$8.7 Million for a Condo You Can Only Live In 120 Days a Year

I almost get the math that would justify the purchase of a hotel condominium listed at Trump Soho (warning: the hotel website has music) for just over $8.7 million. As a hotel condo, you are allowed to use your unit for no more than 29 consecutive days in any 36, for a maximum of 120 in a year. The rest of the time it is added to the rental pool and offered to hotel visitors.

Owners of hotel condominiums still pay condominium and taxes all year long. In essence, it’s exactly like a rental property that you buy and hand over to a rental pool to manage. You get a cut of the profits and the management company takes a bit. As it’s in a rental pool – revenue is split between all units each month even if they all weren’t rented.

If the general rule of thumb is 1/16 of the price of housing is what you can normally rent it for so let’s assume a more generous 1/15, and add in an 81.5% hotel rental occupancy use and the room should go for.

Because there are room rates online for the studio units (425 sft) which match some of the available units for purchase, let’s try the math. This unit lists at $995,000.

$995,000 / 15 / 0.815 / 245 (days available) = daily room rate required. That works out to about $332/night required rental rate. Currently the hotel is offering ~435/day ($1.03/sqf/night) for room bookings, based on blended rates listed for units of about 420 sqf on the Trump Soho booking site.

Ok – that seems plausible that there might be an opportunity for the owner to actually make some money on the purchase. Don’t forget the owner is paying a fixed price (taxes, management, and hotel operation) no matter if the unit is rented – while the return from the pool is affected by the occupancy and average nightly rate. A 31% mark up over required daily rate might be enough to cover the costs of operating the hotel and miscellaneous costs.

All in all hotel condominiums may not be for the faint of heart. One would assume that if all the numbers where known, the management company is likely putting the following offer forward: the purchase should return about 4% (much like a good bond) with the bonus of 120 free days of living in Manhattan.  I really think that’s how simple the formula likely is when trying to sell the units to investors/part time residents.

So that $8.7 million unit – should return about $29,000/month in revenue, and cost (thinking that one couldn’t rent for less than a week such a large unit) about $17,000/week.

Patchogue Village Board Completely Wrong in Believing Rental Units Reduce Property Values

On Monday, the Patchogue Village Board unanimously under ignorance, denied an owner the right to rent their unit. The trustee that tabled the motion – Gerard Crean believed it would help protect property values.

First off, the whole “gotta protect property values” is a bunk argument. The role of the board is not to “protect property values”. I’ve not seen a single bill of legislation that has indicated the role of a HOA or condominium corporation is “protecting property values”. They often indicate a mandate to maintain the physical infrastructure and to ensure services. Arguing property values is just a weak excuse a board uses to falsely justify their often ill and often mean decisions. You ever hear “we did this for property values” know that there is likely some sad decision that the board has made.

But let us also evaluate this argument that allowing rental property reduces property values. The neat thing is, the argument is completely false.

An in-depth study by Tsur Somerville – Director University of British Columbia Centre for Urban Economics and Real Estate, Sauder School of Business, Chris Kay – Head of Acquisitions, Fairmont Pacific Development Ltd, and Seang Dong – PhD Student, Sauder School of Business found:

Rental Restrictions in general Decreases property values by 3.3% to 5.4%.

Wow. That is substantial.

Tangential to this, we can also look at the effect of affordable rental housing on neighbouring property values. “Affordable rental housing” often causes shivers in local owners, as they imagine hordes of smelly dirty people with chipped teeth and pan handling tins at the ready invading their neighbourhood. What really happens to property values as found by the Real Estate Board of Greater Vancouver relying on American publications:

There is increasing evidence that affordable rental units are not a threat to local property values and are instead a net plus.

Yup – those huddling masses of poor (our imagination of them, not reality) are a net plus. So if we’re talking about private owners renting their own asset, who aren’t seeking tenants who are the huddled poor, the positive value should be even better.

And an article by Smart Money indicates that no-rental policies are more likely to force foreclosure or empty units, as depriving an owner of rental income to pay their condominium fees places greater units into fiscal failure. With multiple units in foreclosure, values of the other units are significantly reduced. For single family houses – each one within a block will decrease the surrounding buildings by almost 1%. Especially in today’s market boards should do everything they can to stop foreclosures.

The Iowa Property Owners Alliance indicates:

An outright ban on rentals may not make sense, particularly in an economy where there are many properties on the market. An HOA should consider if it would rather have vacant properties or occupied properties with renters. Additionally, some buyers may be reluctant to purchase a home in a community that does not allow rentals, so an outright ban could also lower property values by creating less demand for properties in the community.

All arguments point to the justification (which is a stupid justification all on its own) that “rental reduces property values” is completely bunk, wrong, stupid, and dim witted.

