Toronto’s real estate investment market has grown immensely in the last ten years. Historically speaking, we have seen investment properties double in value every 12 years in Toronto. Nowadays, 12 years typically shows a 2.5-3x increase in value. Let alone the rents that carry the investment property and the paying down of the mortgage. A noteworthy consideration is that Toronto’s vacancy rate is about 1.9%. This is very low. Also, worth noting, this vacancy rate factors in older rental apartment buildings and less savvy landlords who do not use MLS and take necessary steps to increase the rents with wise investment property upgrades between tenants. Cash flow is king. That being said, some property investors are comfortable paying a small top-up on the mortgage payment each month (a form of forced savings), which in turn ends up going towards the annual mortgage principal payment, to each their own. In an ideal world, your investment property cashflows from day one as you ride the appreciation wave in the years to come.
The key here is to buy an investment property with excellent fundamentals (location, construction, reliability, state of repair, etc.). Have a strict investment strategy written down, a checklist that you follow religiously as you would a finely tuned business plan. After all, this business can be lucrative if the correct steps are taken at every turn.
Investment condos have performed phenomenally well in the last 15 years. The margins have become tighter, but depending on the downpayment, mortgage interest rates, maintenance fees, square footage and the number of bedrooms, there is certainly room to not only maximize the rents but also ride the value appreciation wave in Toronto’s central core neighbourhoods. We have many condo investors who have purchased with us over the years. We act as ongoing real estate investment advisors and assist them with their lease listings on MLS. Some condo investors have purchased pre-construction over the years. There are pros and cons to buying pre-construction. For those condo investors looking to get their return on investment (ROI) going today, buying resale condos or a late-stage condo assignment may be your best bet.
Single-family homes are the least common investment property type in Toronto. The reason being is that most investor landlords want to maximize their monthly cash flow return. Adding a second or third unit to a house is where the real cash is made. All this being said, older investment homes may be single-family, and the higher-end neighbourhoods, like Lawrence Park and Summerhill, that feature luxury or executive rentals, will typically be single-family as the higher rents can carry the monthly costs. Not to mention higher-end neighbourhood neighbours would be more likely to complain about a multi-unit rental house in their predominantly single-family neighbourhood.
Duplexes & Triplexes
Duplexes and triplexes are where the well-capitalized landlords begin steering their attention towards. Think of the game Monopoly – first, as a landowner, and you add a house on that property, then up to three houses, then hotels. Ultimately you want to add more “doors” (aka units) to your portfolio to drive higher rental revenue. This Monopoly game analogy works when you think of Toronto investment property owners starting with a condo, or two, then a house with more than one unit, and ultimately adding more doors in time. Purchasing a triplex typically provides the greatest chances of cash flow out of the gate if you have the necessary funds to purchase a house in Toronto. It’s an incredibly wise financial decision considering the huge gains in Toronto’s freehold property value over time.
When looking to buy an investment property with 4 or more units, you will trigger commercial lending requirements. This means higher mortgage lending rates and a larger downpayment typically in and around 35%+. What is incredibly powerful is buying a multi-resident apartment building, as the greater leverage will allow you to generate far more rental cash flow. Also, a vacancy here and there should be easier to handle as more units pay their rent. Also, taking a tired multi-plex property will provide a great opportunity to make capital cost improvements, thereby increasing the rents for the next tenant and the value of your building (see below for re-financing).
Re-Financing The Golden Goose
Ultimately your goal is to own a Golden Goose or more. The Golden Goose (as the Brothers Grimm fairy tale tells us) is what will provide the golden eggs of your future. Golden eggs can be used to fund other investments, maybe other golden geese as well. To best leverage your golden goose investment property, you will need to balance time, investment and rents. When the appropriate time comes (we guide our clients closely with this one), you should re-finance the investment properties to access the capital appreciation and allocate the investment capital into another investment vehicle. Our lawyers, mortgage brokers and accountants add extra guidance at this step to ensure that you are re-financing in the most tax-effective manner possible.
Reshuffle The Deck
A wise mentor once said, “Ryan, always look to re-shuffle the deck.” Sage advice that we have used to guide our clients throughout our real estate careers. Whether that reshuffling is to unlock more rent from a surplus of land, to add an addition, an additional living unit, unlocking parking rental potential, we advise our clients as to how to take their current investment property and make it more efficient, unlocking the highest and best use, thereby driving revenues higher for our investors.
Always look to improve your investment property between tenants. Upgrading to stainless steel appliances will help in the long term as people are willing to pay more in rent for a more modernized rental unit. We also guide our investor landlords as to which capital cost improvement will best serve their goals.