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10 Things Every Condo Investor Should Know about Leasebacks

1. What the heck is a leaseback?!

When we are talking about investing in pre-construction condos, a leaseback agreement is when you buy a condo from a developer and the developer agrees to lease the unit back from when once it is completed for a pre-determined rate and for a pre-determined amount of time. The money is not paid in a lump sum at closing like a cash back, rather, it is paid out slowly each month just like a tenant who pays on the first of the month. The actual tenant pays rent to the developer who in turn pays you (the owner). The tenant may be paying an amount that is more or less than the leaseback amount but the owner always receives the leaseback amount guaranteed (even if the unit is vacant!)

2. Why are leaseback offers becoming so popular?

The pre-construction market is driven primarily by investors. The investors only goal is to make money on their investment. There are traditionally 2 ways to do this: through cash flow and through capital appreciation. Cash flow is when you rent out a property for more than it costs you to own the property. Capital appreciation is when you sell the property for more than what you bought it for. There has been a lot of talk about the current prices of Toronto condos not supporting positive cash flow with the traditional 20% investor down payment in place. These leasebacks are an attempt to lure investors by giving them not just positive cash flow, but in many cases, guaranteed positive cash flow for 1 or 2 years (assuming mortgage rates do not rise dramatically in the next few years).

3. How are the leaseback rates determined?

The leaseback rate is set by the developer and offered to the purchaser. For example, if you buy this 1 bedroom unit at $350K, I will rent it back from you for $1700/month for 2 years.

4. Are the leaseback rates negotiable?

No. However, in some cases you may be able to take a cash-back at closing instead of a leaseback agreement, and this amount may be negotiable. Talk to your agent.

5. Who finds the tenant in a leaseback situation?

It depends on how the agreement is put together, but generally the developer will find the tenant as they are going to do their best to re-coup the guaranteed leaseback amount (it's not in their best interest to have the unit sitting empty and still paying the unit owner the leaseback amount).

6. Who manages the unit?

It depends. Usually the owner is the property manager but in some cases like at INDX Condos right now, they developer is offering to not only find the tenant, give the guaranteed rental rate, but also manage the property on behalf of the unit owner (the investor).

7. How do I know if the leaseback offer is a good offer?

Generally speaking, if the guaranteed rental rate covers the monthly expenses AND it is at or above the current market rate for the given suite and location, then it's a good offer. That said make sure you read #9 on this list.

8. What is an example of a leaseback offer in action?

INDX is offering a great leaseback promotion right now

Right now Karma condos and INDX condos are offering an excellent leaseback package.

Example 1: Studio at 372 sq ft on the 47th floor at INDX
Price: $307,900
Cashback at Closing: $9136
Deposits: 20%
Mortgage payment: $1143/month (3.1% amortized over 25 years)
Property tax estimate: $194/month
Maintenance fees: $186/month
Total carrying costs: 1523/month
Guaranteed Rent: $1600/month
Positive Cash Flow: $77/month

Karma Condos is also offering an excellent leaseback promo

Example 2: 1 bedroom 540 sq ft on the 4th floor at KARMA
Price: $396,900
Cashback at Closing: none
Deposits: 20%
Mortgage payment: $1519/month (3.1% amortized over 25 years)
Property tax estimate: $255/month
Maintenance fees: $291/month
Total carrying costs: $2065/month
Guaranteed Rent: $2200/month
Positive Cash Flow: $135/month

Example 3: 2 Bedroom 708 sq ft on the 10th floor at INDX
Price: $480,900
Cashback at Closing: $15,913
Deposits: 20%
Mortgage payment: $1780/month (3.1% amortized over 25 years)
Property tax estimate: $309/month
Maintenance fees: $354/month
Total carrying costs: $2443/month
Guaranteed Rent: $2700/month
Positive Cash Flow: $257/month

9. Anything else I should know about leasebacks?

As with any offer from condo developer, it is important to evaluate leasebacks from a developer in context. In context of what other competing projects are offering, as well as in the context of what the developer who is offering the leaseback was previously offering. Often developers simply rotate through promotions whose net effect on the price of the unit and expected return for the investor are actually the same. Sometimes a new promotion that sounds amazing is actually worse than an older promotion that was offered the previous month.

Also, make sure you find out when the leaseback begins. Is it from the point of occupancy (the time you get possession of the condo and the time you start paying for it), or is it from final closing (the date when your mortgage kicks in and you officially own the property).

 10. What's the bottom line on leasebacks?

Leasebacks may not be for everyone. Some investors may wish to simply purchase a unit for the lowest possible price, and forget about all these cash backs, leasebacks, and kick-backs. If that is the case, stick to buying at the Platinum VIP stage (hint: make sure you are subscribed to our newsletter for the latest opportunities in this regard). Seasoned investors know that these leasebacks always come at the tail end of the marketing life cycle of a new development, when only 10-15% of the project is left. This means selection is low and prices have probably already gone up significantly from the Platinum VIP stage.

However, for the investor who wants the security of guaranteed rental income, and they intend to hold the unit for sometime after closing (they are not flippers), leasebacks can be a very attractive option-particularly for the investor who is not living in Toronto and will not be around to find a tenant and manage the unit.

In a growing market like Toronto, time does marvelous things for your investment. Having 2 years of positive cash flow plus 2 year of building equity through mortgage pay down and appreciation will improve your bottom line and give you peace of mind at the same time.

For more details on the current leaseback promotions available at KARMA and INDX, please fill out the form below.






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2 Responses to “10 Things Every Condo Investor Should Know about Leasebacks”

  1. Mike

    Good explanation, but... You may wish also to point out the downside of leaseback offers.

    1. The bonus option is null/void if you assign or transfer Purchaser name.
    2. You are responsible for all damages to own unit and entire building caused by the subtenant you don't even get to choose. The builder chooses that subtenant for you and shifts responsibility.
    3. You inherit that sub-tenant at the end of 2 year period, even if it is a bad house-squatter professional tenant.
    4. You may not get your NRRP HST Rebate because the lease requirement is not fulfilled. This will lead to an extra $24,000 tax bill to your purchase price.

    Most real estate lawyers would advise their clients to avoid "leaseback" arrangement. It's not worth the headache.


  2. Mike,

    you are correct that lease backs are not for everyone, but they can be very advantageous for the condo investor and if the price is right, they can be highly lucrative.

    if market rental rates change in favour of the investor before the building is completed, the investor can always opt-out of the lease back agreement and simply lease it out themselves if they think they can achieve a higher rate.

    you can get your NRRP HST rebate back with a lease back. you need to submit both your lease agreement with the developer/management company and the sub-lease between the developer and the actual tenant to the CRA. CRA just needs to see that an actual person is using the suite for residential purposes.

    if you have tenant you want to get rid of after 2 years, simply file an N2 form and they will be gone in 60 days. for more info see this blog post: http://www.truecondos.com/toronto-condos-rent-control-secret/

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