Remember how I said above that if you hear someone use the property value excuse to justify a sad board decision, it applies is spades to Gerard Crean and the Patchogue Village Board. They denied Lori Patton the right to rent her unit to help cover the costs of treatment for her two-year-old daughter’s rare blood disorder. It is a disorder that requires costly transfusions and, at some time, a wonderfully expensive bone marrow transplant.

Way to go Gerard Crean and the Patchogue Village Board! You win the current award for “stupid decisions that show you have no humanity, using arguments that are completely contrary to facts”. You. Are. Awesome.

More links indicating rental effects of property values:

How Do Rental Properties Affect the Neighborhood?
There Goes the neighborhood: The Effect of Single-Family Mortgage Foreclosures on Poperty Values
Field Guide to Effects of Low-Income Housing On Property Values

Board Insanity Stories #98457892374 – Only Allowing Rentals to “Families”

I’m not sure I want to even start with guessing what the definition of a family is – blood relationships, marriage, are adopted children ok, how about a two person same sex union, or one lady and seventy-two cats?

Thankfully a condominium corporation has been able to figure that out for me! Carleton Condominium Corporation No. 24 of Ottawa, Ontario, has been able to clarify that challenging definition:

unit owners can only rent to single families, which includes parents and children, married couples or people in a ‘conjugal relationship,’ two or more persons intending to live together permanently, two or more persons who own the unit, or someone who is a caregiver for someone else.

Caregiver? Really – an assisted living support nurse can be family? The intention to live together permanently (really, how can that ever be challenged or proven) is a definition of family – so Felix and Oscar, or Bert and Ernie, those lovable non-gay roommates, would count?

What’s up is Carleton Condominiums attempting to remove student renters from their condos, whom occupy about 20% of the units. The board claims these student rentals are rooming houses renting by the room, with upwards of 8 people per unit. The condominium is close to transportation and popular with students.

I’m pretty sure this will be appealed to either a court or the Human Rights Tribunal of Ontario.

As to that definition of family, I love the idea of “conjugal relationship” – does that mean if each of the eight students commit to some sort of regular orgy that they classify as family? Right on – I knew university is supposed to be an awesome experience!

Toronto Condo Sales Are Freaking Insane – Still Think it is Speculation Driven

Toronto is Hot Hot Hot baby! The National Post is reporting – for only January through August 2011 – 18,055 new (NEW) condo units were purchased for $8.1 billion. That’s about $449,000/unit. Like I said – HOT!

We know that more than 50% of those are investor (non-resident) purchases which run highly leveraged (usually 25% down) . The Financial Post runs a good article where one of the showcased examples is an investor with seven properties – holding 2 million in value with 700k equity.

Based on some averages, the investor is spending about 100k/year on mortgages, condo fees, insurance and tax. The investor – if 100% rented all the time is likely pocketing about 34k/year. The game here is the investor is hoping the 7.5% yearly appreciate in condominium value for the last 15 years continues. With that, he’s pocketing and extra $150k/year. Not bad for the risk – $185k/year in income and equity.

So here are the concerns.

For the full year, Toronto may add upwards of 27,000 new condo units on top of current inventory. That’s 45% more than any other year on record. There is also that much inventory slated to be added each year for the next 3 years.

Second, real estate is hot because US, Europe, and many other jurisdictions are facing or have experienced a housing crash with no certainty of recovery. While New York announces the most expensive pre-sale units in history, large multi-story developments have been shelved right left and centre. If Europe tanks, housing prices are going to go low, low, low. With that, international investors have been buying Canada because of our stable economy and the start power of Mark Carney.

When local markets pick up in the US and Europe the money parked in Canadian real estate will flee back to their home countries.

Finally, even in the Canadian banking town Toronto (and I’ve said that banking cities will always perform well for real estate compared to the rest of the country), incomes are flat and the middle class is being squeezed (Bank of Canada indicated last month that income disparity grew significantly last year). That means there is a question if rent levels (which equal investor cash flow) can be supported – or if they will stagnate.

If we are lucky, because Toronto is our financial capital, we could see Toronto continue to appreciate every year until we have prices similar to New York. It’s not out of the question. But investor money is fickle. Both foreign and local money is sensitive to price change, and a slow down in Toronto cost per sqare foot will create a feedback cycle that would be vicious.

Toronto and Singapore Experience the Shoebox Condo

Some trends cover the world, but the underlying reasons may be different. For example, Singapore and Toronto both are experiencing a surge in shoebox condos (500 sqf or less) but for significantly different reasons.

With Singapore, prices on condominiums are averaging $1185USD/sqf – putting the price of anything lager than shoebox well outside the financial means of most local residents.

In Toronto, price is not nearly as sensitive (running about $630USD/sqf), but tax legislation is pushing units to list at $390k or less or suffer, and one bedroom condominiums now make up almost 60% of new construction. This forces smaller shoebox units to be built in order help create consumer choice in a market that prefers one bedroom condominiums.

