As most of you already know, I have been and continue to be very critical of the concept of condos as a good real estate investment strategy. The truth is very evident, as I explained here and here.
It is highly unfortunate how some investors have been, and continue to be, seduced by some very good sales people using very liberal assumptions about expected returns and cash flows on these projects.
One of the most recent examples of these shenanigans are Waterloo Student Rental Condos.
Heck, even Michael Wekerle, former Bay Street trader, technology investor, Dragons’ Den judge and now real-estate mogul has now gotten into the game, as you can see here. Michael is innovative and plays a good game. In fact, I myself love his investment strategy.
The main issue is not his investment strategy. Michael is much more of a marketer who touts Waterloo condos as a manufacturer and builder of Waterloo condos, rather than as a unit owner/buyer of these same condos that he is touting! That is where he is making his investment returns. By building and selling these condos, not by buying and holding them as investments!
What he is selling is a totally different animal than what he himself is actually investing in.
As further illustrated in this CTV news story.
“Some of those condo projects are good investments, but a lot of the time it’s people speculating – buying a condo thinking that in two years, before it’s built, they could resell it and profit.”
Don’t get me wrong, I am big fan of student housing investing. As I always practice what I preach, I can confidently and proudly say that I own student housing investments myself that are hugely profitable and spit out incredible and actually real positive cash flow each and every year.
However, the key here is not only having great knowledge about what is driving the real estate market in general in any given region but to also have a keen understanding of supply and demand dynamics pertaining to anyone niche, such as student housing.
So it is easy to be seduced by the real growth, low vacancy rates, increasing infrastructure spending, etc. occurring in Waterloo Region. However, if these would be investors, fail to realize that the market for student housing is limited to the student populations located within the confines of this very same growing region, then you they are unwittingly taking on more risk than they may realize.
Combining this reality with further seductions of guaranteed first year rental occupancy, without asking “what happens after the first year” or whether “first year rents are actually based on market rates or some other fictitious amount” before they buy, creates for a very risky investment indeed.
What happens if in the second year the investors fail to rent their purpose built student condo units to students? Who would they rent them to instead of students? Ask yourself, would you like to live in a building predominantly occupied by partying students? Are you beginning to see the true picture here?
To be sure, the Waterloo Region remains a great place to invest in real estate. The same CTV article goes on to say:
“Reitzel says most local home buyers he’s seeing are opting for detached or semi-detached homes, with the bulk of the condo activity being fueled from outside the region.”
The Waterloo Region locals apparently know the truth, while investors from outside the region continue being seduced and bamboozled. Sometimes the truth really does hurt.
But that’s not all, it get worse. Now you can combine student condo investing with student condo overbuilding. This simply means that their are more student condos going up than there are students. Really, I kid you not. You can check it out for yourself here.
The Bad:
“Currently, there is an oversupply of nearly 1,200 beds, but when new developments that are in the works are included, the surplus increases to 8,321 beds…”
“There are 41,440 university and college students in Waterloo, Colliers said. When you take away students who commute to campuses, that number drops to 31,429.”
The Ugly:
You would think that would be bad enough, but the picture actually gets worse…
“At least one recently built student building is now in power of sale proceedings…”
Yup, some of these student condo developments are going belly up and quite possibly taking unsuspecting investors with them. Yet investors continue to flock to these student condo investments in droves.
In fact, recently this past January 2016, after a very short 3 hours after Michael Wekerle’ pitched his $85 million District Condos project to 1600 investors, the 250-unit, was sold out and 170 people were added to a waiting list.
As always: Caveat Emptor – Buyer Beware!
