coming into the market, but it’s going to be temporary,” Hildebrand said, as this year will see an unusually high number of rental units coming online.

Condos represent about 20 per cent of Toronto’s rental housing market.

Those who marvel at the city’s expanding skyline should prepare for 30,000 condo completions this year. That’s compared to about 20,000 last year. As many as 10,000 new condos could be ready for occupancy in the first quarter alone, Hildebrand said.

On top of that, there will be 3,579 purpose-built rental completions in 2020. That’s not a huge number but it is more than the last 20 years.

By 2023-24, however, when the next wave of development comes up for occupancy, Hildebrand says condo investors will need about $4,000 a month to carry those units based on a 25 per cent down payment and a 3.5 per cent interest rate.

But he doesn’t expect tenants will pay 60 per cent more than the current average of about $2,500, even though there are no rent controls on new units.

“There is a tipping point,” he said, and Urbanation research shows we may be close to hitting it as rents barely rose between the second and third quarter of last year.

“We’re seeing a big shift in demand for micro-units, small studios that are really the only type of unit in today’s market that’s priced under $2,000 a month. You’re starting to see some migration from the downtown markets into the 905 where it’s cheaper; renters are gravitating to older buildings,” Hildebrand said.

In November, the average resale transaction was $617,658, according to the Toronto Real Estate Board. New construction or pre-construction units were selling for $866,827 on average the same month, said the home builders association.

Hildebrand doesn’t think investors will change their behaviour until they see red ink at the end of the month. Even then, he said, it won’t have a dramatic impact on the condo market.

“Those investing in new condos today are incredibly optimistic about the future. If you’re buying after a 50 per cent jump in prices over a three-year period, you have to be pretty optimistic about the outlook for the market. It’s going to take some change in the economics first before (investor) behaviour starts to shift,” he said.

“The condo market is so large now that some investors selling from completions isn’t going to be a major event for prices. It’s going to change the trajectory to some degree but it’s not going to cause a massive flooding of units in the market,” Hildebrand said.

But Toronto real estate broker John Pasalis calls the discrepancy in condo rents and prices one of the “big vulnerabilities in the market.” It’s less an issue for investors who bought five years ago than for those who paid higher prices in the past year or two and are still waiting for their units to be built, he said.

His Realosophy brokerage in Leslieville is seeing so many would-be investors that it is developing tools so agents can advise clients on which condos will rent for enough to cover their carrying costs. While there are investors who are fine with a negative monthly cash flow, many of the aspiring buyers are using their homes or lines of credit to finance an investment.

He says it’s similar to the consumer behaviour that helped build the froth in the Toronto-area real estate market in 2016 and early 2017.

“It’s this envy, it’s this psychology. The only difference now is it’s condos not houses,” he said, although condo rents at least come close to justifying the income prospects of the investments.

Still, Pasalis says, “what happens if prices don’t catch up and the condo’s not even worth what they paid for it?”

Some condo buyers could find themselves in a similar situation to those who bought pre-construction houses three or four years ago, only to discover a year or two later when the market cooled that they were obligated to close on homes that were worth less than they agreed to pay.

“If that happens, and I hope it doesn’t, we’re way more exposed because there’s way more (condo) units and there’s way more units in the pipeline, so it would be way messier,” he said.

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“When they take possession in four years will they generate the rent? Are they going to break even? I don’t think they are,” Pasalis said.

“There’s a cap to what someone will pay for a one-bed rental,” he said.

He cites one instance of a downtown condo listed for about $2,350 a month. Nobody would rent it. When the price dropped to $2,100, there were 11 interested parties. Even an extra $200 a month is a lot for tenants, Pasalis said.

He says that’s where pre-construction condo investors may not be doing their math.

“If they can’t cover themselves, people are just going to start selling their units,” he said.

Ryan Coyle, a broker at Connect Asset Management, has spent 15 years advising investors — many of them mom-and-pop clients — on how to buy property with an emphasis on maintaining positive cash flow.

So far he says all his clients with units in downtown Toronto are seeing positive cash flow. But that is becoming more challenging as the price of real estate outpaces rents.

There are other ways to boost rental cash, including investing in what he calls “value neighbourhoods” and renting units as executive suites. His company has a property management arm that facilitates rentals to workers in the film and technology industries, who will pay about 10 to 20 per cent more on average for an apartment than a longer-term resident. Coyle is careful to distinguish from Airbnb-style accommodations that are now being regulated by the city.

But some investors will bear a monthly negative on a condo in favour of longer-term appreciation on the unit.

“A lot of people want to park their money somewhere safe and they’re into the capital appreciation,” Coyle said.

“If the market’s appreciating 10 per cent a year and you’re losing $200 a month, you’re better off than gaining $1,000 a month and (the property) only appreciating two per cent,” he said.

“But I think there’s a lot of mom-and-pop investors in Toronto and they want the cash flow,” Coyle said.

Sometimes investors will put more money down in order to ensure they end up in the black at the end of the month.

But Coyle said monthly concerns about cash flow are secondary to the desire just to get into the market.

“The biggest sentiment in the market is that people want to get into the market. Cash flow is not the biggest driver. It’s really just getting in,” he said.

Correction - Jan. 14, 2019: This article was edited from a previous version that mistakenly said condos represent 35 per cent of Toronto’s rental housing market.