Why Rents Being Up 11.2% Matters More Than Mortgage Rates Being Up 0.25% for Investors
New mortgage rules and interest rates have been the talk of real estate circles for the past few months, but for investors the real story should be the incredible 11.2% growth in condo rental rates. Given that rents have grown to $2,433 per month, it is the pre-construction condo investors who are buying at today’s prices and then renting at 2022 rental rates who are benefitting the most.
What does that mean for investors?
Let’s look at a $500,000 condo with 20% down. The mortgage will be $400,000, so a quarter point increase will require around a $54/month increase in mortgage payments. That being said, that same unit could be rented out for about $245 more a month based on the annual increase, which more than compensates for the increase in monthly mortgage payments.
For investors with fixed mortgages, there will be no impact until they are forced to refinance. For properties closing this year, the increase in rent covers increased financing costs.
Rising rates and new mortgage rules have been the main real estate news stories that dominate the headlines. The parallel story, however, is that this is causing more people who can’t afford to buy to remain renters. This drives rental rates up as fewer renters can convert to owners at the same time there has been no simultaneous increase of low cost housing to relieve the supply shortage. New projects are averaging well above $1000 per square foot, and even an the coming increases in purpose-built rentals will not alleviate mounting rental demand. Even with this tight rental supply for Toronto, US based SmartAsset research reveals that the city’s price-to-rent ratio remains relatively cheap compared to major US cities:
Admittedly, rents are significantly higher today than any rental predictions we were making 3-5 years ago. With that being said, there is still more room for growth. Dramatically increasing rents would appear to be the norm for the time being. Rising rates and new legislation only appear to solidify that. Investors that are spooked about the increasing rates and are missing the real story, which is: the economy and fundamental growth remain strong and the demand for housing will remain strong.