Suckerville

Best estimates are that half of all new condo sales are to investors. Well, they may call themselves that, but in reality they’re cannon fodder for the real estate development business. Without them, prices would be lower, urban skylines not be pierced by cranes and reasonable companies would be building nice rental accommodation instead of acres of concrete boxes fetching a grand a foot.

(Actually a new launch in Toronto’s Liberty Village this week boasted of prices ‘only in the $1,200 range – $200 to $300 less than standard.’ So a 445-foot apartment – barely large enough to swing the average cat – is on for $544,000. Plus $6,500 for a locker and $75,000 for a parking spot. Yikes!)

Why do investors snap up precon units, buying real estate that doesn’t exist yet which has no dirt?

First, it seems cheap. Five grand down. Another 5% in a month, with the remainder of the deposit spread over a year. Second, condos always go up, right? Your friend Vinny’s cousin’s girlfriend made out like a bandit on that unit, somewhere, that she sold on assignment before construction even finished. So this is a sure thing. And then there’s the visceral pleasure of potentially being a landlord, and ‘letting someone else pay your mortgage.’

It’s a pitch that has lured tens of thousands of people in the past couple of years, and kept those cranes going up. Yes, some folks have made money. But many have not. And many, many more may learn the same lesson – these days landlords subsidize renters, not the other way ‘round.

A suspicious blog dog recently sent me the pitch for a new condo building in Barrie, where the elk and caribou go to diddle and mayhem reigns on Hwy. 400. Aimed 100% at amateur investors, it promises to double your money in three years. Could this be true?

It turns out a one-bedroom unit of 563 square feet sells for $410,000 – which is cheaper than Liberty Village, but you need lithium battery-powered thermal undies to live there. A 20% deposit of eighty-two grand leaves a mortgage of $328,000 and combined with condo fees and taxes, the monthly nut is almost $1,900.

The developer says this will command rent of $1,830 – which is brazenly optimistic, since the market rate in Barrie is $1,400 for a one-bedder (a whole house can be rented for less than two grand). So the odds are an investor would be in negative cash flow from the get-go.

So how do you double your money in 36 months?

Here’s the formula given to the suckers contemplating a purchase:

Click to enlarge. Wear protection.

Turns out the modest (and inflated) positive monthly cash flow is added to the reduction in mortgage principal over the course of three years, then goosed wildly by an anticipated $64,600 increase in the value of the condo unit. That totals a $94,670 ‘return on investment’ of the $96,231 an investor spent. So the logic is you receive 98% of your money back, which is an “Average Annual ROI of 32.79%”

Really?

In actual fact, a buyer would have received (maybe, if lucky) $245 per month while actually spending $96,231. That’s cash flow of $8,820, for a real-world ROI of 3% – about the same as a GIC, and taxed at the identical rate. The only way an investor could realize more is in the event of (a) a sale and (b) at the fantasy future price. Of course, that would come after paying a commission of $28,500 (plus HST) which would seriously reduce any potential return.

“Double Your Money in 3 Years!” is a lie. Shame on the marketing company which produced this material. Shame on the regulator for allowing it. Shame on Hersh Condos for preying on the gullibility and greed of others.

But if you really want one, these beauties are available for four hours only, next Wednesday afternoon. In Toronto, of course. Barrie isn’t safe this month. Bears.