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Selecting the Best Unit Type for Your Investment
Many options are available to real estate investors looking at condo properties in the Greater Toronto Area, but how do you pick the best one? Location is the top consideration, but once you've settled on a building in a great area, then comes selecting the floorplan. Between the commonly rented and available options of one-bedroom and two-bedroom units, which one provides the better return on investment?
There are many reasons why someone may invest in a one-bedroom versus a two-bedroom property (and vice versa). Below, we go into the differences between each choice to help guide your investment decision.
Investing in One-Bedroom Versus Two-Bedroom Condos
Key Points
An Overview of Expected Rental Activity for One and Two-Bedroom Units
Why do we tend to focus on one- and two-bedroom condos? The most popular units rented out in Toronto are one-bedroom apartments, which account for more than 50% of leasing activity, according to TRREB's quarterly rental market reports. Two-bedroom units closely follow one-bedroom suites in overall activity. Studios and three-bedroom units are much smaller markets and account for only a tiny fraction of leasing activity each quarter.
Developers usually look at the demographics of where their projects will be located and allocate the percentage of unit sizes according to who will most likely be living there. For the most part, condo buildings tend to have mainly one- and two-bedroom units in order to provide the most flexibility and options for buyers and renters. This can help point investors toward the most suitable options.
One-bedroom apartments are extremely popular in urban areas, where many young professionals are located. Two-bedroom units are a significant part of the rental market in more suburban areas, which are full of growing families who want more space. Thus, location is the main factor for deciding which unit type will be most profitable.
Money Matters: Rental Income and Resale Value
Ideally, the rental income generated by these units you're investing in should exceed the carrying costs of owning them. Investors will be pleased to know that the average rental rates in the GTA have steadily increased over time, often faster than the rate of inflation, which is why real estate investment is an excellent option for building toward the future.
For the last decade or so, rent has increased dramatically in the GTA. Towards the end of 2010, the average rent for a one-bedroom condo apartment was $1,493; in 2020, it hit $1,845. For two-bedroom units, the average rent was $1,955 in 2010 and $2,453 in 2020. This indicates a 23.6% increase in rent for one-bedroom apartments and a 25.5% increase in two-bedroom units in that period. Since the pandemic, rental rates have skyrocketed even further and faster. Compared to the rate of inflation from 2010 to 2020, which was roughly 17%, this demonstrates that investing in rental properties, whether one- or two-bedroom units, is a practical way to counter the effects of inflation on your savings.
Similarly, with rental market popularity, one- and two-bedroom units dominate the resale condo market. Two-bedroom apartments (with or without dens) have a slight edge over one-bedroom units, accounting for roughly 48% of sales for the last decade, while one-bedroom apartments (with or without dens) account for around 44% of sales.
Average selling prices have also displayed strong growth. From Q1 2013 to Q4 2022, the average cost of a condo of any size increased from $332,846 to $710,520. That's a growth of 113.5% in ten years! Therefore, investors can be rest assured that both one- and two-bedroom condo units are a worthwhile long-term investment.
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Know Your Target Market
Having understood why investing in real estate will reap long-term rewards, one question to ask yourself when choosing between one- or two-bedroom options is, "Who will most likely be renting the unit?" If the condo unit is near post-secondary schools and transit, your renter may likely be a student. Your renter could be a busy young professional if the building is located by employment zones and everyday conveniences. And if you are investing near parks and schools, you may be expecting to rent to families. Therefore, you should select a unit that will be more likely to be rented out in that specific neighbourhood.
This is a great reason to lean on the expertise of a Platinum Agent who will be able to tell you about the demographics of the area as well as the direction it is shaping toward. Their knowledge of the local market is advantageous because real estate investment is a long-term commitment that will be impacted by changes in the coming years. You will want to know what your investment looks like in the future in order to decide on the most suitable one for your financial goals.
Here are a few more points about renting out your unit. There are some expected differences between renting out one-bedroom versus two-bedroom apartments. Renting to families is perceived as more stable as there is often more than one source of income, and parents will likely seek stability for their children by staying in place, meaning that you will not need to worry about finding new renters every year.
Renting to students and young professionals will likely have a higher turnover as these individuals will graduate or look for new job opportunities after a shorter period. While constant change may require more effort to find renters, investors can also command the most current rental rates, which tend to go up quickly in the GTA. But you should also be aware that there may be some periods when the unit is empty. Be prepared to weather those times by having a buffer to cover your costs during fallow periods.
Other Considerations: Monthly and Yearly Costs
Other factors may impact your commitment to investing long-term. Namely, there are carrying costs to consider. Larger units tend to have bigger condo maintenance fees, as these costs are calculated according to a unit's square footage. Buildings with more amenities, floors, and units, or are simply older and require more repairs, will also tend to have higher maintenance fees. These fees can impact your carrying costs as a long-term investor, so it is essential to include them when calculating your monthly payments and anticipate having them increase over time.
The typical maintenance fee in the Greater Toronto Area ranges from 60 to 80 cents per square foot, although some buildings can be as low as 40 or 50 cents per square foot. The average size of a condo in Ontario is approximately 700 square feet, which means the average maintenance costs can work out to between $280 to $560 per month.
Other fees include utilities — internet, gas, hydro, and water — which can be compounded by the number of people living in the unit. And annual taxes — income and property — are something to remember when totalling your long-term carrying costs. Ultimately, your budget should dictate if a smaller or larger unit is the most suitable investment for you.
Which Unit Type Is Right For Your Investment Goals?
With all these factors in mind, investors can make a more informed decision about whether one-bedroom or two-bedroom units are most aligned with their financial goals. Both property types are popular in the GTA. They can provide tremendous long-term worth for investors, bringing in rental income and maintaining resale value while serving different needs and renter types. But the driving factors for your decision should be the demographics of the location you are investing in and your budget. Contact a GTA-Homes Platinum Agent today to speak to an expert about addressing your specific needs and goals through real estate investment.
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