Those who brush off concerns about the Toronto condo market’s ability to absorb the record number of completions expected this year point out that many of those units will supply Toronto’s rental market.
From a planning perspective, the only difference between a condominium and rental building is ownership structure. Both are technically apartments. So, at what point does a condominium complex become a rental apartment?
Twenty-five is Dan Barnabic’s magic number. It is the percentage of rentals above which he discourages prospective condo buyers from purchasing a unit within a particular complex. In fact, it is one of his 10 commandments of condo buying in his book, The Condo Bible for Canadians: Everything You Must Know Before and After Buying a Condo.
Barnabic is a consumer advocate with a background as a real estate agent, broker, property manager and condominium developer.
When condos were originally conceived in the 1960s, they were meant to create an affordable alternative to traditional home ownership, he writes. Many renters bought in.
Then came the real estate crashes of the late 1980s and early 90s, and from 2006 to 2008 in the United States. Many condo owners lost their units to foreclosure, leaving some buildings with a surplus of vacant units that would not sell. Re-enter renters.
The only exceptions Barnabic offers to the 25-per cent threshold are condominium complexes located in high-demand, downtown cores and touristy areas, like Miami Beach.
“(Failing this) your building, your property which you call your home, to which you have your own, separate deed to a unit, will all of a sudden become part of the rental inventory,” he says. “And as the condominium complex is nothing but an apartment building, except it’s legally structured to be a condo building, the difference between condominium and apartment building will eventually become purely academic.”
Tenants simply do not have a stake in the well-being of a condominium building, he says. Not all tenants are bad, he concedes, but the few who are may engage in behaviour that results in unnecessary repairs to the common elements.
What worries Barnabic is the possibility that the higher maintenance and repair costs he associates with heavily tenanted buildings could come to exceed the costs of owning a unit. Put simply, if condo fees and realty taxes exceed the cost of rent, why own a unit? In that scenario, faced with closing costs and the prospect of losing money if the economy goes bust, a prospective purchaser is likely to prefer the option of renting, he says.
Ironically, heavily tenanted buildings, the direct product of investor-owners, may turn off future potential investors.
“If the condominium complex is heavily rented out, it gets stigmatized,” Barnabic says. “This absentee owner complex gives investors a red flag that this may not be as properly run a complex as it should if all the owners are actually occupying the units.”
He says that condominium boards should pass bylaws to restrict rentals in their complexes. (Such a measure has previously failed when tested in Ontario courts.)
If challenged, Barnabic says condo owners should lobby the government to empower them to do so via the Condominium Act.
“Make it fair to the condo unit owners,” he says. “The only way to preserve the condo value in the future is to ensure the condo does not degrade itself to the apartment building rental unit.”
Michelle Ervin is the editor of CondoBusiness.