Historically, investors seeking income properties have sought out houses. Over the past decade, that trend has turned and more investors are opting for condos. However, condo investments can seem daunting and there’s a lot of data to consider. So, let’s cut through the jargon and get straight to the facts.
The best investment: studio
We went back 10 years and looked at every sale recorded on the Toronto Real Estate Board between 2009 and 2019. In assessing each sale, we calculated the selling price against the square footage, giving us the exact cost per square foot for each sale.
After aggregating the results, the studio – traditionally the smallest condo unit and without a bedroom – showed the greatest growth overall. Studios have the highest price per square foot (PSF) and have appreciated more than any other unit type.
The average studio purchased in 2009 had a cost PSF of $465. By 2019, that number grew to $1,080, an increase of $614 PSF. One-bedroom units showed the second largest growth, starting with an average price PSF of $457 in 2009 and growing to $1,001 by 2019; an increase of $544 PSF. By comparison, three-bedroom condos grew from $405 to $916 PSF – gaining a still impressive $510 PSF from 2009 to 2019.
When it comes to rent, three-bedroom units showed the highest growth – increasing by $1.85 PSF over a 10-year span to $3.92 PSF: From our experience, much of this growth is likely attributed to empty nesters who are downsizing from detached single-family homes and find modern one- and two-bedroom units to be too cramped. There’s certainly an argument to be made for catering to this crowd, though it’s not the best investment from a dollar’s perspective.
Studios had the second-largest rental growth, increasing from $2.75 to $4.59 PSF by 2019, an increase of $1.78 PSF; just seven cents lower than three bedrooms. Given the disparity in purchase price between studios and three-bedrooms and in growth as well, studios come out on top.
Potential drawbacks of a studio
When working with investor/landlord clients, we usually start by discussing the type of tenant you’ll attract within each neighbourhood and unit type. With a studio unit, you’ll likely be renting to a student or young professional on a smaller budget, as those with higher income will usually opt to spend a little more to get a bedroom. Tenants who rent studios are often short-term tenants, and the moment they can afford a one-bedroom, they’ll probably move. This results in a higher than average vacancy period, which can quickly offset the benefit of renting a studio at the highest cost PSF. A one-bedroom, however, where a tenant has a more adequate living space, will undoubtedly result in a lower vacancy period.
Another potential drawback with studio units is financing. Large banks in Canada have a history of being hesitant to approve mortgages for units below 500 square feet (many studios are around 450). However, banks look at these units on a case-by-case basis – units in popular, newer buildings or highly desirable areas are more likely to be approved than those in less desirable neighbourhoods or older buildings.
Bigger isn’t necessarily better
Of all the data we examined, the most intriguing conclusion wasn’t that studios were the best unit for investment from a dollars and cents perspective – it was that the smallest unit among its respective unit type (for example, a 500-square-foot one-bedroom versus a 650-square-foot one-bedroom) are better investments.
Units generally rent based on unit type, not square footage. If you compared the cost of rent for one-bedroom units in the same neighbourhood, you’d find that the prices are mostly on par with one another. That’s because rent is based on the unit type as opposed to the actual square footage.
But when units are sold, square footage carries a lot of weight. This is where things get interesting, because if your goal is to rent a unit out over a number of years, you could save money by purchasing a smaller unit, secure in the knowledge that it will rent for roughly the same price as a unit of the same type that might have a larger (and more expensive) floorplan.
A common principle of real estate investing is to invest in a property that you’d personally enjoy living in. Maybe it’s time to make an exception? There are plenty of people who would never live in a studio, but there are just as many who would – why not rent it to them?