4 ways to win as a Toronto real estate investor

4 ways to win as a Toronto real estate investor

Investing in real estate is on a lot of people's minds these days, especially since the Toronto condo resale market has softened somewhat: right now, you have a much better chance of picking up a downtown property at a great value.

Related info: Is this a good time to invest in a Toronto resale condo?

So what are the benefits of using real estate as a wealth building tool?

For one, you're using other people's money to build your wealth. Plus, it's a pretty safe investment, as long as you look at it with a long-term lens. Toronto and the GTA offer a lot of opportunities for investors: although COVID has slowed things down, those effects won’t last forever. Immigration will resume in greater numbers than before, and post-secondary schools will eventually reopen for in-person learning, driving property values, rents and demand for rentals back up again.

Also, once you’ve built up some equity in one property, it's relatively easy to tap into it to buy another one. Then, every 3-5 years, you can refinance and pull out the equity you’ve built to buy something else, creating a “ladder” that gets you closer and closer to your financial goals.

There's more than one way you can make money with real estate investment. There are actually four key ways to win:

Win #1: Passive appreciation

Property values increase over time. Even though we often see peaks and valleys month-to-month and even year-to-year, those variations average out over time, showing consistent appreciation. Over the last 10 years, properties in the 416 have steadily gone up in value, with an average annual appreciation of 8.3%.

CREA, April 2020

CREA, April 2020

If you go back even further and look at the last 40 years, appreciation has held steady at around 7%. So as long as you're not looking to flip a property in the short-term (though that can work too, it's just higher risk), real estate is an investment that offers strong, predictable returns.

Toronto investors have unique opportunities to maximize passive appreciation by purchasing in not-yet-gentrified neighborhoods or focusing on areas near development projects like new transit lines: as soon as those areas start to get more appealing to buyers and the subways/LRTs/GO lines are built, values inevitably jump up...significantly.

With passive appreciation, you essentially build wealth by doing almost nothing (apart from maintenance and finding tenants, of course). Doing your research can help you figure out the neighbourhoods poised for the biggest price jumps. If you need some expert insight, I can help you determine where those opportunities may be.

Win #2: Principal recapture

This win comes from having a tenant whose rent is paying down your expenses. So even if the values don't go up, your mortgage keeps decreasing

Condo Improvements

Win #3: Active appreciation

When you make improvements that increase the value of your investment property, like putting in a new kitchen or installing hardwood, you boost resale value, increase the amount of rent you can charge, and improve the quality of the tenant pool you can attract.

Investors love the idea of active appreciation. In Toronto and the GTA, there's a lot of opportunity to go into older buildings and renovate to really boost value. Plus, older buildings tend to have bigger layouts, and at a time when people are craving homes with more space, they’re a great investment.

Win #4: Cashflow

Positive cash flow is when the rent you charge exceeds your costs, allowing you to win again. In Toronto, where property values are particularly high, this particular win is a little harder to come by. Most investors hope to just cover their costs with rent, but that isn't always possible, especially now that we're in a market where landlords are dropping rents to compete with oversupply.

But that’s not necessarily the worst thing. A negative cash flow situation doesn't make a unit a bad investment: you're still paying down your mortgage and building equity, even if you’re doing it partly with your own money.

A lot of young investors are only looking at this number and are really concerned about rent not covering their costs. But even if you're adding $100 or so a month out of pocket, remember: you're still putting it towards your own wealth. The property is still appreciating in value AND you can write off that negative cashflow as a business expense!

Some investors are attracted to smaller towns, where properties are priced lower and the potential for positive cash flow is higher. The downside of buying for that reason, however, is that you probably won't see the same kind of appreciation you would in Toronto – and you'll be limited to a much narrower tenant pool.

In Toronto, on the other hand, you have more people to choose from, and you can focus on areas near schools if you want to rent to students, for example, and other areas in the core if you want to rent young professionals. Plus, living near your investment property makes life easier, unless you'd rather pay a property management company to take care of it for you.

Are you an investor in the making?

I’d be happy to help you figure out out which areas, buildings and unit types could offer you the best return.

About Sean Miller

Sean is one of the top realtors at property.ca / condos.ca, with the drive and expertise to guide you through one of the most important financial decisions you’ll ever make. Whether you're a first-time buyer, a seasoned seller, are new to the Toronto market or are looking for a great investment, he makes the experience as stress-free as possible, quickly assessing your needs and offering a full range of options that fit with your lifestyle and budget. Navigating the GTA market is his specialty, and stellar customer service and deep market expertise are his calling cards. He is always ready to go the distance to help clients make the right choice, at the right time and the right price. Get in touch with Sean

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