By Jason Chow
Globe Investor Magazine, Feb. 21, 2008
Photograph by Stacey Brandford
The location
After the bullish housing market of the past few years, the running joke amongst Toronto real estate agents is that it costs $2 million to buy a $1-million home these days.
In the $2-million to $3-million range, you can buy yourself a new Sopranos-style manse in the far suburbs or an older, more modest executive-style home in the city central. For those who prefer the latter, $2.5 million can get you a foothold on a prime street in a good neighbourhood, but you still won’t be close to cracking the A-list areas of Rosedale and Forest Hill. If you want to live at those addresses, you’ll need to spend at least $4 million.
The agent
Janet Lindsay, driving a black Lexus SUV, arrives at the house she has promised to show me. An elegant 50-something agent with Chestnut Park Real Estate Ltd., Lindsay is one of only a handful of Toronto realtors who deal with upmarket homes in large quantities. She was the sales titleholder in 2007 for homes in the $1-million-plus category. “I just can’t get enough product to sell,” she says. Unfailingly polite and patient without being doting, Lindsay reminds me of a well-bred governess.
The house
I have come to see a 4,628-square-foot, 1990s-style luxury residence in Moore Park, an upscale central Toronto neighbourhood just north of ritzy Rosedale. The house is on a quiet street that reeks of old money, and two of the city’s most prestigious public schools are only two blocks away. At $2.5 million, it’s in the mid-price range compared with other houses on the street, says Lindsay, who sold a house up the street for more than $4 million only a year ago.
Spread out over three floors, the house boasts five bedrooms (one of them has been converted to a library), a spacious living room, a grand dining room that would easily accommodate 12 people for a formal dinner, and a kitchen with centre-island granite countertops and casual bar seating. Twelve years ago, a previous owner added 800 square feet of living space: a breakfast area, a family room and an ensuite bathroom for the master bedroom. The renovations are betraying their age, however, and many of the fixtures and wallpaper schemes are clearly of a 90210 era. The basement is carpeted and set up as a billiards room.
In the backyard, a deck overlooks a well-manicured garden. Unlike most suburban piles, this home does not have a garage (a previous owner had it removed). According to Lindsay, the private drive can accommodate four cars. As for taxes, the owner forked over $10,687 in 2007.
The potential
Lindsay admits this home is lacking the amenities of a top-flight luxury home, and says a few changes would be needed to get it to the next “snack bracket.” For example, the master bedroom at only 244 square feet is not considered luxury-sized, while the
ensuite bathroom lacks a bidet and marble floor (I am told that tile just isn’t good enough). The first-floor extension at the back is an advantage, however, because new owners could easily expand on the second storey.
Lindsay says that whoever buys this house will likely spend $300,000 to $500,000 to upgrade the master bedroom, update the fixtures, and maybe even dig out the basement so it can be transformed into a serious home theatre. If everything in this home was “up to the minute,” the asking price could go up by as much as $1 million,
says Lindsay. “It’s not even that it needs more rooms, but it’s missing the full luxury of what people expect nowadays.”
Make your move
While the supply of upscale houses on the market is limited, there is no shortage of prospective buyers, so act quickly and be prepared to bend. Buyers of luxury homes rarely put any conditions on their offers. “The only condition you can put in is for a building inspection to be completed within three business days, but that’s only if there are no other offers,” says Lindsay. “If you’re in a competition, you have to do the building inspection before the offer date and give a certified cheque ready for deposit.” And if you want to prove how serious a buyer you are, make a deposit of 10% of your offer price instead of the usual 5% that is common practice.
Bankrolling your purchase
Naturally, the more money you need to borrow, the more careful the banks will be in scrutinizing your finances. “What happens if a high-end executive gets downsized?” asks David Smith, a mortgage broker with Oriana Financial Group who completes many financings for upscale clients. “The risk on a $300,000 mortgage is far smaller than on a $1-million mortgage.” Surprisingly, the size of your mortgage and the quality of your application have no effect on the interest rate, which is the same across the board: prime minus a full per cent for variable-rate mortgages.
Rate of return over five years
Let’s assume that you buy this house at the asking price of $2.485 million and then renovate. If you sell the house after five years, what’s your hypothetical return?
Total cost of home: $2.545 million (including fees, insurance and transfer taxes)
Down payment: 40% of total price, or $1.018 million
Mortgage: $1.527 million at 5.79% (rate charged by Oriana Financial Group, effective
on a five-year mortgage)
Monthly payments on mortgage: $10,470.64, based on 25-year amortization (after
five years, you will still owe the bank
$1.368 million)
Home equity loan for renovations: $500,000 at prime (6.25%)
Monthly payments on home equity loan:
$9,724.63 (after five years, you will
have paid off the principal of $500,000
plus $83,477.80 in interest)
Taxes: $55,615.58 over five years,
assuming taxes rise at an inflationary
rate of 2% a year
If you are bullish on the housing market and assume that the house rises in value by 6% a year over the next five years, and that Lindsay is correct that the renovations would add $1 million to the purchase price, then, in five years, the house will be worth $4.744 million.
After subtracting all the borrowing costs and taxes, you are still left with a whopping gross profit of $2.737 million. Total return on your initial down payment: 169%, or 22% on an annualized basis, which doesn’t include selling fees.
If the housing market slows to a more modest 2% gain each year, your house would still be worth $3.914 million after five years. Your gross profit: $1.907 million. Total return: 87%, or 13% on an annualized basis.
The verdict
It’s a no-brainer. Buy the home, do the renos and sell before it gets outdated. Even if the market slows to a snail’s pace, you’ll still have double-digit returns.
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