In both cases though – Singapore and Toronto are both seeing massive preconstruction sales to investors and foreign buyers. This is likely a strong incentive to build shoebox condominiums, as they become more “affordable investments” and require smaller capital down. If that’s the case, shoebox condominiums are creating a new form of downtown transient population – encouraging renters to populate the cores of each city.

I live in an 1150 sqf 2 bedroom condo – with wife and 2 cats. At 500 sqf, one of those would have to go! (I love you hunny!)

Owners Throw Hissy Fit Regarding Tenants with Mental Illness

There is an awesome line I once heard – “if you have to spend time explaining what you aren’t, you likely are”. Hence the snicker I had when I read the statement from Michael McMahon of the Admiral Dewey House condominium, in Framingham Massachusetts:

None of us want to come across as ignorant, or superstitious, or prejudiced, but…

Ah, then of course you’re not coming across that way.

The residents of the Admiral Dewey House are upset that two of the units in the building (of 20) have been bought by Cascap Inc – a non-profit that owns and manages properties for state contracts they have. The issue arises that Cascap bought the properties to meet a contract from the Department of Mental Health – to house people with mental illness.

The situation seems pretty clear cut – the units were bought by a corporation, and as such Cascap Inc are not live in owners. The people there will be classified as tenants. Cascap Inc. tenants will have all the same rights, responsibilities and requirements of any other tenant renting a unit from another owner. The corporation and the owners have no extended rights to violate the privacy of these or any other tenants. Neither can they deny the rights to rent, or to inhabit, based on those silly things like race, gender, disability or sexual orientation.

As to the specific issue of these two units being rented by Cascap Inc under contract with the Department of Mental Health – well Mr. McMahon has this to say:

If you think that somebody who is purchasing a unit doesn’t take that into [Cascap Inc’s] acquisition decision, their purchase of a property, then you’re crazy.

Nicely chosen words there Mr. McMahon. Of course you aren’t ignorant, or superstitious, or prejudiced.

How Much Can I Rent My Condo For

The easy answer is “whatever a tenant is willing to pay.” That answer though makes it difficult as an owner to predict the average rent that can be charged over a period of 5 or 10 years, and thereby determine if it is economically feasible to rent their unit, or if they should simply sell.

It’s an important decision – because margins on rentals can be very thin if the unit is highly mortgaged.

Certainly part of the process is to check what similar units are renting for, near where your unit exists. Maybe it also includes looking at some historical rental data. But good planning usually involves a bit of a formula.

There are two formulas – one on average income, and one on the unit price.

Average Income

As an owner, look at the average income your tenant may have. When we rented our unit – a two bedroom – we assumed a young single male with either a female or male roommate. In Canada for 2009 A non-elderly male (average) and a non-elderly female (average) make 40,600 and 35,800 respectively. Combined they would have 76,400 in income (both before tax).

The maximum a person should effectively pay in rent (including utilities) is 30% pre-tax. Because our condominium includes water, waste and electricity in the condominium fee, we don’t have to factor those into the 30%. So from an average income perspective, we should be able to charge about 1910/month. This turned out to be well over what the local market turned out to be – probably because other units don’t include electric, and maybe we are thinking that one or both might be students, which might reduce the (average to non-earner) income. If we change the female to non-earner, her income goes to 18,100 – or now a total income of 58700. 30% of that number is $1467.50/month, and if you subtract utilities (to be competitive with the market) then you get about $1387.50/month expected rent.

Unit Price

There is a rule of thumb that indicates if the cost of the unit is 15x or less the rental cost (yearly basis), then people will migrate from renting to buying. If the unit is 16x or more the rental cost people will continue renting. The smaller the percentage of the unit they pay per year, the better the odds of renting the unit. The sweet spot seems to be 16x or higher cost:rental makes better economic sense.

Assuming that we want to charge the highest rent, but still have it make worthwhile sense to a renter, we want to charge a rent that is 1/16 the cost of the unit. If we were desperate to rent the unit, we might charge 1/17 or even 1/21 of the cost – both being much more attractive to a renter. The city of Calgary places our Fair Market Value at $248,000. So our maximized rent would be 248,000 / 12 (months) / 16 (our ratio) = $1291. If we subtract utilities, we would be renting at $1211/month.

Which Formula Works

We are successfully renting our unit at $1200/month. It’s in line with the other local rents, and is competitive for both the city and the rental market (which changes as rental occupancy goes up and down). From a personal perspective, the Unit Price approach seems to be easy and very close to the actual rental amount. We should be aware though that if the rental market softens, we could expect to see rental rates at lower then 1/16 – if it was at 1/19, then the market would likely only support $1007 rent (or 17% cheaper), something we should be aware of.

The income ratio tells us the type of people we are likely going to be interviewing – with a pre-tax income of rent X 12 / .3 or in our case (at $1200) about $48,000 before tax.