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PSR’s Official ‘Unofficial’ Toronto Real Estate Investor’s Guide

The Toronto real estate market has been called a ‘runaway train’. And in an effort to strike while the iron’s hot, investors are hitting big by buying, renting, selling, and/or flipping properties in the city. Well, guess what? You can too.

But first, it’s crucial to lay out out some basic real estate investment fundamentals.

First off, there’s financing. Obtaining a mortgage for a second property isn’t as straightforward as borrowing for your primary residence. No, this time you’ll need at least 20% of the purchase price for a down payment. On top of that, only a portion of the income you get from rent (typically 50%) will be considered in qualifying you for a mortgage.

Taxation also plays an important role. In Canada, your income can constitute any money collected from rent, therefore it’s subject to regular taxation. From the time your property becomes an investment one to the time you sell it, increases in its value will be subject to capital gains taxes. So to fully comprehend the tax implications in purchasing an investment property, be sure to talk to your accountant.

Finally, consider your timing! Many—if not nearly all—real estate investments require long-term objectives. Because of the volatile nature of the realty market, expecting to profit in a short period of time is fraught with uncertainty.

Our official ‘unofficial’ guide will now explore the various options to make money in Toronto’s fickle real estate market.

CG income property
37 Garden Ave, a fully-detached multi-unit home located in Roncesvalles, Toronto.

INCOME PROPERTIES

Considered to be houses that have self-contained apartments which are rented out, income properties remain red-hot commodities in Toronto…

The Good

  • You should be able to break even—or ideally be cash positive—with a 20% down payment on a multi-residential house.
  • History shows that houses have appreciated faster than condos. This means that if you’re looking to make money when you sell, then an income property might be a safer bet.
  • At current interest rates, $1,000 in rent can cover over $200,000 in mortgage. In other words, having a basement apartment that you can rent out just could make the difference between affording the home of your dreams and not.

The Not-So-Good

  • Landlord troubles: tenants that don’t pay their rent, renovations, repairs, etc.
  • Having tenants in leases may make it harder to sell your home when the time comes.
  • If you’re living in the other (upstairs or downstairs) apartment yourself, you’ll need to cope with the noises and smells of your tenant.
cityplace harold stiver
Cityplace condominiums in downtown Toronto. Image via Harold Stiver.

INVESTMENT CONDOS

Here’s why investors are buying all of the new condominium projects that you see changing Toronto’s city landscape…

The Good

  • A good investment condo will break even (or be cash positive) with a 20% down payment (which you require for a mortgage anyway).
  • Opportunity for both cash flow and appreciation in value over time.
  • Unique condos in good locations have historically appreciated more than the stock market.
  • Finding a good tenant shouldn’t be difficult, as the rental market is at an all-time low for vacancies.
  • There’s predominantly less repair work and maintenance than being the landlord of a house.

The Not-So-Good

  • It’s a long-term strategy.
  • Very little flexibility and lots of obligations due to the Residential Tenancies Act.
ART SHOPPE
The Art Shoppe Lofts + Condos located at Yonge and Eglinton in Toronto.

NEW CONSTRUCTION

Buying condominiums during the pre-construction phase and selling them when they were built (often up to 5 years later) used to be the number one way investors made money in Toronto’s real estate market…

The Good

  • Since you aren’t at the mercy of what happens to be on the market, you get a prime choice of units and location.

The Not-So-Good

  • Uncertainties in the shorter-term condo market mean that your new construction condo could be worth less than you’ve paid for it by the time you take possession
  • Today it’s actually cheaper to buy a resale condominium.
88 colgate ave
The interior of a suite within 88 Colgate Ave, located at Queen East + Carlaw Ave in Toronto.

INVESTING IN SHORT-TERM CONDOS IN TORONTO

Astute investors have discovered the rewards of short-term rentals for their downtown Toronto condos, rather than going the customary 12-month tenant route…

The Good

  • Short-term rentals command almost twice as much rent as a regular tenanted apartment. That equals cold hard cash flow.
  • Cash flow plus price appreciation equals double whammy.
  • Flexibility! No long-term leases and generally no landlord obligations under the Residential Tenancies Act.

The Not-So-Good

  • This strategy only works in 5-star locations: near hospitals, universities, and the best of downtown. Tourists don’t want to be in the suburbs.
  • Most lenders won’t consider any rental income from short-term condos, so you’ll need to qualify for a mortgage without the rental income.
  • Many insurance companies want nothing to do with short term rentals, or wouldn’t want to if the owners were honest with their insurers!
  • Less predictable revenue stream due to potential for vacancies and cancellations.
  • Many buildings have minimal time requirements for tenants—usually 6 months—so renting out your condo short-term might be breaking the condo bylaws.
  • There are extra cleaning and maintenance costs, extra start-up costs, and extra wear and tear on your condo.
  • Should you charge HST? Are you actually running a small hotel? From the CRA’s perspective, short-term rentals are in a grey zone between traditional rental income and running a full-blown business.
  • It takes time and energy to manage a short-term rental—or cash, if you outsource it to a property manager.
145 galley ave roncy toronto star
The ‘before + after’ of 145 Galley Ave, a home in Roncesvalles which was listed in Jan 2013 for $649,900, sold for $803,649, was completely renovated and put back on the market late 2014 for $1.5 milllion. Image via the Toronto Star.

FLIPPING

It’s not as popular as it was a few years ago, but flipping—as in buying a rundown house and renovating it for profit in under a year—happens every day in Toronto…

The Good

  • Cash! There are certainly lots of examples of houses bought for $600,000, renovated for $150,000, and sold for $1,000,000.
  • A proper quality flip in a good neighbourhood will be in high demand, since many of today’s buyers want the fully done-up house.

The Not-So-Good

  • There are just as many examples of houses bought for $600,000, renovated for $150,000, and sold for $725,000.
  • Renovations always take longer and cost more than you expected. With a flip, every dollar spent and every month where you have to pay a mortgage counts.
  • No matter what reality television tries to tell you, flipping for profit isn’t easy. It takes a lot of time and can be a dicey venture for someone who isn’t a contractor or tradesperson.

 

Header image via Toronto Life.